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Health Savings Accounts: Why They Won't Cure What Ails U.S. Health Care

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Health Savings Accounts: Why They Won't Cure What Ails U.S. Health Care

by S.R.Collins, Commonwealth Fund

Executive Summary

Invited Testimony before the Committee on Ways and Means U.S. House of Representatives Hearing on “Health Savings Accounts,” June 28, 2006

Thank you, Mr. Chairman, for this invitation to testify on health savings accounts (HSAs). The Committee is to be commended for focusing attention on the manifold problems currently confronting the U.S. health care system: steady growth in the number of uninsured Americans, rising health care costs and premiums, wide variation in the quality and cost of care, and inefficiencies in the delivery and administration of care.

Some maintain that HSAs, coupled with high-deductible health plans (HDHPs), are an important part of the solution for the cost, quality, and insurance problems that plague the U.S. health care system. Asking families to pay more out-of-pocket, the reasoning goes, will create more prudent consumers of health care, driving down growth in health care costs and improving the quality of care as providers compete for patients. And the tax incentives of HSAs will lure previously uninsured people into the individual market, reducing the numbers of families without health insurance.

But while it is comforting to believe that such a simple idea could help solve our health care problems, nearly all evidence gathered to date about HSAs and HDHPs points to the contrary. Indeed, there is evidence that encouraging people to join such health plans might act as salt on a wound, exacerbating some of the very maladies that undermine our health care system’s ability to perform at its highest level.

Higher Patient Cost-Sharing Is the Wrong Prescription

  • Americans already pay far more out-of-pocket for their health care than citizens in any other industrialized country.
  • Real per capita out-of-pocket spending has been steadily rising since the late 1990s. Combined with sluggish growth in real incomes, families are spending increasingly more of their incomes on medical costs.
  • There is considerable evidence that high out-of-pocket costs lead patients to decide against getting the health care they need.
  • Rising out-of-pocket costs reduce people’s ability to save for the future.

Early Experience with HSA-Eligible HDHPs Reveals Low Enrollment, Low Satisfaction, High Out-of-Pocket Costs, and Cost-Related Access Problems

  • Few people are currently enrolled in HSA-eligible HDHPs; those who are enrolled are much less satisfied with many aspects of their health care than adults in more comprehensive plans.
  • People in these plans allocate substantial amounts of income to their health care, especially those who have poorer health or lower incomes.
  • People in HDHPs are far more likely to delay, avoid, or skip health care because of cost. Problems are particularly pronounced among those with poorer health or lower incomes.
  • People in these plans are more cost-conscious consumers of health care: they are more likely to ask for lower-priced drugs and more likely to discuss with their doctors different treatment options and the cost of care.
  • Few Americans in any health plan have the information they need to make decisions. Just 12 to 16 percent of insured adults have information from their health plan on the quality or cost of care provided by their doctors and hospitals.

Patients’ Use of Information Alone Is Not Likely to Dramatically Reduce Health Care Costs or Improve Quality

  • It is unrealistic to expect that even with adequate information and patient financial incentives, the transformation of health care system will be driven by patients’ choice of provider. Patients are in the weakest position to demand greater quality and efficiency.
  • Most health care costs are incurred by very sick patients, often under emergency conditions. Shopping for the best physician or hospital is impractical in such circumstances.
  • Payers, federal and state governments, accrediting organizations, and professional societies are much better positioned to insist on high performance.

HSAs Will Not Solve Our Uninsured Problem

  • Economists Sherry Glied and Dahlia Remler estimate that under current law, fewer than 1 million currently uninsured people are expected to gain coverage as a result of HSAs. This is primarily because 71 percent of uninsured Americans are in a 10-percent-or-lower income tax bracket and would thus benefit little from the tax savings associated with HSAs.

New Proposals to Expand HSAs May Fragment Group Insurance Markets, Increasing the Number of Uninsured

  • Additional tax incentives proposed by the Administration’s 2007 fiscal year budget aim to equalize the tax treatment of HSAs in the individual market to those in the employer market, with premium tax deductibility and tax credits. Economist Jonathan Gruber estimates that the Adminstration’s proposals would actually increase the number of uninsured Americans by 600,000. While 3.8 million previously uninsured people would become newly insured through HSA-eligible HDHPs in the individual market, many employers, especially small employers, would drop coverage. Some 8.9 million people would lose their employer-based health insurance.

What Needs to Be Done
We as a nation should focus on more promising strategies for expanding coverage, improving affordability, and lowering costs. These strategies include:

  • Expanding group insurance coverage, with costs shared among individuals, employers, and government. This could be done by expanding employer-based coverage, eliminating Medicare’s two-year waiting period for coverage of the disabled, letting older adults “buy in” to Medicare, and building on Medicaid and the State Children’s Health Insurance Program (SCHIP) to cover low-income parents, young adults, and single adults.
  • Ensuring affordable coverage for families by placing limits on family premium and out-of-pocket costs as a percentage of income (e.g., 5% of income for low-income families).
  • Greater transparency with regard to provider quality and the total costs of care.
  • Pay-for-performance incentives to reward health care providers that deliver high quality and high efficiency.
  • Development of “value networks” of high performing providers under Medicare, Medicaid, and private insurance.
  • High cost care management and disease management.
  • Improved access to primary care and preventive services.
  • Investment in health information technology.

Citation: S. R. Collins, Health Savings Accounts: Why They Won’t Cure What Ails U.S. Health Care, Invited Testimony Committee on Ways and Means U.S. House of Representatives Hearing on “Health Savings Accounts,” June 28, 2006

Fragmented system of coverage vulnerable to budget

Budget Writers Nix Children’s Coverage Expansion
Health Access Alert
June 26, 2006

Legislative leadership and Governor Arnold Schwarzenegger, announced earlier today that they had come to a deal on a state budget. Eager to pass a budget on time this year, they gave up on the fight to expand children’s coverage, one of the sticking points with Republican legislators. Since a budget requires a two-thirds vote, Republican legislators were able to hold up the budget on this issue.

Republicans from both houses had been fuming over $23 million, which had been added by Gov. Arnold Schwarzenegger in his May Revise, to cover about 24,000 children who were awaiting coverage through their local county “Healthy Kids” initiatives. This money is no longer in the budget.

Last week, Republicans had succeeded in getting Democrats to abandon a plan that would have expanded Healthy Families (SCHIP) to all children living in families with incomes below 300 percent FPL ($60,000 for a family of four) beginning in 2008. Also opposed by Governor Schwarzenegger, that plan was slated to cost $1.8 million this year and expand over the next few years.

Both efforts included covering all children, including undocumented children, which make up around 12% of the uninsured children in the state.

http://www.health-access.org/

Kids’ health hooks voters
By Soraya Sarhaddi Nelson
The Orange County Register
June 25, 2006

The two leading gubernatorial candidates say ensuring that basic health care is available to all of the state’s children will be a top priority for them if they’re in the Governor’s Office next year. The issue is important enough to Gov. Arnold Schwarzenegger that he parted company with fellow Republicans in his proposed budget this year, earmarking $23 million to provide coverage for youngsters in 18 counties who don’t qualify for programs like Medi-Cal or Healthy Families (SCHIP) because they aren’t poor enough or are here illegally.

“As you have heard me say many times, we should not politicize the children and drag them into this,” Schwarzenegger told reporters in mid-June. “Children need to get all the attention, if they are here legally or illegally.”

http://www.ocregister.com/ocregister/news/state/stateelections/article_1192707.php

Comment:

By Don McCanne, M.D.

There is almost universal support for providing all children with health care coverage. Although employer-sponsored coverage has continued to decline, efforts to cover children have offset much of this decline, slowing the rate at which the numbers of uninsured are increasing.

Instead of a universal program of health care coverage, we depend on a fragmented system of providing coverage. Special efforts have been made to cover low-income children though Medicaid, SCHIP (Healthy Families in California), and county programs such as California’s Healthy Kids. Theoretically, all low-income children should be covered through these programs. But what is the reality?

Because of greater state revenues than anticipated, in his May Revise of the budget Gov. Schwarzenegger was able to include funding for the county Healthy Kids program. These funds were not to expand eligibility, but rather they were to fund care for children that were already qualified for this program but were excluded merely for lack of budgeted funds. But in the legislative budget battles, these funds were once again cut, leaving 24,000 children on the waiting list (eligible but unfunded).

SCHIP (State Children’s Health Insurance Program) has been the most successful program of the past decade in expanding coverage for children. Many support its expansion to include all uninsured children. Yet partisanship has prevented a modest expansion of the program in California that would have been accomplished by setting the threshold for eligibility at 300 percent of the federal poverty level.

As long as we have a fragmented system of providing health care coverage, the political debates will center not simply over how much we can “afford” to budget for health care, but also about which citizens we will exclude from any coverage whatsoever.

(I used “citizens” deliberately to separate immigration issues from health insurance issues. Fragmented systems of funding health care result in profound inequities in coverage and access. The fact that 12 percent of uninsured children in California are also undocumented does not change that fundamental premise. We can agree on covering the other 88 percent of uninsured children, and then many of us can continue the battle to see that every person living in the United States receives affordable health care regardless of what documents they possess.)

Consumer Directed Health Care and Health Savings Accounts

“Consumer-directed health care” (CDHC) is a euphemism for shifting health care costs onto patients with skimpy insurance policies that offer virtually no coverage. Popular with conservatives, CDHC plans are based on the idea that Americans currently have too much insurance coverage, and would be more prudent purchasers if forced to pay more of their own health care costs. CDHC plans have very high deductibles (e.g. $10,000 for a family), and some come with an attached health savings account (HSA), a private bank account that can be used to pay health expenses (although half of all employees have nothing in their HSA).

But this concept is fundamentally flawed. Americans are not “overinsured,” illness and medical bills currently contribute to half of all U.S. bankruptcies (pdf). These plans simply shift costs from insurers and businesses onto families. Moreover, they offer no hope of controlling health costs, as the sickest 20 percent of the population responsible for 80 percent of health spending (people with tens or hundreds of thousands of dollars in health costs annually) has no incentive to change their spending. In reality, these plans add another complex layer of administration which will exacerbate wasteful health spending.

This fact sheet provides background on consumer directed health care and outlines the arguments against it.

Click here to read the fact sheet (pdf)

Read the testimony of Senior Health Policy Fellow Dr. Don McCanne on HSAs. Submitted to the Committee on Ways and Means, United States House of Representatives.

For additonal information, read an exchange between Dr. Don McCanne and Dr. James Knight on Health Savings Accounts.

Tax Credits for Private Insurance

It is often suggested that the best way to cover the uninsured would be to provide them tax credits to buy private insurance. But tax credits simply launder public money through wasteful private insurance system that takes a one-third cut of every dollar. With the cost of private insurance policies skyrocketing ($10,000+ for family coverage), the size of tax credits would have to be substantial to help the uninsured get coverage. Moreover, studies have shown that offering these credits barely makes a dent in the number of uninsured because it gives employers the incentive to drop coverage for their employees.

In this brief, PNHP Senior Health Policy Fellow Dr. Don McCanne details the case against using tax credits to cover the uninsured.

Click here to read the brief (pdf)

A Survey of the Canadian Health System

In this excerpt from “Universal Health Care: What the United States can Learn from the Canadian Experience,” the authors (including PNHP Past President Dr. Claudia Fegan) provide a realistic survey of the strengths and weaknesses of the Canadian health system, debunking many of the common myths.

Click here to read the excerpt (pdf)

The Canadian Supreme Court Decision

In June 2005 the Supreme Court of Canada ruled in a close (4-3) opinion that Quebec’s ban on private insurance duplicating services covered by the public system violates that province’s Charter of Rights and Freedoms. The case (Chaoulli v. Quebec) was brought by Dr. Jacques Chaoulli, an extreme right-wing physician with close ties to pro-privatization political organizations. In an unusually strongly-worded dissenting opinion, the minority criticized the questionable basis for the case, its overtly political motivation and the phony “experts” brought to testify.

Click here to read PNHP’s statement on the Canadian Supreme Court Decision

Click here to read a backgrounder on the case (pdf)

A Proposal for Financing National Health Insurance

In this 1999 article, physician economist Dr. Edith Rasell outlines a possible system for financing national health insurance. Savings on administration (currently 31 percent of health spending) would be combined with current sources of public funding (Medicare, Medicaid, SCHIP, etc). A modest 2 percent personal income tax would replace insurance premiums and out-of-pocket costs currently paid by individuals (the average individual health insurance premium alone is today more than $3,500), and a 7 percent payroll tax would replace employer contributions and relieve them of the costly burden of administering their own health benefits (industrialized sectors currently pay as much as 14 percent of payroll for health care).

Although Dr. Rasell’s is the most often cited financing structure, any number of different arrangements could possibly be used. Since the financing of public programs is more a matter of tax policy than health policy, PNHP does not endorse any single financing proposal.

Read “An Equitable Way to Pay for Universal Coverage” (pdf)

For-Profit Hospitals Cost More and Have Higher Death Rates

In this pair of studies from the Canadian Medical Association Journal, a distinguished team of researchers led by Dr. P.J. Devereaux at McMaster University (Ontario) performed large scale meta-analyses on the existing research concerning mortality rates and payments for care at private for-profit vs. nonprofit hospitals. Since private for-profit hospitals are virtually nonexistent in Canada, the research examined U.S. for-profit hospitals. Taken together, the studies reviewed 23 academic papers (15 on mortality rates, 8 on payments) examining more than 26,000 hospitals.

After all the research was reviewed, the evidence against for-profit hospitals was conclusive: for-profits had 19 percent higher costs and 2 percent higher death rates. The authors attribute these defects directly to the for-profit nature of the hospitals: The necessity to generate revenues to satisfy investors, the significantly higher administrative costs and the large executive bonuses, they say, “result in limitations of care that adversely affect patient outcomes.”

Read “Payments at For-Profit and Non-Profit Hospitals” (pdf)

Read “Mortality Rates of For-Profit and Non-Profit Hospitals” (pdf)

For-Profit Hospitals Cost More and Have Higher Administration Expenses

In this 1997 NEJM study, Drs. Steffie Woolhandler and David Himmelstein examine costs of care and administration at for-profit, nonprofit and public hospitals in the U.S. They found that administration consumes 34.0 percent of total costs at for-profit hospitals, 24.5 percent at nonprofit hospitals, and 22.9 percent at public hospitals. Compared with public hospitals, nonprofit hospitals were 23 percent costlier and for-profits were 34 percent costlier. Among acute care hospitals, for-profits had higher adjusted costs per discharge ($8,115) than did nonprofit ($7,490) or public ($6,507) hospitals. Much of this difference was due to higher administrative costs.

Read “Costs of Care and Administration At For-Profit and Other Hospitals in the U.S.” (pdf)

For-Profit HMOs Provide Worse Quality Care

In this 1999 JAMA study, Drs. David Himmelstein, Steffie Woolhandler, Ida Hellander and Sidney Wolfe examined the performance of for-profit HMOs vs. nonprofit HMOs on 14 quality-of-care indicators. Compared to the nonprofits, for-profit HMOs performed worse on all 14 care indicators. After controlling for HMO model type, geographic region and method of data collection, the researchers found investor-ownership to be consistently associated with lower quality care.

Read “Quality of Care at Investor-Owned vs. Not-for-Profit HMOs” (pdf)

For-Profit Medicare Plans Cost 11 Percent More Than Traditional Medicare

Medicare advantage (formerly Medicare + Choice) plans are private for-profit plans that administer Medicare benefits. Given a big boost by the 2003 Medicare drug bill, supporters argued that competition and businesslike efficiency of these plans would drive down costs. In fact, the reverse is true. Private plans enrolled only cheap, healthy seniors and dumped the rest on the traditional program. The result has been large overpayments by Medicare to the private plans. This latest report from MedPac finds private plans are paid an average of 111 percent of what it would have cost to treat their beneficiaries in traditional Medicare.

Click here to read more (pdf)