Health savings accounts have helped moderate costs over the past 10 years

Past 10 years have shown benefits of high-deductible plans


by Jerry Geisel

Source: Business Insurance

A decade ago, annual double-digit group health care plan cost increases were the norm.

In 2003, for example, costs shot up 10%, the third consecutive year of double-digit cost increases, leading many employers and others to ask whether it was possible to control health care costs.

A decade later, a very different health care plan cost story is playing out. In 2013, group health care plan costs nudged up just over 2%, the lowest increase since 1997, according to consulting firm Mercer L.L.C.

And this year's cost increase was not a one-year fluke. In 2012, costs rose just 4.1%.

While there is no one reason why health care plan cost increases have come down so dramatically, many experts say a key reason has been the large-scale employer adoption and employee enrollment in a health care plan design that didn't even exist a decade ago: high-deductible plans linked to health savings accounts.

It was 10 years ago last week that President George W. Bush signed legislation authorizing HSA-linked plans, effective in 2004.

From that beginning, HSAs have grown to be a major health care plan design. At the start of 2013, more than 15 million individuals were enrolled in HSA-linked plans, a 50% increase in just three years, while the overwhelming majority of employers now offer HSA-linked plans.

“We wanted employees to better understand the cost of health care,” said Ray Allsup, senior director of global benefits at Lam Research Corp. in Fremont, Calif.

At a dinner sponsored by the National Center for Policy Analysis and held in Washington in conjunction with the 10th anniversary of the HSA authorization legislation, a key congressional backer of the legislation reflected on the impact of HSAs on consumer behavior and use of health care services.

“It was about giving people incentives to be cost-conscious. It was incentivizing the consumer to be cost-conscious,” said former Sen. Phil Gramm, R-Texas, who spoke at the dinner.

The design of HSA-linked plans was radically different from that of mainstream plans, such as health maintenance organizations, and their low employee cost sharing requirements.

In 2004 — the first year that employers could offer the arrangement — HSAs had to be linked to health insurance plans with a minimum deductible of $1,000 for single coverage and $2,000 for family coverage. Those minimum deductibles — which currently, due to an indexing feature in the law, are $1,250 for single coverage and $2,500 for family coverage — were many times higher than the $100 or $200 deductibles that were the norm a decade ago.

But offsetting that much higher exposure to picking up a portion, or even all, of a medical or hospital bill was the HSA feature. Employers and employees could contribute on a tax-favored basis — currently as much as $3,250 for those with single coverage and $6,450 for family coverage — to the HSAs.

Under the law, employees can use HSA funds to pay for health care expenses that are not covered, such as those falling under a deductible. Unused funds can be rolled over year after year to pay for succeeding years' expenses and can also be used to pay for retiree health care expenses on a tax-free basis.

Those high deductibles — coupled with the account feature — have made employees far better consumers of health care services, experts say.

“When you have to use your own money, you start to understand health care costs and you become more prudent in spending on health care services,” said Joseph Jackson, CEO of HSA administrator WageWorks Inc. in San Mateo, Calif.

One HSA executive, Gregg Larson, senior vice president and managing director of health care consumerism for Xerox Corp.'s HR solutions unit. in Minneapolis, cites his own experiences in how participating in an HSA-linked plan has made him a better consumer of health care services.

After his son was injured in a sporting event and taken to an emergency room, the doctor suggested an MRI. Mr. Larson would have had to pay the roughly $1,500 cost of the MRI out of pocket. So he asked if an MRI were really necessary, and the doctor acknowledged that an X-ray would be appropriate.

“It was an appropriate question from a consumer,” said Mr. Larson, noting that the exposure to big deductibles makes individuals, like himself, ask more questions as they search for lower-cost but appropriate care.

“Employees learn they can use fewer services and more cost-effective services. They learn they can go to an urgent care center rather than an emergency room,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

Asking questions in search of more cost-effective care has helped to make HSA-linked plans far less expensive than more traditional plan designs.

For example, in 2013, HSA-linked plans cost an average of nearly $8,500 per employee, or about $1,700 less compared with traditional preferred provider organizations, according to a Mercer survey released last month.

That cost difference is certain to trigger even greater employer adoption of HSA-linked plans in the years ahead, experts say.

“You will see increased popularity in the next five to 10 years. We could get up to 50% enrollment,” said Todd Berkley, president of HSA Consulting Services L.L.C. in Minnetonka, Minn.

Currently, according to Mercer, about 18% of employees are enrolled in HSA-linked plans, or plans linked to health reimbursement arrangements, which are somewhat similar to HSAs.

“We have only seen the tip of the iceberg,” Mr. Thompson added.