Open Letter: Opponents Misrepresent Health Savings Accounts

Published April 1, 2004

To: Members of Congress
From: Greg Scandlen
Subject: Recent Attacks on HSAs

You have received emails from certain interest groups urging you to oppose adding Health Savings Accounts to the Federal Employees Health Benefits Program.

You have been told that traditional FEHBP premiums could double because HSAs would siphon off healthy enrollees from the comprehensive plans. These letters cite a number of old studies to support their claim, including ones by the RAND Corporation, Urban Institute, American Academy of Actuaries (AAA), and a Congressional Budget Office (CBO) estimate that adding MSAs to the FEHBP would cost $1 billion over five years.

It is important to understand what these studies actually say, rather than just accepting the spin that has been put on them. Of these, the AAA study is perhaps the most important. That was the basis of the CBO estimate, though the CBO study had other flaws as well.

American Academy of Actuaries

The AAA study was a serious piece of work performed by a working group of respected actuaries with varying points of view. It is a gross distortion to characterize it as anti-MSA or suggest it predicted massive selection problems with MSAs. The study was written in 1994-1995, and published in May 1995–well over a year before the HIPAA MSA provisions were even written, and certainly years before there was any experience with the approach.

The study was necessarily speculative. It could not focus on the specific designs that would become law, including how the programs would be treated for tax purposes. The authors didn’t know who would be allowed to contribute to the MSA or how much they could contribute. They didn’t know what sort of insurance coverage would accompany the MSA.

The study is full of cautions about program design. It says if employers pay a percentage of health plan costs, “a destructive cost spiral can result for the richest benefit option. However, multiple-option programs can be designed so as to avoid the spiral, by maintaining the same relative level of employee contributions among the various options from year to year.”

More importantly, the AAA did not know and could only guess at how consumer behavior would change. The authors knew that higher cost-sharing results in lower utilization, but they did not know how the presence of an MSA would change that dynamic. Would employees view the money in the MSA as their own money and therefore spend it wisely, or would they view the funds as the employer’s money and spend it without constraint? “Appreciating this distinction is critical to determining the precise effects of MSAs on utilization,” the study says.

The environment in 1994-95 was unique. The “backlash” against managed care had not yet set in, and the assumption was that HMOs would continue to be the dominant form of coverage. The study cautions, “Integrating the MSA concept with current managed care approaches, such as HMOs, will be difficult. Adoption of MSAs would require major changes, such as modifying state and federal HMO laws.”

Few analysts could foresee at the time that the consumers who were most discontented with managed care would be the highest utilizers. It was assumed that sick people would be concerned solely with out-of-pocket costs, not with gaining access to the physicians and treatment programs they preferred. We now know that the people with the greatest health care needs are the very people who want the most control over their own health care decisions. They find consumer-driven health care, including MSAs and HSAs, very attractive for that reason.

Congressional Budget Office

CBO estimated in 1998 that adding a HIPAA-qualified MSA to the FEHBP “would raise mandatory federal outlays by $0.4 billion over [a five-year period, and], subject to appropriations action, discretionary spending would increase by $0.5 billion.” How did they derive that? “CBO assumes enrollees selecting the catastrophic/MSA option would tend to be better health risks than those remaining in comprehensive plans.”

Not just better risks, but their costs would be 33 percent lower than the comprehensive plan premium. CBO also figures some of the 10 percent of federal employees who currently decline coverage would find the MSA attractive enough to enroll for the first time–not precisely a bad outcome.

CBO cites the experience of the government of Ada County, Idaho, which, though CBO doesn’t mention it, was not eligible for HIPAA-qualified MSAs and had no federal tax advantage. Ada County’s decision to stop offering MSAs was mostly tied up in local politics rather than a reflection of actual experience. CBO also cites the AAA study mentioned above and concedes its “estimates of selection results are uncertain.” One might think that with uncertain estimates an agency would offer a range of possibilities, but that isn’t how CBO works. It is required to come up with a specific number, regardless of the uncertainties.

Urban Institute

The Urban Institute released a study in April 1996 that tried to estimate the “winners and losers” with widespread adoption of MSAs. Again, the study predates the enactment of HIPAA so it is fairly speculative. But it doesn’t deal with selection at all, basing its estimates on universal adoption of MSAs. It concluded that 75 percent to 80 percent of the population would gain from MSAs, including low-wage workers. The people who would be financially disadvantaged would be those with annual expenditures in the range of $2,000 to $5,250. People with higher costs would find it a wash.

It is an important finding because people with mid-range expenditures are precisely where the greatest opportunity for cost-containment lies. Healthy people don’t consume enough health care services to make much of a difference, and the very high utilizers are unable to influence their own consumption very effectively. It is in the middle range, where people use significant services and also are likely to be well enough to change their buying patterns, that MSAs are most effective.

RAND Corporation

The opponents of HSAs cite some unidentified RAND study, but most of RAND’s work has been very favorable to HSAs. RAND has produced a number of important studies, starting with the landmark Health Insurance Experiment published in the early 1980s. (The study was conducted in the 1970s.) This study is actually the basis for most of the MSA/HSA activity. It showed definitively that people will consume more health care services when care is free, and far less when there is significant cost-sharing–without adverse effects to their health condition.

The most germane RAND study was “Simulating the Impact of Medical Savings Accounts on Small Business,” conducted by Dana Goldman, Joan Buchanan, and Emmett Keeler. This study found MSAs attracted the least healthy population by far, while the wealthiest people preferred HMO coverage, not MSAs.

The same RAND research team conducted an earlier study that was published in the Journal of the American Medical Association (JAMA) in 1996. They found, “Depending on the size of the catastrophic limit, waste from the excessive use of generously insured care could be reduced, and MSAs would be attractive to both healthy and sick people.”

Better Information Is Available

It is not necessary to base policy on nine-year-old speculations, projections, estimates, and simulations. Today we have real-life experience upon which decisions can be based.

MSAs have been in business for seven years, and there is absolutely no evidence they have had selection problems. Enrollment has been low because of the restrictions placed on them under HIPAA, but the hysterical predictions from some quarters–“MSAs will destroy the insurance pool,” “MSAs have become the Trojan horse that could destroy health insurance reform. [They] will raise premiums for the vast majority of Americans”–have clearly not materialized.

What we have seen is that MSAs appeal to a segment of the population that has declined any other kind of available coverage. The IRS reports 73 percent of MSA buyers had been previously uninsured.

More significantly, we now have nearly two years of experience with Health Reimbursement Arrangements (HRAs). The Galen Institute brought six of the leading vendors to Capitol Hill on February 11, 2004, to discuss their experience.

They report that, when given a choice, the people who choose HRAs actually tend to be older and slightly sicker than those who do not. But they also tend to make much better use of preventive services, use generic drugs much more, use hospital ERs much less, access supportive services like nurse hotlines much more, and generally have been holding down costs significantly. This material is all available at the Galen Web site at

Now Health Savings Accounts are available as a new option. There hasn’t been any reportable experience with them yet since they have been in effect only since January 1 of this year.

But HSAs solve many of the design issues the actuaries were concerned with, such as allowing first-dollar coverage for preventative services and lower allowable deductibles. Most importantly, they address the AAA question of whether employees will think of the HSA money as their own to be spent wisely.

HSAs belong to the worker, and they allow both employer and employee to contribute. Balances roll over from year to year and are fully portable when a worker changes jobs. There is no question workers will see this money as their own. And the opportunity to save a little money for future needs is of far greater value to lower-income workers than to “the wealthy.” Saving $1,000 a year means a lot to someone making $25,000, but not so much to someone making $100,000.

Employers all over the country–big companies, small companies, and everything in between–are setting up HSA programs for their workers. It would be a shame if the federal government deprived its workers of the opportunity to take advantage of this bright new idea by basing its decision on outdated or irrelevant studies.

Greg Scandlen is director of the Galen Institute’s Center for Consumer Driven Health Care and assistant editor of Health Care News. For more information, please contact him at [email protected], phone 301/606-7364.