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.
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.
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.