July 2006

Study says HSAs may not be reducing medical spending

Health-savings accounts (HSAs) may not be achieving their goal of reducing medical spending, according to a Commonwealth Fund study published in Health Affairs (July/Aug. 2006).

Proponents of HSAs believe they can reduce medical spending by making consumers more sensitive to the costs of care. The study, “How Much More Cost-Sharing Will Health Savings Accounts Bring?” finds that because of the tax subsidies accountholders receive, HSAs may actually lower effective out-of-pocket costs for some enrollees.

In the study, researchers Dahlia K. Remler, PhD, a professor at Baruch College School of Public Affairs, and Sherry A. Glied, PhD, chair of the department of health policy and management at Columbia University, evaluate consumer cost-sharing under traditional health policies compared with cost-sharing incurred under HSAs coupled with high-deductible health plans.

Remler and Glied find that HSA/high-deductible health plans actually reduce cost-sharing for people who spend the least and the most on healthcare, while increasing cost-sharing for individuals in the midrange of spending. In particular, those patients responsible for half of all medical spending — 7.7 percent of the population — would see no change, or even a decline, in cost-sharing under HSAs.

HSAs allow people to save and withdraw money tax-free to pay medical expenses. Because of this, HSAs extend the tax subsidy for health insurance premiums to consumers’ out-of-pocket medical spending. Employers also can contribute to workers’ accounts from pretax income.

Whether and to what extent HSAs actually reduce health spending depend on consumers’ behavior, the cost-sharing provisions of comprehensive plans and high-deductible health plans, as well as the tax bracket of those individuals with HSAs.

COST-SHARING COMPARED

For the study, the researchers modeled cost-sharing levels in three types of plans: a typical comprehensive plan ($350 deductible, 20 percent coinsurance, and $1,800 out-of-pocket limit); a typical high-deductible policy without an HSA (no coinsurance and $2,500 deductible); and the same high-deductible policy, but with an HSA.

In the comprehensive plan, maximum out-of-pocket spending would occur at total medical outlays of $7,600. But for someone with a high-deductible policy without an HSA, maximum out-of-pocket spending would occur at $2,500 of medical spending.

Thus, while the high-deductible policy has greater cost-sharing before the $2,500 deductible is met, the comprehensive policy has greater marginal cost-sharing above $2,500.

Moving to high-deductible plans with HSAs changes the cost-sharing picture. Because HSA contributions are shielded from federal and state income taxes as well as payroll taxes, consumers in effect receive a subsidy with which to purchase care.

With a marginal tax rate of 40 percent (35 percent income tax bracket, 6.2 percent Social Security, and 1.45 percent Medicare tax), for example, very healthy individuals would have lower cost-sharing under an HSA than under the comprehensive plan; only those with expenses between $700 and $2,500 would see an increase in cost-sharing.

EFFECTS BY SPENDING LEVEL

According to the authors of the Health Affairs study, HSAs with high-deductible plans would entail an increase in cost-sharing for those in the middle of the healthcare spending distribution. However, the accounts would bring a decrease for those at the very low end and in much of the high end.

In fact, the authors note, maintaining or introducing an out-of-pocket maximum while increasing the deductible would greatly reduce cost-sharing for high spenders, who are responsible for a large share of overall medical spending.

HSA plans as currently structured do not appear to greatly increase cost-sharing and may actually lower cost-sharing when tax subsidies are considered.

To make HSA/high-deductible polices more effective in controlling medical spending, the authors say that cost-sharing would have to be raised substantially among the people who spend the most on healthcare.

But a large increase in cost-sharing would make care unaffordable to those needing it the most.

Source: Commonwealth Funds, www.cmfw.com

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