Last year, as Congress debated what would become the Medicare Prescription Drug, Improvement, and Modernization Act, the media and most policymakers focused on the elephant in the room: major changes being made to the Medicare program, affecting more than 40 million senior citizens.
But a “mighty mouse” occupying the same room went largely unnoticed. The law also paved the way for greater consumer acceptance of Health Savings Accounts (HSAs) by allowing individuals who purchase high-deductible insurance policies to establish tax-free savings accounts for health care expenses.
New Insurance Option
HSAs became available to consumers on January 1, 2004, and real data on their use is emerging. In the first six months of availability, tens of thousands of Americans purchased HSAs. From January to April of this year, more than 50,000 polices were issued by eHealthinsurance and Assurant alone. Data from other firms is not yet available.
The early data has surprised critics by showing HSAs are encouraging many Americans to obtain health insurance and save for their future health expenses. Most importantly, many of the new HSA owners were formerly uninsured, defying initial prophecies that only the “young, healthy, and wealthy” would utilize the accounts.
With an HSA, the consumer purchases a high-deductible insurance plan, which has significantly more-affordable premiums, allowing those who are unable to purchase a “Cadillac” health care plan to become insured. Consumers then funnel some of their premium savings into an HSA account. Over time, consumers save enough in this way to pay their deductibles and other out-of-pocket expenses.
Under a typical HSA arrangement, an individual might have a health insurance policy with a $1,000 deductible and deposit $500 in an HSA. The first $500 of medical expenses is paid from the HSA; the next $500 is paid out of pocket; and above $1,000 the insurer pays the bills with a copayment from the consumer until the annual out-of-pocket cap is reached. HSA funds not spent remain in the account, roll over to following years, and grow by earning tax-free interest.
After a few years, the HSA could have sufficient funds to pay most, if not all, of the health care expenses not covered by the insurance plan. Importantly, the HSA account stays with the individual regardless of job transitions, and he or she can continue to accumulate the savings until retirement.
New Data Rebut Anti-HSA Myths
Two companies have collected and shared demographics about who is purchasing HSAs: Assurant Health (formerly Fortis), one of the largest carriers operating in the individual and small group markets; and eHealthInsurance, an online source of health insurance for individuals and small businesses, offering insurance products from a number of carriers nationwide. The data provide a broad-based look at what is happening in the market. They also help separate the myths from the facts.
Myth: HSAs will not help to reduce the numbers of uninsured, because people without insurance coverage will be unable to afford an HSA policy.
Fact: HSAs already have reduced the number of uninsured Americans.
- Some 43 percent of HSA applicants reported they did not have prior insurance coverage, according to Assurant.
- Nearly one-third (32.8 percent) of all HSA applicants to eHealthInsurance, and about half of those with incomes under $35,000, had not had coverage for at least six months prior to their enrollment in the HSA.
Myth: Only the wealthy will purchase HSAs, because lower-income individuals will not be able to contribute to their accounts.
Fact: HSA purchasers come from many income and vocational backgrounds:
- Nearly half (46 percent) of HSA purchasers have family incomes of less than $50,000, according to eHealthInsurance.
- Some 38 percent of Asssurant HSA purchasers have only high school or technical school training, Assurant reported.
- Many HSA purchasers live in modest homes–38 percent in homes with a market value of less than $125,000–and 27 percent of enrollees have a net worth of less than $25,000, according to Assurant.
Myth: Only the young will purchase HSAs, because older persons need insurance policies with better coverage for their medical conditions.
Fact: HSA purchasers are older than those purchasing traditional insurance:
- More than two-thirds (70 percent) of HSA purchasers are over age 40.
- HSAs were purchased by people from a broad cross-section of vocations, and less than 57 percent of purchasers were from professional and managerial occupations.
- Most HSA purchasers–77 percent–are families with children; 8 percent are single parents; and 45 percent live in households of four or more people.
Myth: Insurers will “cherry pick” the healthiest applicants, who present the least risk to the insurer.
Fact: Virtually all HSA applicants have been offered insurance coverage. Assurant Health was able to offer coverage for 93 percent of the HSA applications it received.
Myth: Insurers will not be able to provide quality, low-cost health insurance to those who purchase HSA-eligible policies.
Fact: Insurers provide comprehensive coverage at a modest cost. Of the policies sold by eHealthInsurance, for example,
- More than 70 percent cost less than $100 per person per month, and almost 95 percent of policies cost less than $200 per person per month.
- More than 95 percent of policies require beneficiaries to pay no more than 20 percent of the cost of office visits, surgery, and diagnostic tests once enrollees meet their deductible.
Myth: Purchasers of HSAs will defer needed preventive care or avoid taking needed medications that are not covered by high-deductible insurance.
Fact: Data on those who have purchased Medical Savings Accounts (MSAs), a precursor to HSAs, indicate enrollees are more likely to use preventive care and generic prescription drugs than those with conventional health insurance.
According to Assurant Health, prior to 2004, when the less-restrictive HSAs supplanted MSAs,
- Purchasers of high-deductible, tax-qualified MSAs made 31 percent more preventive-care office visits than did people with conventional health insurance.
- Generic drug usage was consistently higher for MSA purchasers.
Myth: Very few people will purchase HSAs.
Fact: HSAs have gained wide popularity in the short time since their introduction.
- Assurant Health received applications representing 56,396 members for Individual HSAs in the first four months of 2004, far more than the number of MSA applications Assurant received in the first four months of 2003.
- A survey by Mercer Human Resource Consulting found nearly three-quarters of U.S. employers describe themselves as “very likely” or “somewhat likely” to offer HSAs by 2006.
More Growth Likely
Because passage of the Medicare law came too late for most employers to include an HSA plan as part of their 2004 coverage options, the true impact of HSAs in the group market will not be felt until 2005. However, the data from the individual market strongly suggests HSAs are becoming popular across all age and income groups because of the low-cost, high-quality health insurance coverage they provide.
Laura Trueman ([email protected]) is executive director of the Coalition for Affordable Health Coverage (CAHC). An earlier version of this essay was published in July 2004.