Bush's Health Savings Accounts Are Badly Flawed: John M. Berry

By John M. Berry, Bloomberg, August 3, 2006

Health savings accounts, the centerpiece of President George W. Bush's efforts to slow increases in health-care costs, have a serious flaw that makes them largely ineffective.

Another Bush proposal, the creation of an electronic health record for individuals, perversely appears to be leading to bigger, not smaller, bills for patients and higher costs for providers.

Those are the conclusions of academic researchers detailed in peer-reviewed work in the July/August issue of the journal Health Affairs.

Individuals or employers can contribute pretax money to the health savings accounts, which are tied to the purchase of a high-deductible health-insurance policy. No tax is due if contributions or earnings are withdrawn to pay out-of-pocket costs for most heath-care expenses.

The point is to use the carrot of a tax deduction to wean consumers -- and their employers -- from insurance policies that have low deductibles before benefits kick in.

Such so-called first-dollar insurance coverage plays a central role ``in dulling the incentives for consumers to shop carefully for cost-effective health care,'' Bush's Council of Economic Advisers said in its annual report last February.

The problem is that the most common high-deductible insurance policies that qualify someone to have a health savings account don't actually increase most consumers' health-care cost- sharing.

The Findings

The two researchers who presented this view in the journal were Dahlia Remler, an associate professor at City University of New York, and Sherry Glied, chair of the Department of Health Policy and Management at Columbia University.

``We show that typical plans in the market today already contain substantial cost-sharing,'' Remler and Glied wrote. ``We find that many HSA/high-deductible arrangements would actually reduce cost-sharing for many groups.

``In particular, the group responsible for half of all medical spending would see no change or a decline in cost-sharing at the margin and on average,'' they said.

In a recent interview, Remler said none of the referees who reviewed the article before publication questioned any of the conclusions. Nor has anyone else to whom she has spoken, whether they are supporters or opponents of health savings accounts.

Kaiser Surveys

``The analysis hasn't really been challenged,'' she said. The supporters' ``rhetoric on this is out of line with reality.''

Remler and Glied used data collected in 2004 by the Henry J. Kaiser Family Foundation/Health Research and Educational Trust to calculate what individuals were paying themselves. If out-of- network deductibles were included, the average deductible was $424 with an out-of-pocket maximum of $1,864. Twenty percent of the plans had no out-of-pocket maximum.

In addition, typical plans also require ``utilization reviews'' before a patient can qualify for coverage of many types of care, they noted.

``Thus, health-care plans today already contain both substantial cost-sharing and managed-care measures that are likely to reduce spending,'' Remler and Glied concluded.

Another Kaiser survey last year asked about high-deductible plans. The mean deductible among such plans was about $1,900 and the mean out-of-pocket maximum was about $2,550.

At first glance, it would seem that a high-deductible policy that qualifies someone to have a health spending account would give individuals much more incentive to be cost-conscious than a regular plan. That turns out to be incorrect, mainly because the out-of-pocket costs can be paid with pretax dollars.

Shielding Contributions

If an employer contributes to a health savings account for an employee, the money is shielded from state and federal income taxes and from payroll taxes. An individual's contributions aren't subject to the income taxes -- legislation proposed by the administration would both increase the amount that could be contributed and protect it from payroll taxes.

In the article, Remler and Glied showed an example in which a prototypical high-deductible policy had a $2,500 deductible and a $2,500 maximum out-of-pocket limit. If the policyholder's combined rates for federal and state income taxes and the payroll tax totaled 40 percent, paying that $2,500 would cost only $1,500 in after-tax money.

They compared that policy with a standard one that had a $350 deductible, a co-payment of 20 percent and an out-of-pocket limit of $1,800.

Comparing Deductibles

The comparison is striking.

Up to a total of $700 in health-care spending, the standard plan's out-of-pocket spending is greater. From $700 to $2,500, the high-deductible plan's out-of-pocket costs are greater, though not as much as you would think because of the continuing 20 percent co-payment in the standard policy.

At $2,500 in costs, the high-deductible policy's after-tax out-of-pocket expense is $1,500, compared with the standard policy's $780.

From that point on, there is no out-of-pocket cost for the high-deductible policyholder. Meanwhile, the standard-policy holder is still incurring that 20 percent co-payment. At $6,100 in health-care spending, the latter will have out-of-pocket costs of $1,500 and won't hit the limit of $1,800 until total spending has reached $7,600.

In other words, as spending rises from $2,500 to $7,600, the standard policyholder ought to be much more cost-conscious than the high-deductible policyholder.

Electronic Health Record

Remler said in the interview that cost-sharing in high- deductible policies could be increased to give them more bite. On the other hand, as the advocates who designed the policies realize, ``you can only have so much cost-sharing before you discourage people from buying insurance at all.''

Many of the opponents of health savings accounts have complained that they are much more attractive to high-income individuals because of the tax benefits. Now research by Remler and Glied indicates they aren't achieving their purpose of saving on health-care costs to boot.

As for the electronic health record idea, Jaan Sidorov, an associate at the Geisinger Medical Center in Danville, Pennsylvania, wrote in Health Affairs: ``The EHR often leads to higher billings and declines in provider productivity with no change in provider-to-patient ratios.''

``Error reduction is inconsistent and has yet to be linked to savings or malpractice premiums,'' Sidorov continued. ``Absent other fundamental interventions that alter medical practice, it is unlikely that the U.S. health-care bill will decline as a result of the EHR alone.''

The Bush administration has said adoption of this system could reduce health-care spending by as much as 20 percent a year.

Sidorov cites numerous studies on various aspects of EHR and none of them offer much encouragement that it will ever reduce health-care costs, and certainly not by 20 percent a year.

Restricting the increase in health-care spending is a worthy goal. Neither health savings accounts nor the electronic health record seem likely to help very much.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

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A study at the Columbia University School of Public Health concluded that HSAs are not likely to be an important contributor to expanding coverage among uninsured people and that "HSAs could potentially destabilize the small-group market."