Category: Health

The true-false questions presented here are fully explained in the memo A 2024 Health Care Reform Proposal.

Questions:

1. High-deductible health plans coupled with health savings accounts are more likely to prevent a $25,000 to $50,000 out-of-pocket health expense than short-term health insurance.
2. The sum of deductibles and worker share of premiums has decreased since the passage of the ACA.
3. Tax preferences associated with health savings accounts are smaller for low-income people than for high-income people.
4. The Senate could make major changes to the tax-treatment of employer-based insurance and the premium tax credit based on a majority vote.
5. Short-Term health plans provide great protection if total health expenditures remain below the annual cap.
6. The ACA guarantees that people purchasing state-exchange health insurance have access to top cancer hospital if they get cancer.

Answers and Discussion:

1. True. High-Deductible health plans cap out-of-pocket health expenditures. The current out-of-pocket limits are $7,050 for an individual policy and $14,100 for a family policy. The arbitrary benefit exclusions on short-term health plans can lead to large out-of-pocket expenses for relatively minor health problems.
2. False. The sum of deductibles and worker shares of premiums has risen since passage of the ACA.
3. True. HSA contributions are deductible. The value of the deduction is determined by marginal tax rates. This disparity could be eliminated by replacing the HSA tax deduction with a tax credit.
4. True. if done through the tax reconciliation process. Several tax changes are proposed in the book including the tax credit discussed above and the replacement of the tax subsidy for employer-based health insurance with an employer subsidy of state-exchange insurance.
5. False: A three-day stay in the hospital could result in thousands of dollars of health expenses for people covered by a short-term health plan. The book points the reader to some papers that found problems associated with short-term health plans could be rectified through reinsurance subsidies or by allowing automatic access to Medicaid for people covered by a policy with an annual cap.
6. False. In fact, state-exchange health insurance policies tend to have narrower provider networks than employer-based health insurance policies. The book discusses how issues related to narrow network policy might be addressed through network adequacy regulation, expansion of the No-Surprises Act and new subsidies.

I am not looking forward to a 2024 debate between advocates of Medicare for all and people who want to tinker around the edges of the ACA.  The memo A 2024 Health Care Reform Proposal makes the case for a centrist-flavored overhaul of health insurance in the United States.

Background on Short-Term Health Plans:

A short-term health plan is a health plan that does not provide the essential minimum benefits offered by ACA compliant health plans on state exchanges or through employers.  

Unlike state-exchange and employer-based health plans, insurance companies can refuse to sell short-term plans to people with pre-existing conditions.

Also, unlike state-exchange and employer-based health plans insurance companies can base premiums on a person’s health status.

A recent report by the Democratic staff of the House Energy and Commerce Committee and a paper by the Kaiser Family Foundation paper  identify several general problems with short-term health plans. These problems include:

• Denials of benefits for life-saving procedures including treatments for cancer and heart surgery.
• Strict limits on reimbursements for hospital stays, surgeries and for doctors. Limits include $500 per policy period for doctor visits, a $1,000 daily limit on hospital reimbursements, a $500 maximum for emergency services, and a $2,500 maximum for surgery services. 
• Denial of benefits by requiring extensive documentation after a procedure has been conducted,
• Rescission of coverage
• Lack of automatic renewability.  By contrast, since 1996 federal law guaranteed renewability for all other individual health insurance plans.
• Existence of annual and lifetime benefit caps. Caps on other plans are prohibited by the ACA. 
• No annual cap on cost sharing, another departure from ACA rules.
• No minimum loss ratio.  ACA plans have a minimum loss ratio of 80 percent.  

A second paper by the Kaiser Family Foundation discusses the extent to which short-term health plans covered mental health services, substance abuse, outpatient prescription drugs and maternity care.  The paper found that:

• 43 percent of plans lacked coverage for mental health services, 62 percent did not cover substance abuse, 71 percent did not cover out-patient prescription drugs and no plans covered maternity care. In seven states all available short-term health plans lacked coverage in all categories.

An issue brief written by IHPI concludes increased use of short-term health plans will result in increased coverage gaps for pregnant women.

The literature provides numerous examples of people with short-term health plans being responsible for large bills despite ostensibly having insurance.

• The report by the Energy and Commerce committee describes several situations. In one a patient received a $14,000 bill for two-day hospital stay for pneumonia.  In another the short-term policy only paid $7,000 on a $35,000 bill for an emergency procedure. 
• A CBPP paper citing work by the American Cancer Society Action Network found that a person with a short-term health plan diagnosed with breast cancer would pay $40,000 to $60,000 out-of-pocket compared to less than $8,000 for a person with an ACA marketplace plan.

Are short-term health plans beneficial?

Most economists oppose government restrictions on financial products that leave low-income people exposed to substantial financial risk.  This laissez-faire attitude resulted in the use of subprime mortgages large levels of mortgage defaults and a catastrophic financial collapse.   

Most economists also do not oppose the use of short-term health plans based on their view that some insurance is better than no insurance. 

My view is that many people with short term health insurance plans including the person with a $60,000 out-of-pocket bill for breast cancer and the person with a $25,000 bill for emergency room services are de-facto uninsured.

Short-term health plans with arbitrary benefit packages and large gaps of coverage do not effectively limit household financial risk.  By contrast, high deductible health plans HDHPs, discussed here, require considerable cost sharing do cap total risk.  

The expansion of short-term health plans facilitated by the Trump Administration executive order does more than unnecessarily increase financial risk for households that choose short-term health plans.  The plans will attract younger healthy adults who receive pay all or most of their state exchange health insurance premium.  (The premium tax credit for state exchange health insurance is age-rated leaving many middle-income young adults are responsible for their entire premium.  Go here for a discussion of this issue.) 

Short term health plans are a bad product that creates additional problems for society.

The growth of short-term policies creates unmanageable risk for policy holders, creates coverage gaps for women who get pregnant, and weakens state-exchange markets.

Alternatives to short-term health plans:

A strong case can be made for prohibiting insurance contracts with vague arbitrary features or contracts that often fail to protect individuals from catastrophic losses.  Such a prohibition would increase the number of uninsured but decrease the number of people with insurance who are de-facto without protection.   

The most effective way to reduce use and problems from short-term health plans is to create viable lower-cost comprehensive alternatives to short-term health plans.

A lower-cost catastrophic but comprehensive option:

A proposal offered by Senator Alexander and Senator Murray for a  new catastrophic health plan offered on state exchanges would substantially reduce premiums and would provide much better coverage than short-term plans.  The catastrophic option would have high deductibles and higher cost sharing but would not allow for the arbitrary benefit exclusions that characterize short-term plans.    Catastrophic plans of this type could be improved by the expansion in health savings accounts proposed here.

Reinsurance or Medicaid above an annual cap.

Short term health plans reduce costs by imposing annual and lifetime limits on reimbursed health expenditures; however, the annual limits eliminate access to health services and increase financial risk for people with health expenditures above the limit.   

One way to keep premium reductions achieved from annual and lifetime reimbursement limits and still protect patients that reach the limit is to allow access to Medicaid once the limit on the health plan is reached. This type of cost-sharing arrangement was first described in this SSRN paper.   

It should be possible for the Biden Administration and certain states to implement cost sharing through a Medicaid waiver, which allows states to use Medicaid funds to pay health expenditures for people with health expenditures over their annual cap.   

A Public Option:

Another way to eliminate inadequate short-term health insurance plans is the creation of a public option through increased access to Medicaid or Medicare.   

Existing public options provide comprehensive health insurance and quick reimbursements to health care providers.  Medicaid and Medicare reimbursement rates are low compared to many private insurance plans and some providers do not accept Medicaid or Medicare.  

There is also concern that a widely available public option could crowd-out private insurance.  However, the combination of a public option and a more generous subsidy for health savings account contributions would likely not crowd out private insurance if the HSA subsidies were only available for people with private insurance.  

Concluding Remarks:

Most economists with their pro-market even laissez-faire approach do not support prohibitions against less than complete financial products.   These economists did not appreciate the damage done by the growth of the subprime mortgage market and do not currently appear to understand problems created by short-term health insurance plans.   

Short-term health plans undermine state-exchange insurance markets and have crowded out proposals for the creation of more viable low-cost insurance options.  The adage “some insurance is better than no insurance” is glib advice when arbitrary benefits do not cover serious health problems and the cheap insurance product undermines the market for comprehensive insurance.

Introduction:

High-Deductible Health Plans (HDHP) coupled with Health Savings Accounts (HSAs) are the only health plans offered by around 40 percent of employers. This combination can reduce premiums, provides a saving in taxes, incentivizes some people to save on health care, and creates a potential new source of savings for retirement.

This type of health insurance arrangement also creates health and financial tradeoffs, which are most severe for low-income and mid-income households.

• HDHPs and HSAs often incentivize people to forego necessary health care procedures and regimens.  Studies have shown financial factors result in a lower utilization of prescription drugs for chronic health conditions,
• The existence of HSAs to fund high deductibles causes some people to choose between funding their HSA or funding their 401(k) plan,
• Some young healthy adults paying the full premium on their health plan may choose to go uninsured or may choose a short-term health plan creating financial risk.

These problems can be rectified by changes in the rules governing HSAs and HDHPs and the creation of additional financial incentives.

Potential Policy Responses:

Three policy changes designed to mitigate problems associated with HDHPs and HSAs are proposed and discussed.  Potential modifications include:

• A refundable tax credit for HSA contributions, 
• Expanded eligibility for HSA contributions for additional cost-sharing insurance plans,
• Regulations expanding pre-deductible insurance payments for some prescription drugs 

These potential modifications are discussed in turn.

Tax Credit:

The current HSA subsidy allowing deductibility of contributions is more generous for households with high marginal tax rates.  There are multiple ways to modify the tax treatment of HSA contributions to augment and stimulate contributions to HSA plans by lower-income or middle-income households.

A refundable tax credit of $2,000 for HSA contributions up to $2,000 combined with the elimination of the tax-deductibility of HSA contributions would eliminate the disparity in benefits from HSAs across income groups.   The tax credit would cause other beneficial outcomes:

• The increase in HSA contributions for low-income households would assist people most likely to have payment problems due to medical expenses.
• The tax credit, which is only available for people with comprehensive private insurance, could reduce the number of people choosing to go uninsured or choosing Medicaid over private insurance. 
• The proposed tax credit, if it did not vary with income, would not discourage work.

The economic impacts of the final tax credit depend on the details of the proposal and could impact and be impacted by other tax credits in existence and under consideration.

A tax credit for HSA contributions could be enacted through by majority vote through the tax reconciliation process.

Alteration of Eligibility Requirement for HSA Contributions:

Current tax law restricts HSA contributions to people with a qualified HDHP.  The proposed change to tax law would allow HSA contributions for people with high-coinsurance rates even if the plan had a modest deductible.

Health plans with high coinsurance rates are an effective and equitable cost-sharing mechanism.

People with high coinsurance rates and low deductible retain a partial incentive to economize on health expenditures even after the deductible has been met.   By contrast, people with a high deductible and a 0% coinsurance rate lose the incentive to economize on health as soon as the deductible is met. 

High deductible health plans do have one important advantage.   High deductibles are a highly effective way to reduce premiums and generally the high-deductible plan has a lower premium than the high-coinsurance-rate plan.

A high deductible health plan makes it extremely difficult to pay for health services until the deductible is met leading to possible bad health outcomes.

The choice of health insurance plan often depends on who pays the premium.  Households gravitate towards the more expensive plan if premiums are paid by an employer or through a government subsidy and the less expensive plan when they make premium payments.

This change like the proposed premium tax credit could be enacted by majority vote through the tax reconciliation process.   

Modification of regulations on HDHP reimbursement for some prescription drugs:

There is substantially variability in health insurance reimbursements for prescription drugs.

Some comprehensive low-deductible health plans make partial reimbursements for certain medicines even prior to the customer meeting her deductible.

Many high-deductible health plans do not reimburse any prescription drug costs until health expenditures reach the deductible.

The lack of reimbursement for prescription drugs until the deductible is satisfied causes some households to forego prescribe medicines.  The failure to take prescribed medicines for chronic conditions like diabetes can lead to kidney problems, eye problems, amputation, and heart issues.

A regulation classifying certain medicines as preventive medicines that are exempt from high deductibles under HDHP would reduce incentives for people with chronic health conditions to forego necessary prescriptions. The Department of Health and Human Services could mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.   

Financial Impacts:

The proposed modifications to HSA and HDHP rules impact the premiums paid for health insurance plans, tax revenue received by the government, and taxes paid by households.

The proposed tax credit for HSA contributions would increase demand for HDHPs by lower-income lower-marginal-tax rate households.  The shift in preferences towards HDHPs would reduce premiums and reduce the tax expenditures for insurance purchases in both the state-exchange and employer-based markets.  

The cost to the Treasury of the new tax credit for HSA contributions would be partially offset by a decrease in Treasury subsidies on health insurance premiums.  The elimination of deductibility of HSA contributions would also partially offset costs stemming from the new tax credit.

The proposed changes in rules governing insurance company reimbursements for drug payments would result in a modest increase in insurance premiums for HDHPs.  The change might increase demand for HDHPs, which could lower average premium payments since HDHPs would still be less expensive than low deductible plans.

Concluding Remarks:

The proposed changes to rules governing HSAs and HDHPs are beneficial for several reasons. The changes reduce financial risks associated with high out-of-pocket costs, reduce incentives for people to forego necessary medical treatments and may incentivize some health people to retain comprehensive health insurance.

The plans proposed here reduce out-of-pocket costs both for people insured in state-exchange and employer-based insurance markets.  By contrast, many of the reforms implemented by the Biden Administration and by Congress, including changes to the premium tax credit, the use of gold plans as a default, and cost-sharing subsidies only address problems in the state-exchange market.

Introduction:

Nearly 12 years after enactment of the Affordable Care Act (ACA), substantial disparities in the cost of health insurance still exist. Some middle-income young workers without access to employer health insurance receive no premium subsidies and cannot afford state-exchange premium payments.  Some low-income households with an offer of “affordable” employer-based health insurance are precluded from claiming the premium tax credit for state exchange insurance.  This post discusses potential changes to ACA rules that would address these problems.

Background:  

The Affordable Care Act (ACA) created state exchange health insurance markets for people without employer-based health insurance.  The creation of a viable state-exchange market created an incentive for some firms to eliminate employer-based insurance.

The ACA maintained a dominant employer-based health insurance system through the inclusion of two rules.

The first rule described here disallows the premium tax credit for any person working at a firm that offers “affordable” employer-based health insurance.  Affordable insurance was defined as self-only insurance costing less than 9.61% of household income.  

The second rule, commonly called the employer mandate, described here, is a fine applied to large employers that do not provide affordable comprehensive insurance to 95 percent of full time employees.  

These two rules have limited the size of state-exchange marketplaces.   Currently, around 12 million people obtain their health insurance from state exchange compared to around 156 million people obtaining health insurance from their employer.  

The American Rescue Plan (ARP) enacted by Congress and the Biden Administration includes provisionsmaking health insurance on state exchanges more affordable.  The ARP increased the generosity of the premium tax credit for lower-income households, capped benefits at 8.5 percent of household income, and eliminated the rule denying any benefits to households with income exceeding 400 percent of the federal poverty line FPL.

These provisions of the ARP expire after 2022 unless extended by Congress.   The Biden Administration has not altered the affordability rule, or the employer mandate and employers are still the source of health insurance for most working-age people and their dependents.

Analysis of Disparities in Health Insurance Premiums:

The existence of a large employer-based insurance market coupled with a fringe market for households without offers of employer-based insurance has caused disparities in health insurance premiums and outcomes.

State-exchange subsidies fail to assist young middle-income people seeking self-only coverage:

The premium tax credit provides a generous benefit to older households seeking expensive family-plan policies.  However, the premium tax benefit often provides very little or even no assistance to young adults seeking self-only coverage. 

The premium tax credit is not available to employees at firms offering employer-based insurance. Management of firms that decide to end offers of employer-based insurance to assist older workers seeking family coverage often substantially increase health insurance costs for young workers seeking self-only coverage.

The impact of the decision to offer employer-based coverage on two workers is illustrated with data from the Kaiser Family Foundation state exchange market-place calculator and data on the cost of employer-based coverage from the Kaiser Family Foundation annual survey.

• The KFF state exchange premium tax calculator reveals a 30-year-old individual making $80,000 per year seeking self-only coverage would pay $4,664 for health insurance on a state exchange.  This worker would not receive any premium tax credit.  The average annual premium paid by a worker with employer-based insurance with self-only coverage is $1,299.  

• The KFF state-exchange premium tax calculator was used to find the premium and support provided to a family making $80,000 a year with two adults aged 50 and two children one age 12 and one age 15.    The estimated financial help from the government in the form of a premium tax credit was $16,406 per year.   The average cost to the family was $4,840 per year.  The average cost to the worker for the family plan policy is $5,969 per year.

Many firms that offer employer-based health insurance subsidize all or part of the premium.   The average subsidy in 2021 was $6,440 for single coverage and $16,253 for family coverage.  

Small firms not subject to the employer mandate can avoid these costs by eliminating employer-based insurance.  The decision to eliminate employer-based coverage helps older workers with families and creates additional costs for young adults seeking self-only coverage.

Health insurance issues for people who cannot afford their share of premiums of employer-based insurance:

Many people with an offer of employer-based insurance are ineligible for the premium tax subsidy for state exchange insurance even if the state exchange marketplace offers more affordable and more comprehensive health insurance options.

People with an offer of affordable health insurance from their employer are precluded from claiming the premium tax credit because of the affordability rule. The definition of affordable health insurance is based on the affordability of self-only health insurance leaves employer-based family coverage unaffordable for over 5 million families.   These five million families are ineligible for premium tax credits but cannot afford a health insurance plan covering their entire family offered through their employer.

Many people believed the IRS incorrectly interpreted the affordability definition in the ACA because the original law contained an individual mandate.  The repeal of the individual mandate may make this argument harder to make since people are no longer fined for lack of coverage.  

The Biden Administration has not altered the employer mandate or the affordability rule.  The definition of “affordable” in the affordability rule continues to be based on the cost of self-only insurance leaving around 5 million households unable to afford a family option.

The alteration of the affordability rule could cause some small firms to eliminate offers of employer-based insurance, could cause some large employers to pay fines under the employer mandate and could increase insurance costs for some firms. 

The decision by the Biden Administration to leave the “affordability” rule and the employer mandate in place limited the impact of the more generous premium tax credit on the size of state exchange markets.

Reforms to health insurance markets designed to reduce the disparities in health insurance premiums:

Many disparities in health insurance premiums can be addressed by combining the employer and state exchange markets, by modifying the premium tax credit and through the creation of new low-cost but comprehensive health insurance options.   

The proposed health insurance marketplace has the following rules.

• All employers would be allowed to purchase health insurance for their employees on state exchanges rather than sponsor an employer-based policy exclusively for their own employees. 

• The employer subsidy for state exchange insurance would be a deductible business expense and would not be subject to personal income tax, as with the current treatment of employer expenditures on employee health insurance.

• Employees would be allowed to use the employer subsidy for the purchase of any health insurance plan on a state exchange.

• The state exchange would offer a public option or a new low-cost copper option. 

• Large employers choosing the new premium subsidy would be required to provide a subsidy equal to 60 percent of the cost of the state-exchange policy for every full-time employee.  

• Employers providing a subsidy on state exchanges would be required to provide the subsidy to all full-time workers.

• Firms could make tax free subsidies up to 100 percent of the cost of a gold plan on state exchanges.

• Self-employed people and people without an employer-based subsidy would receive a premium tax credit.

• The new premium subsidy would have a floor of 40 percent of the cost of a silver plan and a ceiling like the existing premium tax credit based on household income.

• The state exchange will offer a public option already offered in some states or a low-cost private option, patterned after the copper plans considered by Alexander and Murray.

Comments on the proposal:

Comment One:  Businesses and workers could continue with employer-specific plans if insurance companies continue to provide the product.  It is likely that workers and firms would prefer state-exchange subsidies because workers could choose any plan on the state exchange best meeting their needs.

Comment Two:   Unions would negotiate the size of the health insurance premium and workers at firms with generous premium subsidy offers could purchase the most expensive state-exchange health plan.

Comment Three:   The smallest permissible subsidy from employers and from the revised premium tax credit should be enough to cover the cost of the copper plan or the public option.

Comment Four:  The floor of 40 percent of the cost of health insurance of a silver plan on the premium tax credit is less generous than the floor on employer-based insurance but it assures that a young adult seeking self-only coverage would obtain some support and does not dissuade companies from offering a more generous subsidy to attract talent in a competitive job market.

Comment Five:    The public option proposed here is not free.  The person could choose to spend its subsidy for a low-cost private or public option or could choose to purchase a more expensive private plan.    The new system puts private insurance on a relatively even footing with the government option. 

Comment Six:   The new low-cost private and public options would be superior to short-term health plans that leave people with substantial financial exposure and do not protect people with pre-existing conditions.

Comment Seven: The existence of private high deductible health plans with tax-preferred health savings accounts could induce many households to select a private plan over the public option to take advantage of the tax savings from contributing to private health savings accounts.  This tax savings would not be available for public insurance plans or for private comprehensive insurance plans.

Comment Eight:   Some aspect of this proposal could be enacted through the tax reconciliation process by majority vote as described here.

Concluding Remarks: 

Many disparities in health insurance outcomes could be resolved by having firms subsidize the purchase of state exchange health plans, through the modification of the existing premium tax credit and the creation of low-cost but comprehensive health public and private health insurance options.

Tip #8:  The growth of high-deductible health plans (HDHPs) has increased financial risk and created an incentive for many people to reduce expenditures on essential health services.   People with high-deductible health plans need to contribute to a health savings account (HSA) to offset these risks.  When funds and income are limited, the increase saving for health care will reduce savings in retirement accounts and general liquidity.

Background on Health Savings Accounts:  

• An HSA is a tax-preferred saving vehicle for people who enroll in an HDHP.   The primary advantage of an HDHP is reduced premiums for the employer and the insured person.   The primary disadvantage is the insured must pay a large share of health expenses.

• The minimum deductible on a HDHP in 2022 is $1,400 for individual coverage and $2,800 for family coverage.  The maximum allowable out-of-pocket limits in 2022 are $7,050 and $14,100.   It is permissible for the HDHP deductible to be as high as the out-of-pocket limit.   A typical HDHP policy requires the insured person pay a share of all health care expenses after the deductible is met and until the out-of-pocket limit is reached.   

• HSAs, created as part of the Medicare, Prescription Drug Improvement Act of 2003 are now a major insurance option.   An HDHP is the only plan offered by around 40 percent of employers and is sometimes the most affordable option through employers or on state exchanges.

• People with high-deductible health insurance coverage are often exposed to large medical bills, take on high levels of medical debt, and often choose to forego necessary medical treatments. The health consequences can be especially severe for people who forego prescription drugs for chronic conditions.  

• People can reduce the adverse health and financial impacts associate with HDHPs by contributing to an HSA. However, this study by JAMA reveals that one in three people with an HDHP do not have an HSA and that 55 percent of people with HSAs failed to contribute to their account.  An article by SHRM cites work by EBRI which found more than half of people initiating contributions to HSAs do so by reducing contributions to 401(k) plans.

• The IRS caps the amount of funds a person can contribute to a health savings account.  In 2022 the caps on health savings account contributions are $3,650 for self-only plans and $7,300 for family plans.

• Contributions to HSAs result in significant tax advantages.   The contribution to the account is not taxed during the year the contribution is made.   The funds are never taxed if they are used for a qualified medical expense.   Funds used for non-medical purposes prior to age 65 are subject to a 10 percent penalty.   There is no tax penalty after age 65.  

• After age 65, funds disbursed from a HSA are fully taxed but are not subject to penalty.  Funds placed in a traditional 401(k) plan are always fully taxed but are not subject to a penalty after age 59 ½.  Fund placed in a Roth account and investment returns from funds in a Roth are completely untaxed after age 59 ½.  In addition, withdrawals of contribution to a Roth are completely untaxed at any time.

Allocation of Resources between HSAs and other saving vehicles:

People with limited income and high debt have a difficult choice between saving for health-related expenses through a health savings account or saving for other priorities.  There is no one-size fit all approach to the appropriate savings strategy.  

• Finance Tip #2, concluded that it was okay for a person entering the workforce with high student debt to forego contributions to a 401(K) plan to prepare for emergencies, maintain a solid credit rating and rapidly reduce their student debt. An HSA reduces taxes and allows for the use of funds for medical expenses.  Young adults who have high debt and are dependent on a HDHP should likely contribute to an HSA instead of a 401(k) fund.

• People with access to a 401(k) plan that does not match employee contributions are likely better off with a combination of a Roth IRA (see finance tip #3) and an HSA.   The HSA gives some tax relief in the year of the contribution while the Roth IRA provides substantial tax savings during retirement. 

• Workers at a firm that matches employee contributions to a 401(k) plan should maximize receipt of the employer match, as discussed in finance tip #5 and then contribute additional funds to a mix of a Roth IRA and an HSA.

• The choice between contributing the last dollar to a Roth or the last dollar to an HSA is affected by several factors.    

• The HSA is the only preferential savings plan that I am aware of that allows for a tax-free contribution and distribution. HSA distributions for qualified medical expenses are never taxed.  The Roth contribution is fully taxed but all distributions after age 59 ½ are tax free and the distribution from the Roth does not increase tax incurred on Social Security benefits.  Workers nearing age 59 ½ will often prioritize Roth contributions because the tax-free distributions could be used for any purpose. 

• HSA funds can be used to fund retirement after age 65, however, funds not used for medical expenses are fully taxed.  It makes sense to spend HSA funds for health care and retirement funds for general consumption.

Concluding Remarks:  The process of saving for retirement is complicated.  Simply plowing everything into a 401(k) is not an optimal strategy.   As noted in Financial Tip 2 people drowning in debt should even forego matching contributions into a 401(k) plan until they can bring their debt down to a manageable level.  

The growth of HDHPs complicates the savings process.  The increased likelihood of incurring high health care expenses increases the need for an emergency fund. A health savings account, like a 401(k) contribution, provides both immediate tax savings and funds for medical emergency.   The analysis presented here and in previous supports the need for investors to use diverse savings vehicles.

Abstract:  The increased use of High Deductible Health Plans and Health Savings Accounts has created substantial financial risks for low-income and mid-income households and has caused many people to decline essential medical procedures and regimens, a practice which can increase future medical costs.  These problems can be rectified through a new tax credit for contributions to health savings accounts and changes in rules governing high-deductible health plans.  Improvements to health savings account and high-deductible health plans are a more effective way to reduce financial risk for people with comprehensive health insurance coverage than ideas under consideration by President-elect Biden and his team.

Introduction:

Most of the focus of healthcare reform proposals is on providing health insurance to the uninsured.   However, low-income and mid-income households with comprehensive high-deductible health insurance face substantial financial exposure.  This memo identifies problems with the use of high-deductible health plans combined with health savings accounts and proposes improvements to this type of insurance.

High-Deductible Health Plans coupled with Health Savings Accounts are growing in market share and are currently the only health plan offered by around 40 percent of employers. Contributions to Health Savings Accounts result in significant tax advantages and the combination of a high-deductible health plan coupled with a health savings account is a sensible health insurance product for many households.  The combination can reduce premiums, incentivizes some people to economize on health care and creates a new source of retirement savings.

However, there are problems with the growing use of health savings accounts and high-deductible health plans.  

The combination of a health savings account and high-deductible health plan is much better suited for high-income households than for low-income households.  The use of health savings accounts has resulted in low-income and middle-income people with relatively low marginal tax rates paying more after taxes for health services than higher-income people with higher marginal tax rates. Low-income and mid-income households have an incentive to fund health savings accounts by reducing contributions to 401(k) plans because they may not have enough income or liquidity to take advantage of both tax deductions.

The use of health savings accounts and high deductible health plans encourage people to economize on health care, which can lead to a reduction in wasteful spending and a decrease in premiums.  A decision to economize on the use of health care can also result in bad health outcomes and higher future health expenditures.  

A high deductible and a lack of funds often causes people to forego necessary health care procedures and regimens.  This problem is most pronounced for the use of prescriptions for chronic diseases. 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.  The decision to decline necessary treatments like prescription drugs for the treatment of diabetes will cause severe complications and often results in people leaving the workforce early with little retirement savings.

The rules governing contributions to and the use of funds in health savings accounts make funds in 401(k) plans and health savings accounts highly substitutable especially for older households.  Often people will reduce contributions to 401(k) plans in order to fund a health savings account.  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.  

Finally, some healthy young adults with high levels of debt may choose to go uninsured or seek short-term health plans that do not cover many essential health services.  This problem is most pronounced for people seeking state-exchange insurance who are ineligible for the premium tax credit.  (A person making $50,000 year seeking self-only health insurance coverage pays 100 percent of the health insurance premiums on state exchanges.)  Young adults in this situation are unlikely to receive substantial benefits from a high-deductible health plan and may decline comprehensive coverage.  This decision can lead to potentially catastrophic outcomes.

Potential Policy Responses:

Three policy changes designed to mitigate problems associated with health savings accounts and high deductible plans are proposed and discussed.

Modification One: Taxpayers 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 associated with tax deductions.  High-income people, with high marginal tax rates, receive a more generous tax deduction than low-income people taxed at lower marginal tax rates.

The modification makes a high-deductible health plan more palatable to low-income people. The additional cash given to low-income households should encourage adherence to prescribed medical procedures and treatments.

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 encourages continuous health insurance coverage.

A generous tax credit for health savings accounts could encourage some young adults to take out their own health insurance and claim the credit rather than remain on their parent’s plan.   This could strengthen state exchange marketplaces.  

This modification could be enacted through the tax reconciliation process, which only requires a majority of the U.S. Senate.

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 current laws governing health savings accounts only allow contributions from people with a high deductible health plan even though health plans with a relatively low deductible and high coinsurance rates after the deductible may be more effective at encouraging people to economize on health care than high-deductible health plans.

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 on covered expenses.

The second health plan has a $0 deductible and a 50% coinsurance rate.   The person has a partial incentive to economize on health care starting with the first dollar of expenditure.    The person does not lose this incentive to economize on health care until al health expenses exceed $10,000.

People with high deductibles may refuse to or be unable to fill their prescription until after their deductible is met.   The low deductible but high coinsurance plan provides a partial payment for prescription medicine throughout the year.  The low-deductible high coinsurance rate health plan might reduce the number of people who decline necessary prescription medicines.     

High deductible health plans do have one important advantage.   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 because the insurance company does not make any benefit payments until the deductible is met.  

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.

This change could be enacted through the tax reconciliation process, which only requires a majority vote in the U.S. Senate.

Modification Three:  Regulations governing prescription benefit formulas for high-deductible plans should be modified to require partial payment on prescription drugs for the treatment of chronic diseases prior to the deductible being met. 

Comment on modification three:

Most health care plans have some deductibles.   Today many low-deductible health plans pay most costs for prescription drugs even prior to the deductible being met.  However, many of the new high-deductible health plans do not pay for any prescription drug treatments prior to the deductible.

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 people with diseases like diabetes where the patient does not have immediate symptoms.  However, the failure to control chronic health problems can lead to bad health consequences and more expensive health services in the long or medium term.  For example, the failure by diabetics to control blood sugar can lead to kidney problems, eye problems, amputation and heart issues.

One way to reduce the tendency for patients with high deductible health plans to economize by foregoing the use of prescription drugs is to treat these prescriptions as preventive treatments that are currently exempt from the deductible.   The current law allows high-deductible health plan to make payments for some preventive treatments prior to the deductible being met.  The Department of Health and Human Services could mandate coverage for some prescriptions treating chronic diseases as a preventive method under current regulations.   This goal might also be achieved with an executive order signed by the new President. 

Financial Impacts:

The proposed modifications to rules governing health savings accounts and high-deductible health plans have potential financial impacts. 

The proposed modifications are more generous than current rules.   Typically, more generous tax rules result in a loss of revenue to the Treasury.

In this case, the more generous features applied to high-deductible health plans could accelerate a shift from low-deductible or high-option health plans to less expensive high-deductible plans.  The decrease in premiums from the shift toward less expensive but comprehensive insurance results in both a decrease in tax expenditures on employer-based insurance and a decrease in the premium tax credit for the purchase of state exchange insurance.   The reduced tax expenditure from the increased use of high-deductible health plans will offset the more generous benefits.

President-elect Biden’s plan to reduce problems associated with out-of-pocket health care costs involves changing a regulation governing the premium tax credit used to subsidize health insurance premiums for state exchange insurance.   His proposal would link the premium tax credit to a “gold” plan with a higher benefit ratio than the current baseline “silver” plan.  

President-elect Biden’s proposal does not benefit people with employer-based insurance.

President-elect Biden’s increases premiums on subsidized state exchange health plans.  The tax credit for low-income contributions to health savings accounts by low-income households leads premiums and the subsidy for premiums unchanged.   It is a more cost-effective way to reduce financial risk associated with high-deductible health plans than the proposal considered by President-elect Biden and his team.

Another way to partially offset the lost tax revenue stemming from new subsidies for health savings accounts and high-deductible health plans involves prohibiting all non-health related expenditures from health savings accounts prior to retirement.   (Current rules allow for distributions for non-related health expenses with a financial penalty prior to age 65 and taxed distributions without penalty after age 65.)  Restrictions on non-health care distributions prior to retirement would also increase funds late in life for long term care expenses and could reduce Medicaid long term care spending.

Concluding Remarks:   The changes to the rules governing health savings accounts considered here are beneficial for several reasons. The changes reduce financial risks associated with high out-of-pocket costs.  The new rules reduce incentives for people to forego necessary medical treatments, especially prescription medicines for chronic conditions.   This could reduce future medical expenditures from people ignoring chronic conditions.  Additional benefits encourage people to remain insured even when they are healthy and expect to receive very little in reimbursements from their health plan.   The new benefits make cost sharing more palatable, which in turn reduces premiums and tax expenditures on premium subsidies.