Abstract: The current rules governing health savings accounts and high deductible health plans favor the rich over the middle class, divert funds from 401(k) plans, and create an incentive for the chronically ill to forego prescription medicines. These rules create a tradeoff — save for your retirement or take care of your health. The tradeoff is most severe for middle class people with chronic health conditions. This memo considers alternative rules for health savings accounts, which would lead to better financial and health outcomes.
Issue: Health Savings Accounts coupled with high deductible health plans are gaining market share. Proponents of this type of health insurance stress three advantages – (1) lower premiums, (2) incentives to economize on health care, and (3) a new source of retirement savings.
However, the increased use of health savings accounts has resulted in several problems.
First, the use of health savings accounts has resulted in low and middle income people with relatively low marginal tax rates paying more after taxes for health services.
Second, it appears that many mid and lower middle households have an incentive to contribute funds to a health savings account rather than a 401(k) plan. All contributions from health savings accounts on qualified health care expenses are tax free. After age 65, non health related expenses from health savings accounts are no longer subject to penalty and at that point health savings account and 401(k) health plans are fungible. The creation of health savings accounts is funded in large measure by reduced contributions to 401(k) plans because of this fungibility in funds after age 65 and because many middle-income households can’t save more. Moreover, most middle income taxpayers realize a modest tax savings from additional contributions to tax-deferred accounts.
Third, the high out-of-pocket expenses under high deductible health plans and the lack of funds in health savings accounts results in many people with chronic diseases choosing to forego needed prescription drugs. Studies have shown that 20% to 30% of prescriptions are never filled and that around 50% of prescriptions for chronic diseases are not taken as prescribed. The research indicates that a lack of adherence to prescription drug prescriptions contributes to 125,000 deaths, at least 10 percent of hospitalizations, and increased annual health costs ranging from $100 billion to $289 billion.
Intuitively, the growing use of health savings accounts and high deductible health plans has exacerbated this problem. Prior to the introduction of health saving accounts many insurance plans reimbursed expenses for prescription drugs prior to the deductible being met. High deductible health plans generally do not provide any reimbursement for prescription drugs or for any service until health expenses exceed the deductible.
The greater use of health savings accounts and high deductible health plans will result in sicker people having lower levels of retirement savings than healthy people. This occurs because sick people disburse more funds from health savings accounts and health savings accounts crowd out other tax deferred retirement accounts. Some people may economize by foregoing use of prescription medicines. This strategy may cause them to leave the workforce due to a chronic disease.
The increased substitutability of health care and retirement savings and expenditures insures that sicker people who cannot extend their careers are most likely to have insufficient retirement savings.
How should the rules governing health savings accounts and high deductible health plans be altered to reduce these unintended problems?
Alternative Rules:
The memo proposes modifications to current rules governing health savings accounts and high deductible health plans, which will maintain and strengthen existing positive incentives and will reduce the tradeoff between saving for retirement and spending to maintain health.
Modification One: Tax payers with family income less than 400 percent of the federal poverty line would be offered a refundable tax credit of $750 for individual plans or $1,500 for family plans to fund their health savings account. Higher income households could continue to make untaxed contributions to their health savings accounts
Comments on modification one:
This modification directly reduces the economic disparities between high and mid or low-income households stemming from the greater ability of higher income households to place funds in health savings accounts.
The additional cash given to low-income households should encourage more people to adhere to their prescription drug instructions.
The tax credit would only be available to people who have active qualified plans. The loss of the tax credit from a lapse in insurance coverage serves the same purpose as the recently repealed individual mandate for the state markets.
Modification Two: Contributions to health savings accounts would be allowed for people with higher coinsurance rate plans even if their plan had a relatively low deductible.
Comments on modification two:
The partial payment for prescription drugs prior to the insured meeting the deductible will reduce the number of people who do not adhere to prescription instructions because they lack funds for their prescription.
High deductibles tend to be a highly effective way to reduce premiums. In most cases the high-deductible plan will be less expensive than the high coinsurance rate plan. The choice between a high coinsurance rate plan and a high deductible health plan may depend on who pays the premium. When employers or government subsidies pay for the premium households are likely to prefer the more expensive plans. Individuals may be indifferent or prefer the less expensive plan when they are responsible for premium payments.
High coinsurance rate plans can in some circumstances provide a greater incentive to economize on health care plans than high deductible plans. Consider the example in the box below.
| Consider a simple example comparing incentives to economize for a high deductible health plan and a high coinsurance rate health plan.
The first plan has a $5,000 deductible and no coinsurance for expenses over $5,000. The insured individual may be reluctant to spend anything on health care unless he believes that total expenses will go over $5,000. Once expenses exceed $5,000 the person has no reason to economize of covered expenses.
The second health plan has a $0 deductible and a 50% coinsurance rate. The person does not lose his incentive to economize on health care until or unless total health expenses exceed $10,000. |
Modification Three: Regulations governing prescription benefit formulas for high-deductible plans should be modified to require partial payment of prescription drug costs prior to the deductible being met.
Comment on modification three:
Patients who receive no prescription drug benefits until a very large deductible is met have a strong incentive to forego prescribed medicines. This incentive is especially large for diseases like diabetes where the patient does not have immediate symptoms. However, failure to control blood and failure to treat other chronic conditions can lead to bad health consequences in the long or medium term.
The disadvantage of modification three is that higher prescription benefits will increase premiums.
Cost Considerations:
The tax credit for contributions to the health savings account will result in a loss of tax revenue. However, a tax credit that induces people to purchase less expensive health care plan could also reduce government subsidies for premiums. The outcome may depend on whether and how the government subsidies for premiums both in state exchange markets and for employer-based insurance are restructured.
The cost of this proposal may also be offset by proposals designed to strengthen state market places created by the affordable care act.
Concluding Thoughts:
There is something perverse about the movement toward health savings accounts and high deductible health plans when one considers the totality of the impacts.
The innovation makes health expenditures more expensive for low and mid income people with lower marginal tax rates.
This innovation creates an incentive for people to make contributions to health savings accounts rather than 401(k) plan.
People who are sick are more likely to spend funds in their health savings accounts than people who are healthy decreasing funds available in retirement.
People who have limited funds and high deductibles will have a large incentive to economize on all health expenses especially prescription drugs for diseases like diabetes.
The decision to forego necessary prescriptions and treatments will lead many individuals to get diseases that cause them to leave the workforce.
The current rules governing health savings accounts and high deductible health plans create a tradeoff — save for your retirement or take care of your health. The tradeoff is most severe for the middle class and people with chronic health conditions.
Some Additional Readings:
Recent research has shown that a high deductible health plan coupled with a health savings account will be the only health plan offered by four of ten employers.
https://healthpayerintelligence.com/news/high-deductible-health-plans-dominate-employer-offerings
Readers interested in empirical work on health savings account balances can go to the following study:
How Health Savings Accounts are Being Used Over Time:
https://www.ebri.org/pdf/PR.1194.HSAs.11July17.pdf
Readers interested in learning more about failures to adhere to drug prescriptions can go here:
https://www.ncbi.nlm.nih.gov/pubmed/22964778
Some information on how diseases like diabetes affect workforce participation for people nearing retirement age can be found here.
https://financememos.com/2018/08/23/diabetes-and-employment/
Authors Note: Please consider my book about ways to fix the student debt problem, available exclusively on Kindle and Amazon.
https://www.amazon.com/Innovative-Solutions-College-Debt-Problem-ebook/dp/B07D9VV8K7