The Potential for Health Care Savings: Can Health Savings … · 2018-12-13 · Obamacare mandated: • Nearly all Americans to buy certain health insurance; • A requirement that

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REPUBLICANSTAFFSTUDY

ThePotentialforHealthCareSavings:CanHealthSavingsAccounts(HSAs)BendtheCostCurve?

December13,2018INTRODUCTION

SinceWorldWarII,well-meaninggovernmentpolicieshavehadtheunintendedconsequence of contributing to medical care cost growth. Over these sevendecades, more Americans became insured and insurance policies expandedcoverage to include more services. However, consumers were shielded fromactual prices with third-party payment increasingly replacing out-of-pocketpayment, and providers encountered diminishedmarket pressure to containcosts.Today,spendingonhealthcareamounts toone-sixthof the economy—more than in all other developed countries—and many Americans may beunaware of the full financial burden on their household budget as costs arespreadacrosstaxes,insurancepremiums,andlowerwages.

Government regulation, taxes, and subsidies distort markets, often causinginefficient consumer andproviderbehavior.America’shealth care industry isespeciallysubjecttoinefficienciesbecauseofdecadesofmountinggovernmentprogramsandpolicies,whichledtohigherpricesandgrowingdissatisfactionformedicalcaredelivery.1

Health savings accounts (HSAs) combined with high-deductible health plansincreasepricetransparencyandmayhelptoreducecostsbyharnessingproveneconomicincentivesthatmakeconsumersmorepriceconsciousandprovidersmore cost conscious. Slowing the growth of health care costs has eludedpolicymakersfordecades,butagrowingbodyofevidenceindicatesthatHSAsmightfinallybeofferingsomerelieftohard-workingAmericans.

ExpertwitnessesattheCommittee’sJune2018hearing,ThePotentialforHealthSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve,testifiedthatHSAsareloweringcostsandsavingconsumersmoney;andthatexpandingaccess will allow more Americans to realize the benefits while acceleratingoverallhealthcarecostcontainment.

1Cogan,JohnF.,R.GlennHubbard,andDanielP.Kessler.Healthy,Wealthy,andWise:5StepstoaBetterHealthCareSystem,HooverInstitutionPress,2013,p.2;andFriedman,Milton,“HowtoCureHealthCare,”HooverInstitution,HooverDigest,July30,2001.https://www.hoover.org/research/how-cure-health-care-0

KeyFindings:

Ø SinceWWII,federalhealthpolicyhasfocusedonincreasingaccessandcoveragebutnotcostcontainment.

Ø Healthcarecostsarenotreflectedinthepricesconsumerspay.

Ø Artificiallylowout-of-pocketexpensesdiminishcomparisonshoppingandcompetitionamongproviders.

Ø HSAsallowconsumerstomanagetheirownhealthcaredollarsandmotivatethemtodemandpricetransparencyandseekthebestvalue.

Ø ExpandingHSAenrollmentwillfurthercompetitionamongprovidersandimproveindustryperformancetothebenefitofallhealthcareserviceconsumers.

JointEconomicCommitteeRepublicans|StaffCommentary


Figure1

GOVERNMENTINFLUENCEONAMERICANHEALTHCARE

Consumptionofhealthcare.

Over the past century, there have been three periods of major government-inducedchangestoAmerica’shealthcareindustry,aswellasseveralsmalleryetstillsignificantevents(Figure1).Thedominantperiodsare:

1) 1943:ExemptionoffringebenefitsfromWWII-erawagecontrols;2) 1965:CreationofMedicareandMedicaid;and3) 2010:PatientProtectionandAffordableCareAct(ACAorObamacare).

First, WWII wage and price controls were implemented during a laborshortage—America’slaborforcewaslargelyredirectedtowardmanufacturingmilitaryequipmentandtroopbuildup.Toattractandretainscarcelabor,manyemployersofferedprivatehealthinsuranceandotherfringebenefitsaspartoftheircompensationpackage.In1943,theWarLaborBoardruledthatcontrolsoverwagesandpricesimposedbythe1942StabilizationActdidnotapplytofringebenefits,whichincludedhealthinsurance;andin1954,Congressclarifiedanearliercourtrulingbyaddingtothetaxcodeaprovision(nowsection106oftheInternalRevenueCode)excludingemployer-providedhealthbenefitsfromemployees’ gross income, effectively exempting those benefits fromworkers’incomeandpayrolltaxes.2

The taxexclusion foremployer-providedhealth insurancedoesnotextendtonon-employer provided health insurance. Only a portion of out-of-pocket

2Buchmueller,ThomasC.andAlanC.Monheit,“Employer-SponsoredHealthInsuranceandthePromiseofHealthInsuranceReform,”NBERWorkingPaper14839.http://www.nber.org/papers/w14839

WWIIgovernmentwagecontrolsallowedemployerstoprovidehealthinsurancetoattractandretainscarcelabor.



medicalexpensesandhealthinsurancepremiumsaretaxdeductible,andstill,manyworkersfailtoqualify.3Consequently,federaltaxtreatmentencouragesfirmstoprovideandemployeestochooseemployer-providedhealthinsurancepoliciesthatcoverawiderangeofexpenditures,whichismademoreattractivewith relatively low copayments and deductibles. Today, 181 million of 217millionprivatelyinsuredAmericansarecoveredbyemployer-providedplans.4

Second, President Johnson permanently expanded government’s role inproviding health care by signing into law Medicare and Medicaid, whichgenerally provide government health insurance for older and low-incomeAmericans.Theseprogramswereintroducedforgoodpurposesandhavehelpedmillions of Americans, but their design—which increased consumption ofsometimes unnecessary or inefficient care—has also distanced spendingdecisionsfromactualcosts.Sinceprovidersareoftenreimbursedaccordingtothevolumeofservicestheyprovide,thesystemcansometimesrewardcostoverquality.Costsandpricescanrisewithoutfacingtheusualreductionindemand,fuelinghealthcareinflation.

Since inception, both programs have expanded, covering more people andservices(seeFigure1).5Medicareexpandedin1972tocoverAmericansunderage 65with long-term disabilities or end-stage renal disease, and in2003, aprescriptiondrugbenefit(MedicarePartD)wasadded.Medicaidhadoriginallyinsured only those receiving cash assistance. However, in 1986, coverageextendedtopregnantwomenandinfants,andlaterexpandedtochildrenuptoage18with incomesunder the federal poverty level. In1997, theChildren’sHealth Insurance Program (CHIP) was added providing health insurance tochildren in familieswith income exceedingMedicaid eligibility but unable toaffordinsurance.Whileallthesegroupsaredeservingofcare,thedesignoftheseprogramshasnotalwaysservedthemwellwithdeliveringqualitycareatanaffordablecost.

Third, and more recent, ACA required nearly all Americans to enroll in agovernment-approvedhealth-insuranceprogramorfaceafinancialpenalty(theTax Cuts and Jobs Act zeroed out the penalty beginning 2019). It expandedMedicaideligibility,createdpremiumsubsidies,andaddedanewgovernment-run marketplace where Americans without employer- or government-basedinsurance can buy health insurance (healthcare.gov or state-run exchanges).Additionally, it set a minimum level of coverage, known as “essential healthbenefits,”andrequiredinsurancecompaniestochargeidenticalpremiumsina

3Todeductout-of-pocketexpensestaxpayersmustitemizetheirtaxdeductionsandthenonlyexpensesexceedingafloor—calculatedasapercentofataxpayer’sadjustedgrossincome(AGI)—aredeductible.In1964,aceilingonthedeductionwasremovedbutthefloorremained;andovertheyearsthefloorhasbeenadjusted.Mostrecently,theAffordableCareActincreasedthefloorfrom7.5to10percentofAGI(increasingtaxes),andtheTaxCutsandJobsActreduceditbackto7.5percentofAGI(decreasingtaxes)for2017and2018.4UnitedStatesCensusBureau,HealthInsuranceHistoricalTablesHIC-4.https://www.census.gov/data/tables/time-series/demo/health-insurance/historical-series/hic.html5Cogan,JohnF.,TheHighCostofGoodIntensions:AHistoryofU.S.FederalEntitlementPrograms,StanfordUniversityPress,2017,pp.375-384.

WhilemillionsofAmericanshavebenefittedfromMedicareandMedicaid,theirdesign distancedspendingfromcostsfuelinghealthcarecostinflation.

Obamacaremandated:• NearlyallAmericans

tobuycertainhealthinsurance;

• Arequirementthatallpoliciesoffer“essentialhealthbenefits;”and

• AbanoninsurersofferingdiscountedpremiumsforhealthyAmericans,causingpremiumstorise.



geographicregionregardlessofhealth.6Astate’sgeographicareaisdefinedbycounties,three-digitzipcodes,orurban-ruraldivide.7Themandatedhighlevelofbenefits,alongwithdenyinginsurerstheabilitytoofferdiscountstohealthyAmericans, drastically increased health insurance premiums. This, in turn,discouraged younger and healthier consumers from enrolling in insurance,leavingolderandcostlierenrolleesintheinsurancepoolandfurtherdrivinguppremiums. In recent years, the Joint Economic Committee Republicans havehighlightedmanyinefficienciesandtheunfairnessofthispoorlydesignedlaw.8

Figure2

All of these programs and policies have encouraged health care spendinggrowth. From 1970-2017, health care spending increased from 6.2 to 17.2percentofGDP;todayAmericahasthehighestrateofall35developedcountriesin the Organization for Economic Cooperation and Development (OECD)countries.Thesecond-highestcountryisSwitzerlandat12.2percent.Onaper-personbasis,Americanspendingis25percenthigherthanthesecond-highestcountry and 2.5 times greater than the OECD average (Figure 2).9 America’sagingpopulationdoesnotexplainthehighlevelofhealthcarespending,sincetheUnitedStateshas a lowerpercentageof thepopulationover age65 thanmanyotherOECDcountries.10

6Cogan,JohnF.,R.GlennHubbard,andDanielP.Kessler.Healthy,Wealthy,andWise:5StepstoaBetterHealthCareSystem,HooverInstitutionPress,2013,pp.25-30.7 Public Health Service Act § 2701(a)(1)(A)(ii) (codified at 42 U.S.C. § 300gg(a)(1)(A)(ii)); 45 C.F.R. § 147.102(a)(1) (ii) & (b), pp. 686-687. https://www.gpo.gov/fdsys/pkg/CFR-2013-title45-vol1/pdf/CFR-2013-title45-vol1-sec147-102.pdf 8SeeJointEconomicCommitteeRepublicans’webpageandfilterby“health”issues.https://www.jec.senate.gov/public/index.cfm/republicans/analysis9OECD(2018),Healthspending(USdollar/capita)https://data.oecd.org/healthres/health-spending.htm(Accessedon3December2018).10Papanicolas,Irene,LianaR.Woskie,andAshishK.Jha."HealthcarespendingintheUnitedStatesandotherhigh-incomecountries."JAMA319.10(2018):1024-1039.

AmericansspendmoreonhealthcarethananyotherOECDcountry.



Costvs.qualityofhealthcare.

Over time, America’s major health care policies have focused primarily onincreasingaccesstohealthinsurancewithlittleemphasisoncostcontainment.By ignoring economic fundamentals such as the law of demand—generally,product demand rises as price falls—and cost-benefit analysis, policies havefueledrisingcosts.Ifpoliciesfocusedmoreonloweringcosts,Americanswouldhavemoredisposableincomeandbetterhealthoutcomes.HooverInstitution’sDr.ScottAtlasexplainedtotheCommitteethat:

Thecriticalconcepthereisthatreducingthecostofmedicalcareitself is themosteffectivepathway tobroaderaccess toqualitycare and lower insurance premiums, and ultimately of coursebetterhealth.11

Theuncheckedriseinhealthcarespendingmaybepartlyduetocostdiffusion—thedisseminationofhealthcarecosts.Americanspayforhealthcarethroughthefederal payroll tax (Medicare hospital services), other federal taxes (parts ofMedicare,Medicaid, insurance subsidies in theACA insurance exchanges, theVeteransAdministration,etc.),andstatetaxes(Medicaid).Insurancepremiumsmay be withheld from workers’ paychecks or, for non-employer plans, paiddirectlytoinsurancecompanies.Andwhilethereissomedegreeoftransparencyin the aforementioned sources, lower wages and salaries are the hiddentradeoffsofemployertaxesandhealthcarespending.12Statedclearlyina2013SocialSecurityBulletin,“Workersbearmostoftheburdenofemployerhealthinsurancecontributionsthroughlowermoneywages…”13

INEFFICIENTANDUNIQUEHEALTHINSURANCESYSTEM

Healthinsuranceandhealthcareareveryexpensiveformanyreasons.Amongthem are first, third-party payment with relatively low copayments anddeductibles lowers consumers’ incremental cost and removes their access topriceinformation,leadingtooveruse.Second,providerpricingisnotdisciplinedbycompetitionandcustomercomparisonshopping.Third,employer-providedhealth insurance covers a wide range of services for which competition andcomparisonshoppingaresuspended.

11TestimonyofHooverInstitution’sDr.ScottAtlasattheJointEconomicCommittee’sJune7,2018hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703312Economicneoclassicaltheorystatesthatfirmswillpayworkersincombinedwagesandbenefitsnomorethantheirmarginalrevenueproduct—theadditionalrevenuegeneratedbyemployingaworker.Asemployerbenefitcosts,suchastaxesandhealthcarespending,rise,moneywageswillfall.13Burtless,GaryandSvetaMilusheva,“EffectsofEmployer-SponsoredHealthInsuranceCostsonSocialSecurityTaxableWages,”SocialSecurityBulletin,Vol.73,No.1,2013.https://www.ssa.gov/policy/docs/ssb/v73n1/v73n1p83.html

Lowerwagesisthehiddentradeoffofemployer-providedhealthinsurance.



Relativelylowcopaymentsanddeductiblescauseoveruseandhighercosts.

Consumers consider incremental cost and benefit before every purchase; ifbenefit exceeds cost—product price—consumers will make a purchase;otherwise,theyforgotheproduct.Formedicalcare,consumersrarelyknoworpay actual health care prices. Consumers typically pay low copayments ordeductibles, and the balance is paid directly to the provider by third-partyinsurancecompaniesorthroughgovernmentagencies.Inotherwords,thereisnopricetransparencybeforeoratthetimeoftheservicenorpricecomparisonshopping.

Accordingly,thebenefitfromphysicians’officevisits, forexample,willalmostalwaysexceed the copaymenteven forminor issues,andconsumersmaynotconsiderlower-costalternatives(e.g.,gettingaflushotatapharmacyasopposedtoadoctor’soffice).Whileindividualconsumershavefacedincreasesintheirownout-of-pocketcostsinrecentyears,thelong-termtrendisthatthird-partypayershavebecomeincreasinglyresponsibleforhealthexpenditures.In2016,out-of-pocket payments as a share of total health care spending was 10.6percent,downsubstantiallyfrom47.6percentin1960(Figure3).14Price—themarketmechanismforrationingscarceresources—hasbeenlargelyremovedfromthedecision-makingprocess,resultinginhealthcareoveruse.

Figure3

HSAcriticshavearguedthathigh-deductibleplansdiscourageuse, increasinghealth care risks; however, this assertion is not supported by evidence.15

14NationalHealthExpendituresbyTypeofServiceandSourceofFunds:1960to2016,CentersforMedicareandMedicaidServices.https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html15Cogan,JohnF.,R.GlennHubbard,andDanielP.Kessler.Healthy,Wealthy,andWise:5StepstoaBetterHealthCareSystem,HooverInstitutionPress,2013,p.36.

Third-partypaymentscombinedwithlowcopaymentsanddeductibleseliminatespricetransparency.

Decliningshareofout-of-pocketcostsleadstooveruseofhealthcareserviceswithlittleimprovementinhealthoutcomes.



Testifying on behalf of the American BenefitsCouncil andMercer,Ms.Wattsexplainedthatarecentstudyof26,000individualsshowsHSAusershadbetterhealth outcomes than those covered by a traditional preferred providerorganization(PPO).

[W]e matched 13,000 individuals in the PPO with 13,000enrollees in the HSA-eligible option who shared the samedemographic and risk profiles at the start of the 3-yearcomparativeperiod.

[T]he HSA-eligible plan participants maintained their healthstatus, while those in the PPO plan saw [on average] an 8%increaseinidentifiedhealthrisks.ThisfactalonewouldseemtosuggestthattheHSA-eligibleplanmayhavebeenmoreeffectiveathelpingparticipantsmitigatetheexacerbationofexisting,oronsetofnew,medicalconditionsorhealthrisks.16

Littleincentiveoropportunityforconsumerstoseekdiscountsorproviderstocutcosts.

Consumersfacingsimilarproductsofferedbydifferentproducerswillgenerallychoosethelowest-priceprovider.Forhealthcareservices,consumersoftenpaythesamecopaymenttoallprovidersinaclassregardlessofpricedifferences.Thus,consumershaveno incentive toseekout thebestprices,andprovidersmayevenhaveanincentivetosethigherpricesoutsidetheirnegotiationwithinsurancecompaniesforbenchmarkingpurposes.

In some instances, governments award firms exclusive multiyear contracts,eliminating most competition for the contract period. Consider California’semergency transportationambulancesystemfor911calls.Firmssubmitbids(paymenttothecounty)fortheexclusiverighttorespondtoemergencycallsina geographic zone. Competing bidders receive reimbursements for patientscoveredbyMedicareandMedicaid(Medi-Cal inCalifornia)thataregenerallybelowtheircostsbutarefreetochargecommercialinsuranceprovidersmuchhigherprices(Figure4).17The lackofcompetitioncombinedwithbelow-costreimbursements by government insurance means that private insurers willencounterartificiallyhighcostswithlittleopportunityfortheinsurer,muchlesstheconsumer,tonegotiatealowerprice.

16TestimonyofTracyWattsonBehalfoftheAmericanBenefitsCouncilandMercerattheJointEconomicCommittee’sJune7,2018hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703317California2018GeneralElectionOfficialVoterInformationGuide,p.62-63.https://vig.cdn.sos.ca.gov/2018/general/pdf/complete-vig.pdf

EvidenceshowsthatHSAparticipantsarebetteratmaintainingtheirhealththanthoseinaPPO.



Figure4

Healthinsurancecoversbothrareandroutineexpenses.

Theinsuranceconceptistopoolrisk.Thatis,withenoughcustomers,insurerscollect sufficient funds (premiums) to cover large irregular individual claimpayments.Premiumsarebasedonthetotalexpectedpayout,whichisafunctionoftheamountinsuredandtheprobabilityofoccurrence.Byinsuringonlyrareevents, the probability of payment is lower, and accordingly, premiums arelower.

Insurance policies for businesses, homes, and automobiles, for instance, aredesignedtocoverexpensive,rare,andrandomlyoccurringevents;theydonotcoverroutineexpectedcosts.Forexample,autoinsurancecoversdamagefromaccidents and theft, but not routine car maintenance and repairs. Health“insurance,”ontheotherhand,isuniqueandcommonlycoversbothrareevents(e.g.,unexpectedmajorsurgeriesandextendedhospitalstays)aswellasroutineexpensessuchasannualcheckupsandfrequentlyoccurringminorillnessesandinjuries. Consequently, health insurance policies covermany services, payingadministratively set prices, which policyholders could otherwise purchasedirectlyfromcompetingvendorsatmarket-determinedprices.Premiumsgoupbecausetheycovermorethanrareeventsandpricecompetitionceases.

MiltonFriedmanonhealthcare.

Nobel laureate Economist Milton Friedman and his wife Rose Friedmanexplained in their book Free to Choose: A Personal Statement how spendingefficiency—in which spenders economize and seek the highest value—is

Theabsenceofmarketforcesinlargeswathsofhealthcareremovesconsumers’opportunitiesandproducers’incentivestorestraincostgrowth.

Coveringrarecostlyevents,aswellasroutinehealthcarespending,drivesuppremiums.



maximizedonlywhenconsumersspendtheirownmoneyonthemselves.18Theirperspective on America’s welfare programs makes clear why third-partygovernment-andprivate-insurancepaymentleadstoinefficiencies.

Table1 OnWhomSpent

WhoseMoney You SomeoneElse

Yours

I-Strongincentivetoeconomize-Strongincentivetomaximizevalue

II-Strongincentivetoeconomize-Doesn’tmaximizevalue

SomeoneElse’sIII

-Doesn’tEconomize-Strongincentivetomaximizevalue

IV-Doesn’teconomize-Doesn’tmaximizevalue

Friedman’sfour-quadranttableillustratesefficiencymaximizationasboxI—asituation inwhich consumers are spending their ownmoney on themselves.Whenspenderspurchaseitemswiththeirownmoneyforsomeoneelse(boxII)theywill economizebut fail to choose an itemthatmaximizes the recipient’svalues(e.g.,agifttherecipientdidn’twant);whenspenderspurchaseitemsforthemselveswithsomeoneelse’smoney(boxIII)theywillmaximizevaluebutnoteconomize(e.g.,businessexpenseaccount);andthemostinefficientscenarioiswhensomeonespendssomeoneelse’smoneyonanotherperson(boxIV),thespender fails to economize or maximize value (e.g., third-party health carespending).

Morethantwodecadeslater,America’shealthcaresystemhadchangedlittle;in2001,Friedmanwrotethefollowing:

Twosimpleobservationsarekeytoexplainingboththehighlevelof spending on medical care and the dissatisfaction with thatspending. The first is that most payments to physicians orhospitalsorothercaregiversformedicalcarearemadenotbythepatientbutbya thirdparty…Thesecond is thatnobodyspendssomebodyelse’smoneyaswiselyorasfrugallyashespendshisown.19

In 2018, nearly twenty years after Friedman’s 2001 observations, America’shealthcareindustryremainsfundamentallyunaltered,exceptforhealthsavingsaccounts.HSAsandhigh-deductiblehealthplansempowerconsumerstomake

18MiltonandRoseFriedman,FreetoChoose:APersonalStatement,HarcourtInc.1980.ThebookwasturnedintoaPBSmini-series.19Friedman,Milton,“HowtoCureHealthCare,”HooverInstitution,HooverDigest,July30,2001.https://www.hoover.org/research/how-cure-health-care-0

Whenconsumersspendtheirownmoneyonthemselvestheyeconomizeandseekmaximumvalue.Third-partyspending,whichdominatesAmerica’shealthcare,doesneither.



healthcaredecisionsusingtheirownmoney,movingmorespendingfromboxIV tobox I; andwhilenot apanacea for rising spending, theypotentially canreducehealthcarecosts.

HEALTHSAVINGSACCOUNTSANDHIGH-DEDUCTIBLEPLANS

Healthsavingsaccountsaretax-exempttrustscreatedaspartoftheMedicarePrescriptionDrug,Improvement,andModernizationActof2003thatareusedtopay or reimburse certain medical expenses such as doctor visits andprescriptions.20HSAeligibilityrequirementsare:

1. Youarecoveredbyahigh-deductiblehealthplan(HDHP)onthefirstdayofthemonth;2. Youhavenootherhealthcoverage;3. YouarenotenrolledinMedicare;and4. Youcan’tbeclaimedasadependentonsomeoneelse’staxreturn.

The2018minimumdeductiblesare$1,350foranindividualand$2,700forafamily(thereareexceptionsforpreventivecare);theout-of-pocketmaximumis$6,650 for an individual and $13,300 for a family; and contributions cannotexceed$3,450foranindividualand$6,900afamily(theseamountsareindexedeachyear for inflation).Amountsan employer contributes toanHSAarenotconsidered part of the employee’s gross income for purposes of income andpayrolltaxes.Additionally,individualscandeductfromincometaxestheamountthey or someone other than their employer contributes to their HSA. Allwithdrawals fromtheaccount forqualifiedmedicalexpensesare tax free.AnHSAcanbesetupatabank,insurancecompany,orIRS-approvedtrusteeforanindividualretirementaccount(IRA)orArchermedicalsavingsaccount.Unusedfundsrolloverfromyeartoyear,andtheearningsonamountsinvestedinHSAsarealsotax-free;consequently,thefundsareneversubjecttoincometaxwhenusedforapprovedhealthcareexpenses.Theaccountsareportable—theyfollowthe consumers even if they change employers or leave theworkforce.21 And,afterage64,HSAfunds—bothdepositsandinvestmentreturns—canbeusedforretirementincome;withdrawalswouldbesubjecttoincometaxbutnotthe20percent penalty that would normally apply to withdrawals for non-medicalpurposes.

Paying for more health care out-of-pocket makes consumers more price-conscious. HSAsmotivate consumers tomanage their account balance whileconsidering future health care needs and retirement. The desire to protectsavings in HSAs creates a strong incentive for consumers to seek value byshopping around, encouraging providers to keep prices competitive and

20“MEDICAREPRESCRIPTIONDRUG,IMPROVEMENT,ANDMODERNIZATIONACTOF2003,”GovernmentPublishingOffice,P.L.108-173,Section1201.https://www.gpo.gov/fdsys/pkg/PLAW-108publ173/html/PLAW-108publ173.htm21“HealthSavingsAccountsandOtherTax-FavoredHealthPlans,”InternalRevenueService,March2018.https://www.irs.gov/publications/p969

Healthsavingsaccountsoffertaxbenefitsandmotivateconsumersandproducerstopursuecost-savings.



transparent. The cost of LASIK corrective eye surgery fell dramatically, forexample,becausecustomerspaidout-of-pocket,forcingproviderstocompeteonprice.

Figure5

While some may argue that there are situations where unexpected medicalneedspreventconsumersfrompriceshopping(e.g.,anemergencyroomvisit),HooverInstitution’sDr.ScottAtlastestifiedthatmostnon-elderlyhealthcarespending—60 percent of private-insurance payments and 60 percent ofMedicaid payments—is for outpatient care, and consumers are often able toconsidervariousproviders.22Figure5presentsabreakdownof totalnationalhealth care spending by type, showing the various spending components;frequentlyconsumershaveopportunitiestovalueshopforretailprescriptions,medicalequipment,professionalservices,andothershealth-careproductsandservices.

Highannualdeductiblepolicieshaveconsiderablylowerpremiumsthan low-copaymentandlow-deductiblepolicies.23TestifyingonbehalfoftheAmericanBenefitsCouncilandMercer,Ms.Wattsstated:

[T]he results from our nationwide survey indicate that HSA-eligibleplanssaveabout20%onplancostswhencomparedtoPPOplansandare6%lesscostlythanPPOplanswithdeductiblesover$1,000.

22TestimonyofHooverInstitution’sDr.ScottAtlasattheJointEconomicCommittee’sJune7,2018hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703323“EmployerHealthBenefits:2018AnnualSurvey,”TheKaiserFoundation,p.9.http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018

Consumerscanvalueshopformanyhealthcareproductsandservices.

Outpatienthealthcareaccountsforthemajorityofnon-elderlyhealthpayments,andHSAscanempowerconsumerstoshopforvalue.



Iwouldnote for theCommittee that thesuccessofHSA-eligibleplansinreducingplancostsisoneofthefewstrategiesproventohelp “bend the cost curve” and, in turn, helpmanagepremiumcostsforemployees.24

A2016studyoflargeemployersthatofferedconsumer-directedhealthplansintheformofHSAsandhigh-deductiblehealthplansfoundsignificantlong-termcostreductionandimportantly,noevidenceofworsehealthoutcomes:

Insummary,inthefirstlargemulti-employerstudytoinvestigatelong term [Consumer Directed Health Plan] CDHP spendingimpactswefindreductionsinhealthcarecostgrowthinallthreeyears post CDHP offer and do not detect increases in anycomponentofhealthcarespending.Thesefindingsdonotsupporteithertheconcernthatdecreasesinspendingwillbeaone-timeoccurrenceorthatshort-termdecreasesinspendingwithaCDHPwill result in increases in spending in the long term due tocomplicationsofforgonecare.25

Americans’growingdemandforHSAs.

ThenumberofpeopleenrolledinHSA-eligiblehigh-deductibleinsuranceplanshasrisendramaticallyinrecentyears.In2005therewereroughlyonemillionpeopleenrolledinsuchplans,andby2017thenumberhadgrowntonearly22million enrollees.26 A2016 survey by the United BenefitAdvisors found thatHSAswereofferedin24.6percentofemployer-sponsoredplans.27AccordingtoDevenir,anHSAservicesfirm,in2017HSAaccountshad$42.7billioninassets.Theseassets increasedby23percent fromthepreviousyear.28Also in2017,morethan18percentofprivateinsuranceholdersunderage65wereenrolledin high-deductible plans with HSAs, nearly double the percentage in 2011(Figure6).29

24TestimonyofTracyWattsonBehalfoftheAmericanBenefitsCouncilandMercerattheJointEconomicCommittee’sJune7,2018hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703325Haviland,AmeliaM.,MatthewD.Eisenberg,AteevMehrotra,PeterJ.Huckfeldt,andNeerajSood,“DO‘CONSUMER-DIRECTED’HEALTHPLANSBENDTHECOSTCURVEOVERTIME?”NationalBureauofEconomicResearch,March2015,p.28.http://www.nber.org/papers/w21031.pdf.26“HealthSavingsAccountsandHighDeductibleHealthPlansGrowasValuableFinancialPlanningTools,”America’sHealthInsurancePlans,April2018,p.3.https://www.ahip.org/wp-content/uploads/2018/04/HSA_Report_4.12.18.pdf27“SpecialReport:HowHealthSavingsAccounts(HSAs)MeasureUp,”UnitedBenefitsAdvisors,May2017,p.3.https://cdn2.hubspot.net/hubfs/182985/docs/2016-uba-special-report-on-hsa-and-hra.pdf?__hssc=53194871.3.1494885129355&__hstc=53194871.a6472f37f42db6e5db8ca07ddc54cbc2.1492704751422.1494599688646.1494885129355.4&__hsfp=1283505112&hsCtaTracking=989ee4a8-56ed-40a5-96b0-1f7928061d7c%20percent7Cb4111d6d-ba0b-4233-bea2-e1d51e00469528“2017MidyearHSAMarketStatistics&TrendsExecutiveSummary,”DevenirResearch,August16,2017,p.3.http://www.devenir.com/wp-content/uploads/2017-Midyear-Devenir-HSA-Market-Research-Report-Executive-Summary.pdf29“HealthInsuranceCoverage:EarlyReleaseofEstimatesFromtheNationalHealthInterviewSurvey,2017,”CentersforDiseaseControlandPrevention-NationalCenterforHealthStatistics,May2018,p.6.https://www.cdc.gov/nchs/data/nhis/earlyrelease/insur201805.pdf

EvidenceismountingthatHSAslowerinsuranceplancostsandslowhealthcarecostgrowth.



Figure6

American Bankers Association HSA Council’s Kevin McKechnie testified: “By2020,just18monthsfromnow,50percentoftheU.S.workforceareprojectedtobeenrolledinanHDHPthatisalsoHSA-qualified…”30

Today, more Americans have access to HSA and provider-specific qualityinformation.America’sHealthInsurancePlan(AHIP)reportsthat88percentofinsurersofferaccesstoHSAinformation,82percentofferaccesstohealthcarecostinformation,77percentofferaccesstohospital-specificqualitydata,and69percentofferphysician-specificqualitydata.31AsmoreAmericanslearnaboutHSAs,enrollmentsrise,andinsurersprovidemorepriceandqualitydatatotheircustomers.

Further,itisimportanttonotethatthesavingsandefficiencygainscanextendbeyond private insurers to governmentworkers andMedicaid recipients, asIndianahasshown.

ACaseStudy:Indiana.

Inrecentyears,theStateofIndianahasimplementedHSAsinMedicaidandasastateemployeeinsuranceoption.In2010,then-IndianaGovernorMitchDanielsexplainedinaWallStreetJournalop-edhowHSAsimpactconsumerbehavior:

30TestimonyofAmericanBankersAssociationHSACouncil’sKevinA.McKechnieattheJointEconomicCommittee’sJune7,2018,hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703331“HealthSavingsAccountsandHighDeductibleHealthPlansGrowasValuableFinancialPlanningTools,”America’sHealthInsurancePlans,April2018,p.5.https://www.ahip.org/wp-content/uploads/2018/04/HSA_Report_4.12.18.pdf

AmericansaremovingfromtraditionalhealthcareplanstocostsavingHSAswithhigh-deductibleplans.



Itturnsoutthat,whensomeoneisspendinghisownmoneyaloneforroutineexpenses,heisfarmorelikelytoaskthequestionshewouldask ifpurchasinganyothergoodor service: "Is thereagenericversionofthatdrug?""Didn'tItakethatsametestjustrecently?""WherecanIgetthecolonoscopyatthebestprice?"

GovernorDanielsalsonoted that:state employees enrolled in the consumer-drivenplanwereexpectedtosavemorethan$8millionin2010comparedtotheircoworkersinthetraditionalPPOalternative;workersswitchingtotheHSAwouldbeaddingthousandsofdollarstotheirtake-homepay(evenifemployeeshad health issues and incurred the maximum out-of-pocket expenses, theywould still be hundreds of dollars ahead); and HSA customers seem highlysatisfiedsinceonly3percenthaveoptedtoswitchbacktothePPO.32

MakingHSAsbetter.

TheaforementionedevidencesuggeststhatmanyAmericansarebenefitingfromHSA-basedcostcontainmentandrecognizethevalueinhavinggreatercontrolover their routine health care expenses. At the Committee’s June 2018 HSAhearing, witnesses praised HSAs and offered recommendations to increasebenefits, expand access, and offer greater flexibility to Americans. Several oftheseareaddressedinRestoringAccesstoMedicationandModernizingHealthSavingsAccountsActof2018(H.R.6199),IncreasingAccesstoLowerPremiumPlansandExpandingHealthSavingsAccountsActof2018(H.R.6311),andProtectMedicalInnovationActof2018(H.R.184),allofwhichpassedintheHouseofRepresentativesinJuly2018andweresenttotheSenate.

Belowarerecommendationsmadebywitnessesatthehearing.Increasebenefitsby:

• raisingthemaximumannualcontributionlimit;• removing restrictions for Medicare Advantage and Medical Savings

Accounts(MSA);and• allowingusageforover-the-counterdrugsandnon-prescriptionhealth

products.

ExpandHSAaccessto:• Medicare,Medicaid(withoutstateshavingtorequestafederalwaiver),

andSocialSecurityrecipients;• TRICARE, Indian Health Services, and Veterans Administration

enrollees;and• holdersoftraditionalorcatastrophicinsurancepolicies.

32Daniels,Mitch,“HoosiersandHealthSavingsAccounts,”WallStreetJournal,March1,2010.https://www.wsj.com/articles/SB10001424052748704231304575091600470293066

IndianashowsthatgovernmentemployeesandMedicaidrecipientscanalsobenefitfromHSAs.

Byincreasingbenefits,accessibility,andflexibility,moreAmericanscanenjoyHSAcostsavings.



Increaseflexibilitybyallowing:• usageforelderlyparents;• access toconciergephysicians,employerorretailmedicalclinics,and

telemedicine;• HDHPinsurerstopayforhigh-valuechronicdiseasemanagementbefore

thedeductibleismet;and• permittax-freerolloveroffundsatdeathtootherfamilymembers,not

justaspouse.

Hearing witnesses also noted thatmany plans offered in the ACA insuranceexchangecomewithveryhighdeductiblesbutaredisqualifiedfrombeingusedwithHSAsbecausetheirout-of-pocketlimitsaretoohigh,exceedingthelimitallowedforHSA-compatibleHDHPs.

AmericanBankersAssociationHSACouncil’sKevinMcKechnietestified:

Congressshouldmakethem[HSAs]availabletomorepeople,andmake their basic plan design more flexible. Expanding theusefulnessofHSAstoalargeraudiencewillbegoodforeveryone,because it will accelerate adoption and thus accelerate costreduction.33

Declining prices from increased health care competition will clearly benefitthose enrolled in HSAs, but the lower prices will ultimately reach non-HSAparticipantsaswell.Inotherwords,theexistenceofHSAslowerspricesforallhealthcareconsumers.

CONCLUSION

America’s health care industry has a spectacular history of innovation anddeliverythathasbenefittedAmericansandtheentireworld.However,70yearsof non-market policies—fromWWII wage controls to the increasing role ofgovernment inhealth care—haveadded inefficiencies that inflateprices.TheACAalone resulted in a simultaneous increase inpremiumsanddeductibles,whichconceptually,shouldhaveaninverserelationship.34Therearecertainlyothersourcesofrisinghealthcostsandinefficiencies.Forexample,ourmedicalliabilitysystemencouragesproviderstoordertestsandproceduresthatmaybeunnecessary in order to prevent being sued later for medical malpractice.However, third-party payment systems for a wide range of services and thealmostcompletelackofcompetitionarekeydriversoftoday’shighhealthcareandhealthinsurancecosts.

33TestimonyofAmericanBankersAssociationHSACouncil’sKevinA.McKechnieattheJointEconomicCommittee’sJune7,2018hearing,“ThePotentialforHealthCareSavingsAccountstoEngagePatientsandBendtheHealthCareCostCurve.”https://www.jec.senate.gov/public/index.cfm/hearings-calendar?ID=F5C36697-435D-4A45-AB94-6B285D32703334Atlas,Scott,“Americansare'winning'onhealthcareasTrumpadministrationchipsawayatObamaCare,”FoxNews,August6,2018.https://www.foxnews.com/opinion/americans-are-winning-on-health-care-as-trump-administration-chips-away-at-obamacare



To pay for rising insurance costs, employers substitute benefits for moneywages.HSAscanpotentiallyreversethistrend,generatesavingsforemployers,andincreaseworkers’take-homepay.

HSAsgiveconsumersgreatercontroloverhowtheirmoneyisspent,muchofwhich is currently administered by insurance companies, providers, andgovernment.HSAsmotivate consumers to carefullymonitorhealth spending:questionthenecessityofretakingexpensivetests;inquireintotheavailabilityofcheaperalternativeslikegenericdrugs;andshoparoundforlower-pricehealthcareproviders(e.g.,doctorsandmedicalsupplies).Atthesametime,theHDHPoffersprotectionfromunexpectedandexcessivemedicalcosts.

There is growing evidence that consumer-directed plans reduce health carespending.Byoneestimate,ifhalfoftheemployer-sponsoredinsurancepoliciesincorporated HSAs, national savings in health care spending could total $57billionannually.35

Byempoweringconsumerstomakewisechoicesandpromotinggreaterpricetransparency,America’shealthcaresystemwillbebetterabletodeliverhighquality at an affordable cost. Specifically, moving toward tax-preferred HSAs combined with an HDHP, consumers are put in charge of their health care spending for most routine services, and by having “skin in the game” they will make better health care decisions.

Russell Rhine

Senior Economist

35Haviland,AmeliaM.,etal."Growthofconsumer-directedhealthplanstoone-halfofallemployer-sponsoredinsurancecouldsave$57billionannually."HealthAffairs31.5(2012):1009-1015.https://search.proquest.com/docview/1015201853?pq-origsite=gscholar

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The Potential for Health Care Savings: Can Health Savings … · 2018-12-13 · Obamacare mandated: • Nearly all Americans to buy certain health insurance; • A requirement that