HSA

On Friday I posted on Consumer Driven Health Care.  These consumer driven health plans (CDHPs) involve individuals having direct discretion about how health care dollars are spent.  If you are interested in CDHP, there may still be some confusion over which H?A you prefer.  Is a HRA (Health Reimbursement Account or Health Reimbursement Arrangement) or a HSA (Health Savings Account) better?  Scott Borden of OFM Benefits Consulting gives some simple explanations in his Kansas City Star article (”…Health Insurance for Workers“).

Consumer directed health plans (CDHP) seem like an attractive option for small businesses. CDHPs utilize high deductible health plans (HDHP) making patients pay more money out of pocket. Because of this, insurance premiums are lower. These HDHPs can be linked to Health Reimbursement Arrangements (HRAs) or Health Savings Accounts (HSAs). Since small businesses do not benefit from economies of scale with respect to the purchase of insurance, HDHPs may be especially attractive for this group.

A paper by Gates, Kapur and Karaca Mandic (2008) find this not to be the case, however. Firms employing 3-49 people are no less likely to offer high deductible health plans than are large firms–conditional on offering insurance. Midsize firms employing 200-499 workers are less likely to offer HDHPs than larger firms.

If the firm offers a HD health plan, will they offer an HSA? One may guess that small firms are less likely to offer HSAs if there are fixed costs to implementing an HSA. Small firms will have higher average costs to offering HSAs, if offering HSA is a true fixed cost and its cost to the employer is not proportional to the number of employees in the firm.

It turns out that small firms between 3-49 workers and firms with 200-499 workers are less likely to offer HSAs–conditional on offering HDHPs–than large firms with 500 or more workers. Middle sized firms with between 50 and 199 workers are just as likely to offer HSAs as large firms.

Other findings of the study include that HSAs are most popular in the Midwest and the South and, surprisingly, firms with a higher proportional of low-income workers are more likely to offer HSAs.

• Susan M. Gates, Kanika Kapur, and Pinar Karaca-Mandic (2008) “Consumer-Directed Health Plans and Health Savings Accounts: Have They Worked for Small Business?,” Forum for Health Economics & Policy: Vol. 11: Iss. 2 (Health Economics), Article 4.

Devon M. Herrick writes an article (”Why rent…“) creating a clever analogy comparing HSAs to equity in a house. He likens traditional health insurance to renting a home, while having a Health Savings Account (HSA) is more like owning the home. Making contributions to HSAs in essence gives you “equity” towards future health care expenses. On the other hand, if you do not use any medical care with traditional insurance, you lose all of your rent annual health insurance premium.

Mr. Herrick claims that he could cut his health insurance premiums by half if he had an HSA. There are 3 main reasons why health insurance premiums are lower. First, in a mechanical sense, health insurance plans are combined with HSAs which have higher deductibles. This means the insurance company will not pay for the first $1000 or so of medical care. Secondly, since there are high deductibles, utilization will decrease because of a reduction in the moral hazard problem. Finally, healthier people sort into HSAs and thus if everyone was compelled to have HSAs, health insurance prices would not decrease as much because there would be less advantageous selection.

As I have mentioned before in this blog, HSAs are highly unequal, since the rich 1) are the ones most likely to benefit from this legislation and 2) they have higher marginal tax rates and thus will receive a larger tax break for every dollar contributed.

Nevertheless, shifting more costs to the consumers and forcing consumers to face the true cost of medical procedures will help to reduce costs and to ensure than only necessary medical procedures are conducted.

• DM Herrick (2005) “Health Insurance: Why Rent When You Can Own?” Health Care News, The Heartland Institute, May 1, 2005.

What is the cost of the last article of clothing you bought. This is easy to determine, just check your credit card statement.

Which is cost of health insurance? This answer is more difficult to find. Sure, there is the price of the premium, but different insurance plans have different co-pay/co-insurance levels and different deductible amounts. How do these insurance product design parameters affect the demand for insurance?

This is the question tackled by Marquis et al. (2007). The authors use a nested logit model to examine plan characteristics within the individual insurance market. In their nested logit, the authors assume individuals first choose whether to be insured or not. Then, they must choose which type of insurance (PPO, POS, HMO, etc.). After they choose which type of plan they prefer, then a carrier is chosen. This methodology is based on the work of McFadden (1978).

The authors find an elasticity estimate of -2.0 for plan choice among purchaser. This means that those who are insurer are very price sensitive. However, Marquis and co-authors also find that once a particular company is selected, there are significant switching costs to changing companies. The elasticity of switching companies once a plan type (PPO, HMO etc.) is chosen is only -0.4.

The authors also find that:

…a 3 percent decrease in the actuarially adjusted price (or a 4 percent decrease in the nominal premium) would induce a healthy consumer to switch to a plan with a 50 percent higher deductible. For a riskier consumer, however, it would take a 4.5 percent decrease in the actuarially adjusted premium (or a 5.5 percent decrease in the nominal premium) to make the switch. This suggests that there is potential for selection in consumer-directed health plans—an outcome that concerns many critics of these new plans. In addition, the findings suggest that introducing new high-deductible products is unlikely to play a major role in reducing the number of uninsured.

Consumer education regarding the choice of different plans and help to expand coverage by introducing consumers to low-cost (actuarially) insurance options.

• Marquis MS, Buntin MB, Escarce JJ, Kapur K. (2007). “The Role of Product Design in Consumers’ Choices in the Individual Insurance Market” HSR 42(6) : 2194-2223.
• McFadden, D. 1978. “Modelling the Choice of Residential Location.” In Spatial Interaction Theory and Residential Location, edited by A. Karlquist, pp. 75–96.
  
  Amsterdam: North-Holland.

Health savings accounts (HSAs) have been a major point of contention for health care reformers. Supporters claim that HSAs can reduce health care costs by decreasing the moral hazard problem inherent when third parties—such as insurance companies or the government—pay for medical services. Opponents claims that HSAs will attract rich and healthy individuals, leaving only poor or sick individuals in the ‘regular’ insurance pool.

One interesting point made in Cardon and Showalter (JHE 2007) is the following:

“Both opponents and advocates of HSAs tend to argue that HSAs will lead to less reliance on insurance, either through higher coinsurance rates and deductibles, or through fewer purchases of policies. This line of reasoning ignores the fact that accumulated HSA balances are wealth, and health insurance protects this wealth. Even individuals with large HSA balances would typically value insurance to protect those balances for future use. HSAs will tend to reduce levels of insurance coverage, but the effect seems unlikely to be as large as some previous researchers suggest.”

The Cardon and Showalter article also gives a nice description of the five main types of tax-preferred health savings accounts.

1. “Archer medical savings accounts (MSAs): accounts in which an individual and/or an employer can contribute pre-tax dollars to pay for most health care services. The tax advantage is the same as for employer-provided health insurance premiums. Unused monies can accumulate over time. An experiment authorized under the Kassebaum-Kennedy bill (Health Insurance Portability and Accountability Act of 1996) allowed for restricted introduction of MSAs which included the requirement of purchasing a catastrophic, (high-deductible) health insurance policy (MSA/CHP).
2. Flexible spending accounts (FSAs): like HSAs, but with no link to insurance coverage. Funds not used by the end of the year revert to the employer.
3. Rollover FSAs: these would allow limited rollover of FSA monies without the restrictions on insurance choices that the current HSA rules require.
4. Health reimbursement arrangements (HRAs): tax-exempt individual accounts used to pay for medical expenditures. Accounts are funded by employers; employee contributions are not allowed. Ownership of the accounts remains with the employer, unlike HSAs and FSAs.
5. Medical IRAs. This proposal would allow consumers to make penalty-free early withdrawals from their retirement plans to pay for allowable medical expenditures.”

• Cardon and Showalter (2007) “Insurance choice and tax-preferred health savings accounts” J Health Econ, v. 26(2), pp. 373-399.