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The HSA is a financial vehicle, akin to an individual retirement account, to which contributions may be made with pretax dollars and from which balances may be withdrawn to pay medical claims, again without payment of tax. If not spent in the year they are made, contributions accumulate, are invested, and can be spent on health services in subsequent years. Unspent balances belong to the account holder, not the employer, and can be moved when the enrollee leaves his or her job. Funds can be spent only on services considered by the Internal Revenue Service to be medically related, but the range of qualified services is broader than that often covered by insurance policies and may include dental, vision, and complementary medicine services, for example. The HSA expands the tax preference for health-related expenditures beyond the premium paid by the employer to encompass the out-of-pocket costs incurred by the employee, and it can easily be used by persons who purchase their own insurance without an employer subsidy.
HSAs receive favorable tax treatment only when they are accompanied by an insurance policy with a high deductible, typically managed by a preferred-provider organization (PPO), to cover the expenses of catastrophic illness. By law, HSA-compatible deductibles must be at least $1,000 for an individual and $2,000 for a family, but substantially higher deductibles can be found in the insurance market. As of March 2005, the deductible for the most prominent HSA products purchased in the individual (nonemployer) market averaged $2,790 for single persons and $5,230 for families.1 When paying for medical services, the enrollee first uses funds from the HSA, until the balance is exhausted, and then uses personal, after-tax income (the so-called doughnut hole) until expenses reach the deductible threshold. The enrollee then continues paying part of the costs incurred, typically 20 to 30 percent, until an annual maximum for out-of-pocket payments is reached, after which the PPO pays all costs.
When combined in this fashion with a high-deductible insurance policy, the HSA is referred to as a consumer-directed health plan. Consumer-directed designs were pioneered by entrepreneurs who were frustrated with the products and policies of managed care. Over time, however, the new designs have been incorporated into the portfolios offered by the dominant insurers, with the savings account sometimes managed by an affiliated banking institution. Most enrollment is still in employer-controlled arrangements for health care reimbursement, in which the unspent balance reverts to the company rather than to the individual, but enrollment in employee-controlled savings accounts is spreading rapidly. Total enrollment in both types of products among all insurers, as of March 2005, was 2.6 million. The largest vendors of consumer-directed products are currently UnitedHealth Group (865,000 covered enrollees), Aetna (370,000 enrollees), and the various Blue Cross and Blue Shield plans (400,000 enrollees).2,3
Most enrollment in HSAs comes from persons purchasing coverage outside the employment context. As compared with policies purchased by small companies or large corporate employers, individually purchased HSA products tend to have higher deductibles and lower premiums (see graph), in large part because individual subscribers are subject to underwriting and are not issued policies if they have substantial health problems or a history of using medical care services. Employers are more likely to purchase health care–reimbursement arrangements than HSA products, in order to retain unspent balances if a worker quits or is fired.
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The principal challenge to such products as a mechanism for cost control is that they focus their incentives on low-cost primary care services rather than on high-cost tests and specialist interventions. The majority of health care expenditures are incurred by the relatively small fraction of patients with the most severe conditions who have spent beyond their deductible and, in many cases, beyond their annual out-of-pocket maximum. There is considerable variation in the pattern of use for high-cost procedures, yet consumer-directed designs do not impose limits on such procedures after their costs exhaust the HSA and exceed the out-of-pocket maximum. In principle, products with high deductibles could be combined with managed-care mechanisms that target high-cost services. Some health insurance plans are experimenting with new network designs, medical-management programs, quality-based payments, and incentives for the adoption of information technology.4
The principle of insured services is "use it or lose it." If a healthy enrollee does not use medical care, the financial benefit goes to sick enrollees who incur claims in excess of their premium payments, instead of remaining with the healthy enrollee. HSA products limit this pooling of health risk to funds that are spent on the high-deductible PPO, whereas contributions to the HSA remain the property of each enrollee. This "use it or save it" principle increases enrollees' responsibility for costs incurred in their own care but decreases their responsibility for costs incurred in the care of strangers.
HSAs thus shift the locus of rights and responsibilities for financing health care from governments and employers toward individual consumers. As the personal property of each person, HSA funds are not a benefit provided by a third party. This shift reduces the potential scope of debate and legislative mandates concerning covered services. The shift from group to individual payment is analogous to efforts to translate part of the Social Security insurance structure into personally owned and managed retirement accounts. More broadly, the HSA is part of a vision that would increase authority for the individual in all aspects of society, with a commensurate reduction in authority for employers and government.5
HSA-based designs are compatible with consumers' desires for control in a world where someone needs to decide which patients will receive which health care services now, which later, and which never. The efforts in the managed-care era to delegate the setting of priorities to employers and insurers failed in part because these payers lacked the social legitimacy to perform ethically and emotionally charged tasks. Most industrialized countries assign the responsibility for setting health care priorities to the government, which uses price controls and capacity limits to restrain expenditures. Americans, however, tend to be skeptical of both big business and big government; many believe that the individual citizen is the appropriate setter of health care priorities. But although some persons can and will function effectively as consumers of health services — pursuing information about quality, comparing prices, and balancing care received today against care that may be needed tomorrow — others will fare less well.
HSAs and other consumer-directed products are receiving widespread attention and undergoing rapid growth, albeit from a small base. Regardless of its eventual market share, the HSA represents a milestone in the ongoing debate about health care reform. Increased cost sharing may cause underuse of effective health care but may also attenuate overuse of discretionary services by fostering greater awareness of costs. The shift from insurance to savings raises concerns about the distribution of financial responsibility between the healthy and the sick, but it salutarily highlights the imperative to adjust pay-as-you-go entitlement programs according to the demographic realities of an aging population and the budgetary realities of costly technology. The language of individual ownership weakens society's sense of collective responsibility for its most vulnerable members but emphasizes the importance of individual effort in generating the economic resources that underlie any system of care. The HSA moves the nation another step toward a personalized and privatized health care system.
Source Information
Dr. Robinson is a professor of health economics and chair of the Division of Health Policy and Management at the University of California, Berkeley, School of Public Health.
An interview with Dr. Robinson can be heard at www.nejm.org.
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