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Early signs of trouble for health savings accounts

by Tony Novak, CPA, MBA, MT
   originally published 2006, updated 11/21/11

Health Savings Accounts have grown in popularity each year but the rate of expansion has been much slower pace than was predicted when this article was originally published.

Health Savings Accounts (HSAs) are barely off the design table and already some fundamental problems are being reported. Consumer-driven HSA plans and the resulting tax benefits are expected to be warmly embraced by the majority of Americans, but their benefits will not extend to everyone. Based on the first few hundred consumer inquiries received by OnlineAdviser^TM service through the Web site www.healthsavingsaccount-hsa.com , three distinct issues are emerging.

Three distinct groups will likely not benefit from HSAs:

1. Employees of large businesses will not embrace HSAs because their employers’ current health care cost-containment systems are already relatively cost-effective and the employers are not likely to react quickly to the new HSA design. There is simply not a strong financial incentive for these employees to switch to a high-deductible insurance plan. HSAs might adversely affect insurance plan costs, because premiums for younger healthier workers tend to subsidize the costs of older workers.
2. Small businesses may not be motivated to use HSAs because the employer does not share in any net savings achieved in providing these innovative health care plans to employees. HSAs may help accelerate the trend for small businesses to save money by increasing the deductibles on health insurance plans but will not provide the employer with a motivation to fund the tax-free savings accounts on behalf of employees. Other health plans like Health Reimbursement Arrangement (HRA) plans, in contrast, ultimately reward the business owner for adapting an innovative and cost-saving health plan design.
3. Those individuals with the highest health care expenses may not be eligible for HSAs if they cannot afford the accompanying HSA-qualified high deductible health insurance plans. There seems to be little incentive for health insurance companies who offer open enrollment or high risk pool health plans to file HSA-qualified versions of their health insurance products.

Even within the two groups of people most likely to embrace HSAs – small businesses and individuals who buy their own health insurance (including self-employed individuals) - there are significant issues to resolve.

Early indications show that small business owners initially like the concept of HSAs. The simplicity and cost-saving features are appealing. Buying cheap health insurance with a high deductible and then using the savings realized to make cash deposits into each employee’s account sounds very attractive. Businesses also like the fact that they no longer have to comply with the strict insurance requirements of the Medical Savings Account plans. Any high deductible insurance plan can be used in conjunction with a Health Savings Account.

When digging deeper, the picture changes. Health Savings Accounts, just like their predecessor Medical Savings Accounts, allocate all of the significant savings realized to the employees and none to the employer. A Health Savings Account requires the owner to make the contribution to employees’ accounts regardless of the medical claims incurred. The business owner’s costs are fixed; the employee stands to enjoy any cash balance left over after thrifty health care spending. In contrast, other popular health plans like Health Reimbursement Arrangements (HRA), and partially self-funded health plans reward the employer for adapting innovative health plan designs to save money. Even fully insured health plans reward businesses with healthy employees with lower renewal rates. HSA plans do not offer this advantage. Interest in small business HSA plans may fade when business owners realize this drawback. HSAs could suffer from the apathy that characterized the Medical Savings Account program once business owners understand the situation.

Some individuals who purchase their own health insurance are discovering an entirely different problem with HSAs. For these individuals, the “entry price” of the HSA program is the cost of the lowest price high deductible health insurance available. In many cases the current legal structure makes these plans unaffordable¹. The original HSA legislation proposal allowed individuals without health insurance to open a Health Savings Account, but this does not provide effective health care protection. HSAs, like their predecessor MSAs, are beneficial only when used in combination with high deductible insurance.

This affordability problem is particularly acute in states like Massachusetts, Maine, New Jersey, New York, Washington and Vermont where state insurance regulations prohibit the availability of low cost or “bare bones” health insurance plans. These states basically endorse a “one type of plan for all” strategy and the least expensive health insurance plan can cost several hundred dollars per month. These states tend to have the highest rate of uninsured individuals. In states like Hawaii and Washington there seems to be little market incentive to change state laws to encourage more competition from the national low-cost health insurance plans. In these states, the current health insurance market may remain unaltered by the availability of HSAs. Without the availability of an affordable qualifying health insurance plan, the HSA is a moot point².

Even more likely to feel the bite of the health insurance affordability issue are those who have pre-existing medical conditions. They usually find that the guaranteed availability of health insurance (often under the state’s federally mandated HIPAA coverage for high risk individuals) is meaningless if the plan is unaffordable.

The marketing and distribution of HSA plans may also be a problem. Most HSA product providers are not expected to pay fees or commissions to financial service agents or, alternately, the fees they pay are significantly lower than industry costs to offer the HSA plans to customers. This means that the financial industry will either ignore them (as happened with the former MSA program) or charge additional up-front fees that may restrict some potential applicants from investigating the HSA plans. In the first few weeks that HSA products were available to the public (December 2003), most HSA plans were promoted by accountants and attorneys to their (presumably) affluent clients who paid a significant fee for this advice. It seems likely that an average consumer relying on an average insurance agent probably would not have access to most HSA programs. This adds credibility to the argument that HSAs are a tax shelter for the wealthy.

Finally, nothing in the HSA program addresses the underlying issue of health care inflation. A person who starts an HSA plan in 2004 can expect the renewal costs to be at least 12% higher in 2005. Larger annual cost increases of 20% or even 30% are possible.  A common complaint of the MSA program was that insurance cost increases, as a percentage of premium, were larger than other health plans. While the overall dollar cost of MSAs was lower than other health plans, the sharp rate of price increases was disturbing to many members.

Health Savings Accounts offer generous benefits that may be enjoyed by the majority of Americans who choose to use them starting in 2004. But the large groups that will not benefit from the new HSA legislation could create a backlash that underscores our ineffectiveness in dealing with the toughest issues in health care delivery. Large and small businesses providing coverage to employees will probably bypass HSAs in favor of other health plan designs like Health Reimbursement Arrangement (HRA) plans. Young and healthy individuals will love the new HSA plans but the picture changes quickly in the event that they incur any serious ongoing medical condition that requires years of expensive treatment.

Footnotes:

¹ For purposes of this article “affordable” is defined simply as reported verbally by users of the OnlineAdviser^TM service who say something like “I cannot afford health insurance”. In fact, other better-documented studies and reports (including other articles by this author) report that the large majority of Americans could afford health insurance by reallocating household disposable income to give a higher priority to health care expenses but choose not to do so. For example, one recent report of large employers who raised co-payment costs for prescription drugs indicates that an out-of-pocket increase of as little as $20 per month can cause up to a third of employees taking prescription medications to stop taking their treatments. The reasons for the halt were not officially polled, but benefits personnel in the companies studied cited employee complaints about affordability. Regardless of the underlying facts, those individuals who conclude that they cannot afford health insurance may be excluded from the benefits of a health savings account.

²While HSAs are being used in combination with a few uninsured health plans, this is a rare exception that is not in the best interest of most businesses. See www.freedombenefits.org for example of HSA-qualified uninsured health plans.

Status: available for reprint; some portions may be outdated

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