Catastrophic health insurance and health savings accounts in the US February, 2008

Some rationales and definitions Since 2004, special tax treatment has been offered to households that combine catastrophic health insurance (CHI) and an earmarked Health Savings Account (HSA) CHI: Comprehensive insurance with (Single person) deductible greater than $1100 and max out of pocket of $2900. HSA: Interest yielding savings account maintained either by HH or employer for uncovered medical spending (broad definition). Intended to encourage more “skin in the game.”

Application of the deductible  Need not apply to primary preventive services and some secondary prevention (statins for someone who had heart attack).  All covered services must be subject to the master deductible but payments for out of network care do not count toward out of pocket limit. Other limits OK (like # visits).  Many plans direct people toward a discounted network (for under- deductible spending too).

Account contributions and withdrawls  Can contribute up to $2900/yr tax free.  Accounts earn interest and can accumulate (roll-over).  Can use money for any qualified purchase (including aspirin) and for any family member.  Withdrawls for non medical purposes are taxed as income and subject to 10% penalty before age 65.

Employer possibilities  Employer can set up a health “reimbursement” account and manage it for worker.  Employers can make automatic transfers to account subject only to “negative election.”  There are limits on employer-managed insurance and account portability.

Some early data I  About 4.5 million with these accounts as of 2/2007 (2-3% of all privately insured).  Treasury projects 25 million by 2010 under current law.  Some consultants/cheer leaders project 20%+ share in long run.  One estimate is that 42% of early joiners had family incomes below $50K

Some early data II  31 % of new buyers were previously uninsured  33% got it from a small business that previously offered no coverage  49% were older than 40  Typical plan had $2400 ded and $3400 max.  Compared to typical PPO with $400 ded and $2250 max but $1000 more in premium.  Really high risks often better off in HSA/CHP.

Economic issues  Primary economic rationale is as a second best modification of the employment-based insurance tax subsidy.  Suppose either an aggressive managed care plan or catastrophic insurance both yielded $3000 in expected benefit, but MC had a premium of $3000 while CHP had a $2000 premium. Under old law MC saved about $300 more in taxes (at 30% marginal rate).

Policy solutions  First best: abolish or limit all tax subsidies at the margin.  But an employer offered HSA/CHP combination has expected tax subsidy equivalent to that of MC plan (if $1000 is expected value of out of pocket payment).

Analysis and alternatives  Under high deductible plans with tax shielded out of pocket spending, there is more out of pocket payment than “distorted” policy but the out of pocket incentives are less potent.  It seems that the former somewhat offsets the latter, leading to expected savings (in studies by researchers) of about 5%.  You could get about the same thing by allowing full deductibility of all premiums and all out of pocket payments

Alleged advantages of these plans (relative to status quo)  More affordable (stimulated marketing)  More flexible (across spending; no rules)  Better controlled by informed insureds.  Portable across jobs  Insurance and account owned by consumer.  Helps with low US savings rate and anti-savings distortions in tax laws.

Alleged disadvantages and current evidence  They only benefit the rich and the healthy.  They confuse people  They discourage needed preventive care  They erode the American way of employment based insurance.  My answer to all of these: “not really that much.”

My views  There is not much room for additional risk selection (compared to individual insurance) and these plans do protect the really high risks.  Estimated savings are less than advocates allege (e.g., by just comparing premiums) and are less than one year’s spending growth.  The taste for risk may not be very widespread.  There will be a backlash.

My predictions  These plans will establish a market share of about 10% if current law is not changed.  They have already established a special interest constituency so may be hard to roll back.  Just as with managed care, they suffer more from propaganda of friends.  Limit access to HH’s with higher incomes?

Health economics issues raised by CHP/HSA plans  What does the distribution of risk aversions look like? Need to know this to know demand.  What is the social gain if any from lower bounds to deductibles and higher bounds to total out of pocket spending? Let the market decide?  How might lower income people behave with a high deductible plan? Underuse or overburden?

My normative evaluation  They probably don’t do great harm  But they distract policy attention from revamping the whole tax treatment of insurance toward a really neutral system and from policies more directed at uninsureds.  HSA/CHP advantages high deductible insurance, in individual market especially. Have we traded one distortion for another?  Emphasis on covering catastrophes is helpful.