April 30, 2009
HSA-Qualified Health Plans Gaining Traction
By Hazel Becker

Consumer-directed healthcare has been a hot topic in recent years, with most of the attention focused on high-deductible health plans (HDHPs) and health savings accounts (HSAs). Industry stakeholders are analyzing market data to gauge long-term sustainability and assess the role this innovative plan design will play in curtailing growth of the nation’s healthcare expenditures.

One recent paper from the Manhattan Institute for Policy Research concludes that “the brief history of HSA-qualified plans suggests that they are likely to continue to expand their market share significantly over time.” This Healthcare Business Strategy report looks at several recent papers and finds insights on the HDHP and HSA market to help health plans position themselves to capitalize on this likely expansion.

HSA Background

Insurance companies have marketed health plans with high deductibles and low premiums for many years. These options have provided affordable coverage, particularly for people without group health insurance. To make these plans more attractive, particularly for the uninsured, Congress created a new kind of tax-advantaged savings account in 2003 available only to people enrolled in high-deductible plans. The new HSAs, authorized by the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), have three types of tax advantages:

• both employers and individuals can deposit pre-tax dollars into the accounts,
• assets in the accounts accumulate tax-free until withdrawn, and
• funds taken out of the accounts will not be taxed as long as they are used to pay for
   qualified healthcare costs.

(Note that although HSAs were authorized in Medicare legislation, they are not limited to Medicare recipients. To date, they have been sold primarily in the group and individual markets rather than to Medicare eligibles.)

To qualify for the tax breaks HSAs offer, the account holder must be enrolled in a high-deductible health plan that meets specific criteria. In 2009 the deductible must be at least $1,150 per year for individual coverage ($2,300 per family) and the out-of-pocket coverage limit can be no more than $5,800 for individual coverage ($11,600 per family). These amounts are indexed for inflation.

The most that can be contributed to an HSA in 2009 is $3,000 ($5,950 per family), with an additional $1,000 allowed for individuals who are at least 55 years old. Unlike some previous tax-advantaged healthcare spending accounts, such as health flexible spending accounts (FSAs) and health reimbursement accounts (HRAs), money and assets held in an HSA belongs to the account holder and are portable if an employee changes jobs. In addition, unlike FSAs, any money left in the account at the end of the year can be carried over to the next year. These features allow HSA account holders to accumulate money in the accounts tax-free to pay for future medical expenses.

Although individuals must be enrolled in an HDHP in order to qualify for a tax-advantaged HSA, there is no legal requirement for individuals enrolled in high-deductible plans to have HSAs. In some cases, employers or health plans open accounts for their insureds but no money is ever deposited in them.

HSA-Qualified Plan Membership Growth

The industry has accumulated data on HDHP membership in the five years since MMA was enacted, and analysts are beginning to report insights on market acceptance. Data on HSA penetration have been slower to accumulate because these accounts are held by financial institutions, including some not directly associated with health plans.

In its February 2009 review of research on HSAs and high-deductible health plans, America’s Health Insurance Plans (AHIP) reported that 6.1 million people were covered by HSA-qualified HDHPs in January 2008 – six times as many as were enrolled in March 2005. An analysis of AHIP data since 2005 shows early adoption of HSA-qualified plans in the individual market, which enrolled 64% of HDHP members in March 2005. The biggest enrollment gain in large-group (50+ employees) plans came during 2006, when membership more than doubled. By January 2007, nearly half of all HDHP members were enrolled in large-group plans. During 2007 the strongest growth was in small-group plans.

The National Center for Health Statistics (NCHS) shed further light on HDHP enrollment in a March 2009 brief on findings from the 2007 National Health Interview Survey. One of the most interesting findings was that 40% of people under 65 who purchased individual policies directly from health plans were enrolled in high-deductible health plans. Only 15% of those under 65 with employer-based coverage reported enrollment in HDHPs.

HSA Adoption Lags HDHP Enrollment

Many people are positioned to take advantage of tax breaks and manage their own health spending accounts, yet research suggests that the take-up rate for HSAs has been relatively low. It is difficult to measure pure HSA penetration because definitions of consumer-directed healthcare often include other special funding options such as Health Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs) in addition to HSAs. Nonetheless, statistics confirm that the market is ripe for HSAs if the industry can figure out how to package and promote them to consumers.

Though 40% of the under-65 individual market (direct purchase) is enrolled in a HDHP (many no doubt HSA-qualifed), only 5% reported their plan was a CDHP. Presumably, these individuals have high-deductible plans with HSAs. NCHS found that only 15% of those with employer-based coverage are enrolled in HDHPs. Within the employer-based segment, 4% reported their plan was a CDHP; in this case, respondents might be enrolled in an HSA or HRA.

Source: CDC/NCHS, National Health Interview Survey (2007 estimates)

The nation’s leading health plans frequently report CDHP membership in their annual reports and performance updates. Though their HSA membership cannot be distinguished from other consumer-directed options, it’s obvious that these plans are committed to CDHP growth.

Future Prospects

The complexity of HDHPs and tax-advantaged HSAs led Manhattan Institute Senior Fellow Benjamin Zycher to qualify his prediction about the future of high-deductible plans. HDHPs are likely to increase their market share significantly over time, he said, “especially if policymakers take steps to make them more economical and easier to understand.” Zycher’s analysis found that the rate at which HSA use is growing is higher than the rate at which assets in individual retirement accounts (IRAs) accumulated after they first were authorized – an encouraging sign, considering the prevalence of defined-contribution retirement plans today.

To encourage further adoption of the high-deductible plans and health savings accounts, Zycher recommended a number of policy changes, some requiring legislation and others that health plans could institute on their own. These recommendations include:

• lowering the deductibles for hospital and chronic care,
• expanding the definition of “preventive care” to include more prescription drugs,
• allowing HSA funds to be used to cover all “qualified medical expenses,” as defined by the tax
   code, and
• raising the annual contribution limit to the policyholder’s out-of-pocket maximum,
• simplifying the statutory requirements for HSA-qualified insurance to enable clear comparisons
   with other types of plans and make it easier for plan sponsors to explain HDHP features to
   consumers.

Even without policy changes, other reports predict higher future enrollment in HDHPs, particularly in the employee benefits market. For example, the 2009 Watson-Wyatt/National Business Group on Health survey reported that a majority of companies will change their healthcare strategies this year in an effort to contain the costs of benefits they offer their employees, and many will implement consumer-directed plans next year. Other reports see further adoption of HDHPs in the small-group market as smaller businesses struggle to survive the recession.

By many accounts, 2009 will be an important year for high-deductible health plans. Among the questions facing insurance companies and policy-makers:

• Will small groups lead the way to broader adoption of HDHPs as they seek to trim expenditures
   while continuing to offer healthcare benefits to employees?
• Will large groups more fully embrace HSA-qualified plans as their bottom lines and cash flow
   come under increasing scrutiny in the recession?
• What part will HDHPs play as the Obama Administration looks for alternatives to fund coverage
   for the uninsured?
• How will state-subsidized plans use HDHPs as they help low-income residents negotiate the
   transition from Medicaid to private coverage?
• How will health plans simplify their offerings so that customers can understand the advantages,
   and how can plans do a better job of explaining how individuals and groups can use these tools
   in overall financial planning?

While it is by no means certain that HDHPs will revolutionize the way health insurance is structured in the United States, their early adoption in the individual as well as group markets demonstrates that they will play a part in the future healthcare marketplace. It will be interesting to track their evolution as the debate over health reform continues.

About Mark Farrah Associates (MFA)

Mark Farrah Associates (MFA) is a leading data aggregator and publisher providing health plan market data and analysis tools for the healthcare industry. MFA’s Health Coverage Portal includes both risk-based and administrative services only membership and financial data by plan, parent, state, region and nationally. Committed to simplifying analysis of health insurance business, our products include Medicare Business Online™, the Health Coverage Portal™, Health Insurer Insights™, and Health Plans USA™.

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Hazel Becker is a healthcare business analyst for Mark Farrah Associates.