Catastrophic health insurance and health savings accounts in the US

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

2. 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.”

3. 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).

4. 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.

5. 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.

6. 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

7. 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.

8. 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).

9. 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).

10. 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

11. 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.

12. 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.”

13. 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.

14. 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?

15. 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?

16. 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.