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2003-11-29 -- The Health Savings Account Tsunami

Thanks to Don McCanne for his analysis on Health Savings Accounts as a
tax break for the rich and another way of killing Medicare by leaving
with the sickest, most expensive patients.  This piece starts with a
communication from the Galen Institute, a "free-market research
organization."


Galen Institute
Consumer Choice Matters, #41
11/25/2003 HSA TSUNAMI

By Greg Scandlen

The new Health Savings Accounts (HSA) provision included in the
Medicare bill just passed the Senate 54-44 and soon will be signed by
the President. The new law will go into effect January 1, 2004. All
250 million non-elderly Americans will now have access to a Medical
Savings Account, and one that is far more attractive than the Archer
MSAs that were enacted in 1996.

Market analysis

* There will be a rush of banks, insurance companies and third-party
administrators (TPAs) to develop products. The previous restrictions
on Archer MSAs have been removed. There is no longer a sunset
provision, there is no limit on employer size or total enrollment.

* All these development efforts will lead to far greater public
awareness of the product.

* The individual market will convert to HSAs in droves.

* The small group market will be slower. Small employers are not
benefits innovators.

* The fully-insured mid-market is a different story. Companies with
100 to 1,000 employees are more likely to have staff that concentrates
on benefits options and has the time to investigate new products.
These companies have been raising cost-sharing requirements anyway, so
the prospect of employee responsibility for funding part of the HSA is
less of a stretch in this segment.

* Self-insured large companies will likely stay with Health
Reimbursement Arrangements (HRAs). Companies that pay directly for the
services consumed are unlikely to be attracted to HSAs, which expect
an up-front contribution of money for all employees whether they are
using services or not. HRAs have the considerable advantage of not
requiring pre-funding.

* The uninsured should find it easier to gain coverage. HSAs will be
available to everybody - especially those workers whose employers
provide no coverage at all, and who make up the vast majority of the
uninsured.

Prospects

The market is ready for this. All of the discussion about consumer
directed health care in the last few years has sensitized corporate
decision makers to the advantage of putting more control in the hands
of employees. HSAs provide them with the perfect opportunity to do
exactly that. The year 2004 will probably not see massive enrollment
because vendors will need to work on developing new products and
marketing strategies. But by mid-year there will be an enormous push
to gain an early position in this new market and become the recognized
"industry leader."

The timing couldn't be better, with an improving economy and
widespread gains in the equities markets. Venture capital will be in
great demand to get the new products off the ground. Get ready for a
twelve month race to the finish line of 12/31/04 and the first-year
enrollment numbers.

http://www.galen.org/ccbdocs.asp?docID=569

Don McCanne's Comment:

The Galen Institute... is a "free-market research organization" that
"was founded in 1995 by Grace-Marie Turner to promote a more informed
public debate over individual freedom, consumer choice, competition,
and diversity in the health sector" (Mission statement, Galen
Institute). Anyone following the health care reform debate recognizes
the rhetoric of the advocates of "consumer-directed," "free market"
health care. Galen has strongly supported medical savings accounts
(now health savings accounts, or HSAs) as a tool to achieve consumer
independence in the free marketplace.

What Galen fails to point out is that HSAs fragment the insurance
pools. The tax advantages accrue to the wealthy, and a tax-favored
personal account appeals to those who do not expect to have high
health care bills. By removing the large sector of the healthier and
wealthier from the traditional insurance risk pools, the higher-cost
individuals remaining drive up premiums making traditional coverage
unaffordable for those with the greatest health care needs. HSAs are
both regressive tax policy, and cruel health policy which rations care
by erecting financial barriers for those with the greatest needs.

For those of us who are healthy, HSAs with catastrophic coverage would
serve our purposes well. But those of us who later develop significant
disorders will discover why we should all have comprehensive coverage
using a common risk pool. Many of us would decide in advance that we
want that degree of security and would want to purchase traditional
coverage. But we'll find that traditional coverage will have left the
market because of the death spiral of unaffordable premiums.

This fundamental flaw in dividing the risk pool into segregated
accounts, favoring the wealthy while penalizing the sick, alone is
enough to disqualify HSAs as a rational model of reform. But there are
a great many other problems, only a few of which are listed here.

1.  HSAs must be matched with high-deductible insurance. Insurers
offer primarily managed care PPOs as the high deductible or
"catastrophic" option. PPOs are undergoing transformation in order to
keep their premiums affordable. They are using methods often lacking
transparency to reduce benefits and increase out-of-pocket cost
sharing. Tighter provider lists decrease choices. Greater penalties
for using non-providers are now standard. Tiering rates for services
shift costs to beneficiaries. Individual PPO plans often exclude
essential benefits such as obstetrical services.

2.  Deductibles have become the norm in PPO plans. The cost savings by
using a high deductible plan theoretically funds the HSA. But, in
fact, the savings now is usually so small that it could not be
considered as a major source for HSA funding. When pricing different
plans, you will find that the moderate deductibles have very little
effect on the premium. Rather, the premium differences are due more to
other factors such as the richness of the benefit package, other cost
sharing measures, and the differences in competitive pricing in the
various service areas.

3.  In the individual market, most insurers will not sell plans to
individuals with significant preexisting disorders, often for even
simple problems such as allergic rhinitis. The uninsured will be able
to access this market only if they have no current or expected needs
for health care. Creating an insurance market for the healthy, and
letting those with needs fend for themselves, is inhumane health
policy at best.

4.  A major flaw in our health care system is the profound
administrative waste that diverts funds from patient care. HSAs add a
very significant administrative layer and interject more middlemen
into the process. Insurers sell administrative services, and HSAs will
expand their market. Not only will insurers be involved but bank
trustees, third party administrators, various investment managers, and
others will all be there quite willing to divert to themselves their
unfair share of the health care dollar. And the providers of care will
have added to their administrative burden the need to access millions
of individual, segregated accounts as they seek compensation for their
services, whether by direct billing to the account managers or by the
necessity of providing documentation of qualified expenses.

5.  Once the beneficiary is eligible for Medicare, funds may be
withdrawn from the HSAs for non-medical purposes without penalty. For
those who remain healthy, the HSA becomes the equivalent of an
individual retirement account (IRA). Much can be said about the
inequitable, regressive tax subsidies of IRAs, but that will not be
discussed here. But it is clearly inappropriate to remove dollars from
an equitable health care risk pool and grant them to wealthier
individuals. Such regressive tax avoidance schemes certainly should
have no place in our health care system.

6.  This program requires that the deductible for the catastrophic
coverage be at least $1000 for individuals and $2000 for families.
Many already have deductibles at this level or higher. Why should an
administratively cumbersome program be established for expenses that
are already being met by personal reserves? The tax advantages for
most would not begin to offset the extra expenses and nuisance of
HSAs.

7.  Again, the worst feature of HSAs is that they effectively shift
costs to individuals with the greatest health care needs which will
threaten affordability of care. More individuals will be forced into
public programs, such as Medicaid, but only if eligible. Public
programs targeted to those with greater needs will remain chronically
underfunded, again further impairing access.

It is important to understand health savings accounts. They are
explained in Title XII of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (pages 660-678). The bill can be
downloaded at: http://www.house.gov/medicarerx/hr1-conflegtext.pdf

Although there are many other elements of the Medicare bill that are
absolutely unacceptable, we have maybe a year or so to change them.
But Title XII, which authorizes HSAs, must be repealed immediately
because it becomes law in only one month. Once millions of HSAs are
established, it will be almost impossible to reverse this program.

CONTACT YOUR REPRESENTATIVES AND SENATORS IMMEDIATELY AND DEMAND THE
URGENT REPEAL OF TITLE XII OF THE MEDICARE ACT!