The Missing Ingredient of HSA Reform
The House recently passed two bills (H.R. 6199 and H.R. 6311) that would make a number of modifications to Health Savings Accounts (HSAs). While most of the provisions contained in these bills would increase the usefulness of HSAs to consumers, their cumulative effect on costs wouldn’t be noticeable in the context of the immense U.S. health sector. HSAs won’t reach their full potential until more is done to promote vigorous price competition among those supplying services to HSA enrollees.
Proponents of HSAs had high hopes when the law which set them in motion was enacted in 2003 (the HSA provisions were attached to the law that stood up the Medicare drug benefit). An earlier version of a tax-preferred account for medical care was limited to self-employed taxpayers, had complex compliance rules, and capped enrollment at 750,000 people. The 2003 law made it much easier for employers of all types to offer workers HSAs in combination with high-deductible health plans (HDHPs). It also made both contributions to HSAs (up to an annual maximum) and withdrawals from them (for qualified expenses) fully tax-preferred, adding to their attractiveness to consumers.
HSA enrollment has increased steadily since the 2003 law went into effect. As of January 2017, there were 21.8 million consumers with HSA accounts, up from just over 1 million in 2005.
There is also strong evidence that HSAs have worked to lower costs. A 2015 study found that families that switched from traditional insurance to a combination of HDHPs and HSAs reduced their health spending by between 7 and 22 percent in the three years after the transition.
This study and others make it clear that HSAs have improved the incentives for consumers to be cost-conscious when seeking out medical care. The funds in the HSAs belong to the people who own the accounts, and they don’t want to waste those resources on services that are overpriced and of little value to their health.
Still, HSAs have not ushered in a new era of more efficient and consumer-friendly medical care. The nation’s vast network of hospitals, physician practices, and affiliated clinics, diagnostic facilities, and pharmacies remains highly inefficient and wasteful. For the most part, consumers with HSAs are enrolled in traditional insurance products, with the same provider networks that are made available to consumers who don’t have HSAs. The only difference is that HSA enrollees have higher deductibles, which gives them the incentive to think twice before getting care. The savings from HSAs that have occurred so far are due to a reduction in the use of services, not to the more efficient delivery of care. Consumers are choosing to forgo some services that they deem unnecessary or of low value in terms of the effect on their health.
The bills passed by the House include some provisions that could make HSAs more attractive to consumers, and thus boost enrollment. The bills would allow consumers to make tax-free contributions each year up to the amount of the deductible of their insurance plans, and to allow consumers enrolled in the bronze and copper plans offered under the rules of the Affordable Care Act (both of which involve fairly high deductibles) to also enroll in HSAs. Further, consumers would be allowed to make contributions to HSAs after they become eligible for Medicare at age 65. Together, these provisions would make it easier for consumers to set aside more resources over their lifetimes to cover out-of-pocket expenses, and to more easily pay for expenses not covered by Medicare when they retire.
Increasing uptake of HSAs is important, but slightly higher enrollment won’t necessarily compel hospitals, physicians, and others to organize themselves more efficiently. The hope has always been that, as more consumers with HSAs become cost-conscious, those providing medical services to them would begin to compete for HSA enrollee business by lowering their prices. That hasn’t happened yet.
One provision passed by the House has the potential to modestly increase the cost-cutting potency of HSAs. The provision would allow consumers to use their HSA balances to purchase services directly from primary-care providers for a fixed fee, up to $150 per month for an individual or $300 per month for a family. These arrangements would allow patients to get a predetermined level of access to care from physicians, such as a certain number of office visits, telephone consultations, and email communications, without having to pay piecemeal for every encounter. HSA enrollees also would be able to more easily compare service levels and prices among the various primary-care options available to them in their communities. Consequently, primary-care providers would have stronger incentives than they do today to compete with each other by offering better access to their patients at lower monthly fees.
HSAs can be more effective in eliminating waste if the thinking behind the primary-care provision in the House bill is expanded to many other services patients need, including different kinds of surgical procedures and on-going care for chronic conditions, such as diabetes. The federal government could make HSAs much more effective by defining a universe of discrete, standardized packages of clinical services that could be purchased directly by all HSA enrollees at the prices posted by competing service providers. This would be a nationwide requirement, which would allow HSA enrollees to compare prices for the same services all over the country. Price comparisons would be straightforward because the clinical interventions would be defined to cover a standardized set of services. Providers would be forced to compete with each other on the prices they charge, and on how well their patients do after receiving their services.
There will be objections to this kind of reform. Some will argue that the federal government shouldn’t get involved in requiring providers to specify their prices for standardized clinical services. But HSA enrollees do not have the capacity on their own to assemble the all-in prices for complex medical interventions, which often involve hospital stays, care from multiple physicians, lab tests, and pharmaceutical care. There are too many variables in these services and too little accessible information for HSA enrollees to build reliable price comparisons themselves. Consequently, meaningful price transparency for HSA enrollees will only take place if the federal government helps make it happen.
The payoff from this intervention would be immense. HSA enrollees would be able to easily find the prices they would pay for scores of common medical interventions. And providers would have strong incentives to root out waste and lower their prices. The end result would be a more consumer-driven market for medical care, which is what HSA proponents had hoped would happen when the accounts first went live nearly fifteen years ago.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.