Early Estimations of National Take-Up of Health Savings Accounts

1. Health Savings Accounts:Early estimations on national take-up from 2003 MMA and future policy proposals Stephen T Parente Roger Feldman Jean Abraham Jon B ChristiansonFunded by the Robert Wood Johnson Foundation Health Care Financing and Organization Initiative (HCFO) and the Department of Health and Human Services

2. Presentation Overview • Consumer Driven Health Plan Overview • Research Questions • Data & Analytic Approach • Plan Choice Estimation Results • MEPS Data • Policy Simulation Results • Implications • Next Steps

3. Health Toolsand Resources Health Coverage $$ Annual Deductible Definity HealthCareAdvantage Web- and Phone-Based Tools Preventive Care 100% Annual Deductible ‘Classic’ CDHP Model – Definity Health • Personal Care Account (PCA) • Employer allocates PCA1 • Member directs PCA • Roll over at year-end • Apply toward deductible2 • Health Coverage • Preventive care covered 100% • Annual deductible • Expenses beyond the PCA PCA • Health Tools and Resources • Care management program • Internet enabled 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets.

4. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible The HSA Model An HSA is a special account owned by the individual where tax-free contributions to the account are used to pay for current and future medical expenses. Used with High Deductible Health Plans (HDHPs) Bush Administration has proposed refundable tax credits for individuals to purchase plans with HSAs. Qualified HDHPs now offered by: UnitedHealth, the Blues, Aetna (w/preventive meds), Cigna, Humana and Kaiser Permanente HSA

5. Nearly National Appeal: States where the study employers’ 1st year CDHP take-up was >5% Take-up >5% 0.1 - 5% 0% Data based on 6 large employers representing ~250,000 covered lives with initial year offerings from 2001 to 2oo3.

6. Economic Analysis Motivation • ‘Donut hole’ and savings account are new ‘prices’ to consider in the demand for health insurance with expected negative and positive responses, respectively. • Price sensitivity to different benefit options (i.e., premium, account, donut, coinsurance) could significantly affect take-up of CDHPs. • Builds on existing literature of high deductible health plans (HDHPs) (Keeler, Newhouse, Phelps, 1977). HSAs introduce a new kink in the budget constraint.

7. Conceptual Model of CDHP Money A to B: Care Account B to C: Deductible C to D: Catastrophic insurance w/no coinsurance b a c CDHP Budget d Medical Care Spending HRA/HSA deductible

8. Research Questions • How does the introduction of Consumer Directed Health Plans (CDHPs) into mainstream health insurance affect plan choice? • What is the expected take-up rate of HSAs in the individual market from the 2003 MMA? • What is the impact of the Administration’s proposed HSA subsidies? • Take-up rate of HSAs • Impact on the uninsured • Cost of the subsidy • What is the impact of other possible subsidy designs?

9. Data Sources • 2002 health plan choice data from 3 large employers participating in a Robert Wood Johnson Foundation funded study on CDHPs • Employee premium, deductible, coinsurance, worker’s age, gender, wage income, single/family coverage • 2001 Medical Expenditure Panel Survey (MEPS) • Household Component: All adults age 19-64 not enrolled in public insurance programs and not full-time students during Round 1 • Demographic, employment, and health insurance information • Linked Insurance Component: Subset of workers offered employer coverage and their plan choices • Plan type, premiums, contributions, coinsurance, copayments and deductibles • eHealthinsurance.com • Individual HSA plan information

10. Analysis Design MEPS CDHPs eHealthinsurance Data Sources Estimate plan offerings using linked data Merge employer data Model Estimation Estimate plan choice regression Estimate hedonic premium regression Assign plan choices to full MEPS sample Choice set Assignment/Prediction Use parameter estimates to predict plan choice probabilities for MEPS Define HSA plan design & premium Re-scale take-up rates Policy Simulation Simulate impact of proposed policies

11. Plan Choice Model Analytic Approach • Plan Choices: HMO, 3 PPOs (low, medium, high), 2 CDHPs with Health Reimbursement Accounts (low and high) • Utility-maximization assumption where Uhj = aj + Zj + Xhj + ehj • Estimate a conditional logit model of plan choice using the pooled, employer data • Explanatory variables • Plan attributes (Z) • Annual tax-adjusted employee premium ($1000s dollars) • Savings/reimbursement account size ($1000s dollars) • Donut hole: difference between annual deductible and account size ($1000s dollars) • Coinsurance rate (i.e., .10 = 10% coinsurance) • Interactions between employee and plan attributes (X) • Age, female, wage income, family contract • Plan-specific constants (aj )

12. Plan Choice – Descriptive Statistics

13. Plan Choice – Conditional Logit (1 of 2) Adjusted r-square: ~0.363, Reference PPO_High

14. Plan Choice – Conditional Logit (2 of 2) Adjusted r-square: ~0.363, Reference PPO_High

15. MEPS Data We used the MEPS Household Component to identify adults 19-64 who were not full-time students and not enrolled in public insurance. We then subdivided them into 2 groups: (1) non-offered adult population and (2) workers with an offer of employer group coverage.

16. Used the MEPS linked sample (n=3,127) to estimate a model for the number of health plans (e.g., PPO, HMO) offered to eligible workers. Predicted the number and types of plans available to each offered worker in the MEPS Household Component using these model estimates (max of 4 plans). Assigned plan attributes based on sample distributions from MEPS linked file and developed a hedonic price model for predicting premiums for specific plan designs. Assigning health plans to MEPS workers with an offer of employer coverage

17. Possible Health Plan Choices • Offered workers • HMO • Low-option PPO (PPO_Low $$) • Medium-option PPO (PPO_Medium $$) • High option PPO (PPO_High $$) • Turn down offered insurance and do not purchase individual HSA • Individual HSA (HSA-Full Price) • Employer-sponsored Health Reimbursement Account (HRA) • Employer-sponsored HSA (HSA-Shared Premium)

18. Assigning health plans to MEPS individuals with no offer of employer coverage • Assumed all of these adults have a choice of 3 PPOs, a ‘stingy’ HSA plan, and uninsured. • Used MEPS linked insurance data to develop a hedonic price model to predict premiums for individual PPO plans, given specific plan attributes. • Used 2002 eHealthinsurance.com/HIAA survey statistics to scale individual PPO premiums by age. • Used eHealthinsurance.com for current premiums and cost-sharing attributes for HSA plans.

19. Possible Health Plan Choices • No Offer: Individual pays entire premium and the five plan choices are the same for everyone • PPO_Low $$ • PPO_Medium $$ • PPO_High $$ • HSA-Full Price • Uninsured Note : All HSA plan offers include a $1,000 ‘starting account’ in the premium amount. For example an HSA premium in the simulation of $4,000 includes $3,000 for the high deductible insurance and $1,000 for the health account.

20. Simulation Calibration • Applied CDHP employer plan choice model estimates to predict probabilities of plan choices for MEPS sample respondents • Model Calibrations • % of adults who turn down employer offers by income quartile • % of adults in the individual market who are uninsured by income quartile • Applied national weights to the calibrated model to represent the population 19-64, excluding full-time students, those enrolled in public insurance, and non-offered dependents with employer coverage through their spouse • Approximately 121.5 million adults

21. Policy Simulations • Baseline take-up of HSAs from the Medicare Modernization Act of 2003 • Simulation (1): Bush Administration’s proposal • Refundable tax credit up to 90% of premium; maximum of $1000/adult, $500/child (up to two) • Subsidy for singles with no dependents phased out at $30,000 adjusted gross income and $60,000 for families • Simulation (2): Low income buy-in subsidy • Set HSA premium at $0 for < $15,000 annual income; 50% of premium for incomes between $15,000-$40,000; 75% of premium for incomes between $40,000 and $60,000. • Simulation (3): Full subsidy of HSA premium • Set HSA premium to $0 for all, regardless of income. • Simulation (3a): Full subsidy of HSA premium for “generous” HSA policy • Simulation (4): Full subsidy of HSA premium for the non-working, non-public insurance population

22. Baseline Impact of MMA 2003 NOTE: Population is 19-64, non public insurance

23. Sim#1: Administration’s* Proposal NOTE: Population is 19-64, non public insurance. *Proposal as interpreted from February, 2004 U.S. Treasury Blue Book.

24. Sim #2: Low-income Buy-in Subsidy Income < 15K, free; 25K to 45K, 50% off; 40K to 60K, 25% off NOTE: Population is 19-64, non public insurance

25. Sim #3: Full Subsidy for HSAs NOTE: Population is 19-64, non public insurance

26. Sim #3A: Full Subsidy for Generous HSA NOTE: Population is 19-64, non public insurance

27. Sim #4: Full Subsidy for Non-working NOTE: Population is 19-64, non public insurance

28. Cost per newly insured

29. Diminishing Subsidy Returns Sim #3A Sim #3 Sim #2 Sim #4 Sim #1

30. Cross price-elasticity* of uninsured take-up with respect to HSA premium subsidy *Calculated as the MEPS survey-weighted average of each person’s: -(pr uninsured|status quo - pr uninsured|Δ HSA premium) * (HSA premium @status quo/pr uninsured|status quo)

31. Cross price-elasticities of uninsured take-up with respect to “donut hole” and account

32. Policy Implications - 1 • Take-up elasticity comparisons • -.3 to -.4 in the non-offered population (Marquis et al, 2004) – Ours are similar. • Take-up elasticity increases as income increases. This contrasts with the literature. Why? • Probability of HSA take-up is positively correlated to income (as opposed to an HMO, which is usually negatively correlated). • Implication is that lower income population need more inducement to take-up an HSA • Plan design matters. • Greater take-up from a reduction in the donut hole than an increase in the account size.

33. Policy Implications - 2 • Other influential factors • Targeting the right population • Need more targeting of subsidy – Want to avoid providing too much subsidy to the group market. • Implementation complexity • Timing of tax credit distribution – needs to be available at time of premium payment. Without this, the delay could be 12 months or later. • Want to avoid unnecessary administrative eligibility barriers like those experienced in the Trade Adjustment Assistance Reform Act of 2002 • Supply side embrace • Compared to Medicare Medical Savings Account in HIPAA and other past policies, insurers are willing to build a new product.

34. Research Implications • Donut can and should be modeled in plan choice to get price response information. • Health savings/reimbursement accounts can and should be modeled in plan choice to see what is an appropriate amount – This will depend on objectives (current spending versus medical savings for later years). • Welfare implications for CDHP plans need to be considered in terms of short term account use and long term medical/retirement use – Need retiree information from employers to take next preliminary steps. Work could be used to contribute the health/retirement decision literature summarized by Gruber & Madrian, 1995.

35. Next Steps Refine the model to account for the following: Individual-level vs. Household-level Income measurement issues for determining eligibility Non-offered adults who have access to employer coverage through their spouse (~26 million adults) Offered but turned down coverage Premium inflation assumptions Examine impact of other policy proposals and/or HSA plan designs on take-up. Look at HSA take-up versus retirement saving choice.

36. Thank YouFor more information go to:www.ehealthplan.orgor email sparente@csom.umn.edu

37. Price-Sensitivity Estimates from the Literature • Take-Up • Non-offered population [Marquis and Long, 1995; Marquis et al. 2004] • -.3 to -.4 • Offered population [Chernew et al., 1997; Shiels et al., 1999; Blumberg et al., 2001; Gruber and Washington, 2005] • -.01 to -.2

38. Impact of the Simulations by Income