A few months ago, one of my two adult children started her first job out of college, and I helped her pick a health insurance plan. As is the case with most large companies, she had several options – all of which had high deductibles. One option included a health savings account (HSA) into which her employer contributes $600 a year. The high deductible health plan (HDHP) with an HSA seemed to make good economic sense for her.
High deductible plans (with or without HSAs) are now the law of the land – a sentiment echoed by panelists at a July 12 briefing hosted by the Employee Benefit Research Institute (EBRI). Even Medicare Part A has a deductible high enough to qualify as an HSA-compatible plan if eligibility rules were changed. There were 20 million HSAs at the end of 2016, collectively holding about $37 billion in assets, according to Devenir Group LLC. That’s up from $1.7 billion in 2006. And Devenir estimates as many as 45 million account holders, spouses, and dependents might be covered by an HSA-qualified HDHP. EBRI expects slow but steady growth in the employer market.
Many in the new administration and the Republican-led Congress have been vocal supporters of enhancing HSA policies across all markets, including the individual market. A number of bills have been introduced with the intention of spurring greater use of HSAs. These include both the House and Senate bills to repeal and replace key elements of the Affordable Care Act. Some of the proposed provisions would increase the annual maximum HSA contribution, allow individuals to use HSA funds to cover over-the-counter medications, and reduce penalties for account holders who use HSA funds for non-medical purposes – from 20 percent to 10 percent. Indeed, last week, the Senate added another proposal, which would let individuals use HSA funds to pay for their HDHP premiums. Senate leaders note that both the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) have projected this provision would increase coverage.
Some young adults might not be able to fund accounts
I recently had the chance to revisit the topic of health insurance with my daughter, and I now have some real-world insight based on how this option has worked out for her. For one, she has already gone through her employer’s contribution. Even for someone who is relatively healthy, she does have a health condition requiring medication, physician visits, and tests. Second, despite a relatively well-paying job, she is not in a position to contribute to her HSA – and won’t be for a while.
The latter revelation is something that is not uncommon for people my daughter’s age, which is supported by our latest research on this topic. The Deloitte Center for Heath Solutions recently published a paper that examines health savings accounts in the individual market, with a focus on learning from the experiences of employees as well as Medicaid and Medicare beneficiaries.
Our study found that young adults – a group that is considered essential for healthy risk pools – would need to have considerable funds in an HSA to pay for the typical outpatient hospital visit. While outpatient visits are less common than emergency room visits, they can be far more expensive. A review of plan designs in several markets, and comparisons to the average cost of an outpatient hospital visit, revealed the costs consumers under age 30 could face with an HDHP.
In the five markets we examined, we concluded that a 27-year-old would need to have between $3,617 and $6,572 in an HSA to cover the cost of the average outpatient hospital visit. Meanwhile, the typical 25- to 34-year-old in the group market has an average account balance of $1,414.1 Even for the oldest group, one outpatient hospital visit could wipe out the account.
“Health savings accounts (HSAs) in the individual market: HSA plans and high-deductible health plans continue to see steady growth,” Deloitte Center for Health Solutions
EBRI’s own studies on HSAs generally have found that:
- Most accounts are new. While HSAs have been available since 2004, 77 percent have been opened since 2013.
- Many accounts (36 percent in 2016) have no contributions.
- Account balances are trending up: the average was $2,536 in 2016.
- Individual contributions are also trending up: the average was $1,987 in 2016, while employer contributions were flat, averaging $935.
- Just four percent of account owners invested HSA dollars in 2016.
Can the individual market learn from employers and Medicaid?
The employer experience with HDHPs and HSA-compatible plans can provide many lessons for the individual market. Younger employees (like my daughter) generally contribute less to their HSAs than their older coworkers, and many healthier individuals find the combination of high deductible plan with accounts more attractive than do unhealthy individuals. Moreover, the arrangements are typically favored by high-income households over lower-income households, and HDHPs plans can reduce health care utilization and spending.
We are also beginning to learn from a few experiments with health accounts in Medicaid. Programs in Indiana and Michigan, for example, have shown that low-income consumers might become more price-sensitive and accountable for their own spending, but also could face barriers that are less common in the group market (e.g., absence of checking accounts or internet access can make it difficult to make payments or check balances).2
A takeaway from our paper and a point made at the EBRI conference that resonates with me is that an HDHP combined with an HSA can provide a financial incentive to shop for medical services, but employers have learned they need to invest in tools and education so that employees know how to use them. Although some employers might have figured out how to encourage people to invest in their HSA funds and use transparency tools to shop for care, there still are gaps in employees’ knowledge.
It can be far more challenging in the individual market where enrollees do not have an employer to help them. Health insurers and insurance exchanges might need to fill that role. These entities may need to consider enhancing tools and support to consumers as HDHPs and HSAs become more prevalent in the individual market.
Going back to the anecdote about my daughter, I think it is fair to say that high cost sharing – through deductibles or other benefit design – can put people at risk for significant out-of-pocket spending. If this means individuals are more apt to question the need for services and shop for lower prices, then that is positive. But sometimes people will have a hard time paying for necessary care. To be clear – this isn’t an issue stemming from HSAs, it comes from high-deductible products more broadly.
That said, I was struck at the EBRI conference with the idea that HSAs could really help people prepare for health care spending in retirement with tax advantages. Some of Congress’s proposed policy changes could make it easier for people to contribute and use the funds. Educating people – including my daughter once she gets ready to think about the long term – about the tax benefit of the contributions and spending (compared to a 401(k) or an individual retirement account), plus the value of investing the funds, is likely needed to help people use this vehicle to its potential.
1 Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2015: Estimates from the EBRI HSA Database, Employee Benefit Research Institute, 2016
2 The Lewin Group, Indiana Healthy Indiana Plan 2.0: Interim Evaluation Report, July 6, 2016; State of Michigan Department of Health and Human Services, Michigan Adult Coverage Demonstration Section 1115 Annual Report, 2016
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