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32–156—PDF 2006

S. HRG. 109–745

HEALTH SAVINGS ACCOUNTS:

THE EXPERIENCE SO FAR

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH CARE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 26, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON HEALTH CARE

ORRIN G. HATCH, Utah, Chairman

OLYMPIA J. SNOWE, Maine

BILL FRIST, Tennessee

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

JOHN D. ROCKEFELLER IV, West Virginia

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

RON WYDEN, Oregon

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Hatch, Hon. Orrin G., a U.S. Senator from Utah, Chairman, Subcommittee

on Health Care, Committee on Finance ............................................................. 1

Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia ..................... 3

WITNESSES

Carroll, Dr. Robert, Deputy Assistant Secretary for Tax Analysis, U.S. Department of the Treasury, Washington, DC ...................................................... 6

Dicken, John, Director, Health Care Issues, U.S. Government Accountability

Office, Washington, DC ....................................................................................... 8

Knight, Joseph V., chief financial officer, Setpoint Systems, Ogden, UT ........... 10

Collins, Dr. Sara R., assistant vice president, Program for the Future of

Health Insurance, The Commonwealth Fund, New York, NY ......................... 12

Goodman, Dr. John C., president and chief executive officer, National Center

for Policy Analysis, Washington, DC .................................................................. 14

Beittel, Eric C., Enders Insurance Associates, Harrisburg, PA ........................... 16

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Beittel, Eric C.:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 39

Responses to questions from subcommittee members ................................... 44

Carroll, Dr. Robert:

Testimony .......................................................................................................... 6

Prepared statement with attachments ........................................................... 47

Responses to questions from subcommittee members ................................... 63

Collins, Dr. Sara R.:

Testimony .......................................................................................................... 12

Prepared statement with attachments ........................................................... 77

Responses to questions from subcommittee members ................................... 120

Dicken, John:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 138

Responses to questions from subcommittee members ................................... 195

Goodman, Dr. John C.:

Testimony .......................................................................................................... 14

Prepared statement with attachments ........................................................... 202

Responses to questions from subcommittee members ................................... 215

Hatch, Hon. Orrin G.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 225

Knight, Joseph V.:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 228

Responses to questions from subcommittee members ................................... 232

Rockefeller, Hon. John D., IV:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 236

Page

IV

COMMUNICATIONS

Coalition to Promote Choice for Seniors ................................................................ 239

Council of Insurance Agents and Brokers ............................................................. 242

Herbalife International of America, Inc. ................................................................ 248

Millne, Timothy S. ................................................................................................... 252

National Association of Health Underwriters ....................................................... 253

National Business Group on Health ...................................................................... 257

Wendy’s International, Inc. ..................................................................................... 259

(1)

* For additional information on this subject, see also, ‘‘Present Law and Analysis Relating to

the Tax Treatment of Health Savings Accounts and Other Health Expenses,’’ Joint Committee

on Taxation staff report, September 25, 2006 (JCX–45–06).

HEALTH SAVINGS ACCOUNTS:

THE EXPERIENCE SO FAR

TUESDAY, SEPTEMBER 26, 2006

U.S. SENATE, SUBCOMMITTEE ON HEALTH CARE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 2:35 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. Hatch

(chairman of the subcommittee) presiding.

Present: Senator Rockefeller.

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM UTAH, CHAIRMAN, SUBCOMMITTEE ON HEALTH

CARE, COMMITTEE ON FINANCE

Senator HATCH. Well, we will call the committee meeting to

order.

I have been a strong advocate of individuals taking personal responsibility for their lives. The Federal Government does not always have the right answer or the appropriate solution for everyone, and all of us can admit that, oftentimes, the Federal Government’s solutions are inflexible and unyielding.

That is the beauty of health savings accounts, or HSAs. HSAs

give the individual the ability to take responsibility for his or her

own health care needs. Who knows best, the Federal Government

or the person needing the care? I believe that the answer is fairly

obvious.

I know that some are uncomfortable with the HSA approach, but

I believe that today’s hearing will help answer many of the valid

questions surrounding the details of HSAs.*

Both our subcommittee Ranking Minority Member, Senator

Rockefeller, and I want to take the time to address this important

issue and ask very relevant questions regarding HSAs.

It is always a pleasure to be with my friend, Jay Rockefeller. In

fact, I could get used to this, couldn’t you?

Senator ROCKEFELLER. Yes. Not necessarily——

Senator HATCH. Right away?

Senator ROCKEFELLER. Well, just the position of the seats.

[Laughter.]

Senator HATCH. Well, we will just switch seats every once in a

while. How is that? [Laughter.]

2

Oftentimes in the Senate it is difficult even to agree on the existence of a problem. That is not the case when it comes to our Nation’s health care system. Everyone in this institution understands

the frustration of ordinary Americans, insured and uninsured, who

have to navigate our health care system.

As is evident in the report released yesterday by the Citizens

Health Care Working Group, which I worked on with my good

friend and Finance Committee colleague Senator Ron Wyden,

Americans want an improved health care delivery system with better access for those who cannot afford care.

They are tired of insurance that is too expensive, benefits that

are too difficult to decipher, a bureaucracy that many times lacks

the human touch, and a system that is too unresponsive for a mobile 21st-century workforce.

The administration believes, and a number of our Congressional

colleagues and I concur, that health savings accounts are part of

the answer. By combining lower premiums with higher deductibles,

they have the potential to make health care costs more manageable

for individuals and for employers.

The idea is easy to grasp. When individuals are more responsible

for their own health care, they will make better, and more costconscious, health care decisions. When someone else is paying the

whole bill there is no incentive to monitor one’s own spending. It

is no wonder that the yearly premiums for traditional first-dollar

coverage have exploded.

By making health care more affordable, these plans will provide

affordable insurance to those who are currently uninsured or

under-insured and reduce the Nation’s health care expenditures as

well. That, at least, is the theory.

Today, we hope to hear how these plans work in practice. One

thing does seem certain to me: HSAs are here to stay. Their growth

has been remarkable. They were only created in 2003 through the

Medicare Modernization Act. I served as a member of that House/

Senate Conference Committee, and to this day believe that the creation of HSAs was probably one of the most important aspects of

that particular legislation.

By March 2005, 1 million individuals had health savings accounts. Only 9 months later, that number had grown to 3.2 million.

Not only are individuals and small businesses turning toward

HSAs, but some of the giants of American industry and retail are

as well.

Now, these plans do appear to be gaining popularity. They are

definitely growing. I think it is incumbent upon us to take the task

of improving them as seriously as we can. For me, just picking up

the newspaper in the last few weeks confirms their promise and

shows the way forward.

The GAO has released its latest in a series of studies demonstrating that both HSA-eligible plans and high-premium plans

cover similar services, including preventive services, and that for

many people there are substantial savings associated with participation in these plans.

Now, the decision by one prominent company to offer almost 300

generic prescription drugs at $4 for a 30-day supply for those living

in Tampa, FL, is an important step in the right direction.

3

Let us hope that this decision will be expanded to other parts of

the country, because it will have a significant impact for HSA participants who may have to pay for some prescription drugs out of

pocket.

As more individuals and businesses elect HSA-eligible plans, I do

not doubt that private consumer pressure will correct some plan

deficiencies on their own. At the same time, I believe that Congress

has an opportunity to improve HSAs for those already participating

in them. HSAs are still in their infancy. The evidence is starting

to come in, however, and our excellent panel should help us to

navigate through some of these critical issues.

[The prepared statement of Senator Hatch appears in the appendix.]

So with that, I will turn to my dear friend, Senator Rockefeller.

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

A U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Thank you, Mr. Chairman.

You notice, the Chairman and I are setting a new example in

how to sit, or on what to sit. This is a first in our history of the

Finance Committee. Right?

Senator HATCH. I am not sure it is that important, however.

[Laughter.]

Senator ROCKEFELLER. It is to me.

Senator HATCH. It is to me, also.

Senator ROCKEFELLER. Health insurance makes a substantial difference in the amount and kind of health care people are able to

obtain. We had a two-hour meeting of a foundation I set up about

15 years ago, co-chaired by Bill Frist and myself, yesterday on the

whole question of why it is we have stopped talking about the really big picture, which is universal health care, with these new statistics out.

It was very interesting. We decided that, frankly, we had all become too timid, too incremental, looking at little ways to incrementally do this or that, not looking at the effect on the large picture

or affecting the large picture.

The consequences of not getting needed medical care are not trivial and can result in unnecessary hospitalizations and serious

health problems, not to mention the effect it can have on a person’s, or a family’s, finances.

According to the Census Bureau, over 46 million Americans were

uninsured in 2005, including 8.3 million children. That was the

first time that number had gone up since 1998, which has something, I think, to do with our Children’s Health Insurance Program.

The weak economy, unemployment, and the increasing cost of

health care all made it harder last year for American workers and

their families to obtain affordable, comprehensive health care insurance. The growing uninsured problem in this country deserves

immediate attention by the Congress. It has not gotten it, really,

for about 10 years or so.

If it is not going to get it in this Congress, which it is not because

of the time, then we have to do it next year. We should get started

before the recess this year. Unfortunately, I do not think the health

savings accounts, HSAs, are the answer, and I remain concerned,

4

unlike my esteemed colleague, that these tax-preferred accounts

continue to be pushed by the administration as a meaningful

health insurance option.

We know that the majority of uninsured Americans are in working families with low to moderate incomes. Research indicates that

71 percent of the uninsured are in a 10-percent or lower income

bracket, and that more than half—that being 55 percent—of the

uninsured have no income tax liability at all.

This means they would benefit very little from health savings accounts. According to the GAO, the vast majority of people who purchase HSA policies are healthy, affluent workers, with an average

adjusted gross income of $133,000, in 2004 figures. That is not the

folks that I deal with in West Virginia, and I suspect it is not typical in Utah, Montana, and a lot of other places.

These individuals are betting on not getting sick, or if they are

getting sick, they are probably not going to do anything about it

because they do not know whether that would have any effect, or

what it would cost, or they become passive in their own health

care, which is dangerous.

Furthermore, the use of HSAs could significantly undermine the

employer-based insurance on which most people, 60 percent of

workers, rely. As healthier, more affluent workers shift to HSAs,

older and sicker workers will be left in traditional employersponsored policies.

This type of adverse selection will drive up premiums for traditional employer-based coverage, further encourage firms to provide

less desirable coverage or to drop health care coverage altogether,

all of which happens.

Indeed, some research even concluded that if the savings limits

for HSAs were increased, they would also undermine employerprovided retirement savings programs. This perverse incentive

would be very dangerous, obviously; as small business owners have

the option of saving more money, tax-preferred, in an HSA, they

would have less incentive to provide 401(k) accounts to their employees.

We need to do more to encourage small business to provide retirement and health care benefits. Our experience with the Trade

Adjustment Assistance Health Care Tax Credit is, in this instance,

instructive regarding the limitations of trying to use the tax code

to expand coverage.

Even with a tax break, health insurance is still too expense for

many, if not most, people to purchase. Therefore, the take-up rate

on the Health Care Tax Credit has been very low, worthy of attention. I believe the HSAs present the same problems. Many people

will not be able to afford health insurance in the private market,

even if they receive some tax subsidy.

Finally, a note about the ability of HSAs to encourage consumer

responsibility. Patients generally lack both the medical expertise

and complete information about costs and quality that would be

necessary to comparison-shop, as we are accustomed to doing for

other goods and services.

What patients are doing, instead, is cost-avoidance, or personal

peril avoidance. Many HSA enrollees are avoiding needed care because they cannot afford the high deductibles. Anyone who knows

5

anything about health care knows that this will lead to greater

costs to our health care system down the road.

If current purchasers of HSAs would not recommend these plans

to people who have chronic conditions, have children, are on medication management, or cannot afford the high deductible, then why

should we proceed with a strong tax advantage? These are characteristics of most uninsured Americans. We have to find a better solution.

I will just end with a story, Mr. Chairman, which you have probably heard me say before. But I was a Vista volunteer 40-plus

years ago in West Virginia. There was one thing which was

rammed into my head and will never leave. I was in a small, southern coal community. Nobody had any health insurance, jobs, did

not go to school, lots of problems. Wonderful people.

One thing I found that I could do was to get a Pap smear van

from the county. They would send that out, and that was important, so I went around the community on that. The van came, nobody showed up. I figured I had done something wrong. So as a social worker, I went to work and tried to do better. The van came

again a month later, and nobody showed up. I went to work again.

The van came on the third month, and two people showed up.

Lesson: when people are poor, when they are discouraged, or

when they are living in adverse circumstances, they have enough

bad news in their life, they are not sure they want to go to a place

or take a test which may give them news that is even worse.

Now, you could say, well, it is their responsibility to do so. But

human nature is human nature. We need to deal with that and we

have to be sensitive about that if we want people to have health

care available to them.

Thank you, Mr. Chairman.

Senator HATCH. Well, thank you, Senator Rockefeller.

[The prepared statement of Senator Rockefeller appears in the

appendix.]

Senator HATCH. I have to run down to Judiciary to make a

quorum, if you can take care of the hearing until I get back. But

let me just introduce everybody here. We have a distinguished

panel of witnesses here today. You will have to forgive me for being

absent for a few minutes.

Robert Carroll, Deputy Assistant Secretary for Tax Analysis at

the Department of the Treasury will testify for the administration.

Dr. Carroll has been a visiting scholar with the Congressional

Budget Office and served as a Senior Economist on the President’s

Council of Economic Advisors.

I want to thank you for being here. We appreciate you being willing to be on this one-panel format, because ordinarily we would

have you go first by yourself.

John Dicken, Director for Health Care Issues for the U.S. Government Accountability Office. He has served as a Senior Analyst

for the President’s Advisory Commission on Consumer Protection

and Quality in the Health Care Industry, and is a Legislative Fellow with the Senate Committee on Labor and Human Resources.

I am especially happy to welcome Joe Knight, from Ogden, UT.

It is always a pleasure to have a fellow citizen of the Beehive State

testifying.

6

Mr. Knight is CFO of Setpoint Systems, a family-owned business

with 34 full-time employees. Setpoint offers an HSA-eligible health

plan to its employees. So, Joe, we are really pleased to have you

here, and I am looking forward to hearing about your company’s

reasons for offering such a plan, and the experiences of both employees and management with this plan.

Sara R. Collins is the assistant vice president for the Program

for the Future of Health Insurance for The Commonwealth Fund,

where she has written extensively on health policy. We are grateful

to have you here as well.

John Goodman is the founder, president, and CEO of the National Center for Policy Analysis. He is the author of nine books

on health care and economic policy, and holds a Ph.D. in Economics

from Columbia University.

Finally, Eric Beittel is a certified financial planner with Enders

Insurance Associates in Harrisburg, PA. He has worked in the financial services industry for over 7 years, assisting dozens of small

businesses and hundreds of individuals with health savings accounts. Furthermore, he owns an HSA himself to manage the

health care needs of his young family.

Now, I understand that your great uncle has accompanied you

here today, so we are happy to welcome him as well.

We are happy to have all of you here today. If you will excuse

me for just a short period of time, I will go down and make that

quorum. In these last few days, it is tough to do that. I will be

right back.

We will start with you, Dr. Carroll. Senator Rockefeller will take

good care of all of you, and we will reserve our questions until the

end.

Senator ROCKEFELLER. Dr. Carroll?

STATEMENT OF DR. ROBERT CARROLL, DEPUTY ASSISTANT

SECRETARY FOR TAX ANALYSIS, U.S. DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Dr. CARROLL. Thank you, Ranking Member Rockefeller and distinguished members of the subcommittee. I appreciate the opportunity to discuss with you today health savings accounts and the

President’s initiative to expand upon HSAs, as included in the fiscal year 2007 budget.

The initiative will help make health care more accessible, affordable, and portable, thus better enabling Americans to obtain health

care and to retain their health care when they change employment.

I will focus my remarks on the problems in health care and how

the President’s proposals help address these problems by building

upon the early success of HSAs.

By way of background, health care costs continue to rise rapidly

in the United States. Growth in health care costs has been exceeding GDP growth by 2 percentage points since 1940, comprising 16

percent of GDP in 2004, and is projected to grow to nearly 20 percent of GDP by 2015.

Higher insurance premiums pose a challenge for employers and

burden workers. The burden of rising health care costs is particularly problematic for small businesses, who often end up choosing

not to offer any health insurance to their employees.

7

At the same time health care costs are rising, the number of uninsured also continues to grow. As health care costs grow faster

than incomes, an increasing number of individuals are unable to

purchase health insurance.

Also, those higher, ever-rising costs mean that the self-employed

and employees of small businesses are far less likely to have coverage. A significant number of the uninsured work for small businesses.

A substantial portion of rising health care costs is due to the effects of our insurance system itself. Health insurance gives people

valuable protection and peace of mind that they will have help paying their medical bills should a major illness arise.

However, the tax system stacks the deck against insurance that

gives the individual a greater role in health care decisions. Firstdollar coverage, in effect, dulls the incentives for consumers to shop

carefully for cost-effective care.

The tax bias that favors this coverage that encourages individuals to purchase pre-paid health care in the form of employerprovided insurance is an important piece of the puzzle, explaining

the rapid growth in health care costs.

When consumers have more at stake, when they have more exposure to the price of health care, when they have more ‘‘skin in the

game,’’ they can be expected to make better decisions. Greater reliance on competition and greater exposure to market prices will

help lead to more efficient use of resources and help stem the excessive rise in health care costs.

With the appropriate reforms, the U.S. health care system can

become more efficient at supplying cost-effective health care to consumers, while continuing to lead in innovation. The President’s

Health Care Initiative would address rising health care costs

through a series of proposals designed to improve the functioning

of the health care market.

At the core of this initiative is a set of tax proposals that puts

the health care consumer more in control of his or her health care,

that removes the tax disincentive to purchase high-deductible

health plans and the tax bias for first-dollar coverage.

Fundamentally, the initiative places health care purchases directly by individuals with high-deductible health plans on an equal

footing with employer-provided health insurance.

The President’s Health Care Initiative allows those with highdeductible health plans to deduct insurance premiums and out-ofpocket expenses and to claim refundable tax credits to cover payroll

taxes paid on these premiums and out-of-pocket expenses.

The initiative also includes a refundable tax credit to cover the

cost of high-deductible health plan insurance premiums that is targeted to the lowest-income Americans. The result is a policy that

provides the same tax advantage available to those with employerprovided insurance as health care purchased by all Americans with

high-deductible health plans.

Providing consumers with a larger role in health care decisions

will help bring market forces to health care. Where market forces

are prevalent, there is evidence that health care costs have grown

slower, or in some cases even decreased.

8

The President’s initiative also helps make health insurance more

portable. In today’s economy, employees frequently change jobs,

and these changes are often for the better. Each year, some 56 million employees are hired, while 53 million leave their jobs.

Our dynamic labor markets make an important contribution to

our economic growth and higher living standards. Tying employees’

health insurance to their workplace, however, is a source of job lock

and an impediment to fluid and flexible labor markets.

HSAs have the distinct advantage of being owned by individuals,

regardless of their employer. When workers change jobs, they take

their HSAs with them.

Just a couple of years after the enactment of HSAs, some 3.2 million people are now covered by high-deductible health plans. Moreover, there is broad use of these plans by important segments of

the population. Early evidence indicates that over 40 percent of

those covered by these plans have incomes below $50,000, and

roughly 50 percent are age 40 or over.

The President’s Health Care Initiative builds on the early success of HSAs by removing the tax disincentive to purchase a highdeductible health plan. Treasury projects that, in the absence of

the tax bias against high-deductible health plans, the number of

HSAs will rise by 50 percent.

The President’s Health Care Initiative also reorients HSAs—and

in many circumstances lower-income Americans would receive a

larger tax subsidy than those with higher incomes—and is in stark

contrast to current law, where lower-income Americans often receive little benefit from the existing subsidy for health care.

Thank you for the opportunity to testify before the committee

today, and I look forward to your questions.

Senator ROCKEFELLER. Thank you. Dr. Carroll.

[The prepared statement of Dr. Carroll appears in the appendix.]

Senator ROCKEFELLER. Mr. Dicken?

STATEMENT OF JOHN DICKEN, DIRECTOR, HEALTH CARE

ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE,

WASHINGTON, DC

Mr. DICKEN. Mr. Chairman, Ranking Member Rockefeller, and

members of the subcommittee, I am pleased to be here today to discuss GAO’s recent report entitled ‘‘Consumer Directed Health

Plans: Early Enrollee Experiences with Health Savings Accounts

and Eligible Health Plans.’’

As Dr. Carroll indicated, HSAs were introduced in 2004, and

HSA-eligible plans are a small, but growing, share of the private

health insurance market, with about 3 million Americans covered

in these plans as of January of 2006.

These consumer-directed health plans have three components.

First is a deductible significantly higher than typical with more

common preferred provider organizations or other traditional plans.

Second is the actual HSA, a tax-advantaged account for paying

medical expenses and accumulating savings.

Third is a decision support tool to provide enrollees with standardized information on the cost and quality of health care providers

and services.

9

My written statement, based on our recent report, provides information on HSA-eligible plans, including their financial features,

characteristics of enrollees, HSA funding and use, and enrollees’

experiences. My remarks today will briefly highlight several key

points from my written statement.

First, the financial features of HSA-eligible plans differ from

those of traditional plans. As detailed in our report, enrollees typically pay lower premiums for HSA-eligible plans than for traditional plans.

However, depending on their use of health care services, enrollees in HSA-eligible plans can also pay more when obtaining care

due to higher deductibles and out-of-pocket spending limits.

To give real-world illustrations, we estimated total annual costs

for enrollees at three large employers, offering both an HSA-eligible

plan and a PPO. For these employers, an enrollee with low to moderate use of health care, such as six doctor visits in a year, could

pay 48 to 58 percent lower annual costs in the HSA-eligible plan

than in the PPO plan.

In contrast, an enrollee with extensive use of health care, such

as a hospital stay costing $20,000, could pay 47 to 83 percent higher annual costs in the HSA-eligible plan than in the PPO plan.

Second, HSA-eligible plan enrollees generally had higher incomes

than comparison groups. Specifically, 51 percent of tax filers who

reported HSA contributions in 2004 had an adjusted gross income

of $75,000 or more. This was nearly three times the percentage of

all tax filers under 65 years old with adjusted gross incomes of

$75,000 or more.

Similarly, data from the Federal Employees Health Benefit Program, two large employers, and a national broker of health insurance showed that HSA-eligible plan enrollees had higher incomes

than traditional plan enrollees in 2005.

Third, regarding the use and funding of HSAs, it is striking that,

in 2004, just over 55 percent of those with an eligible plan contributed to an HSA. Of those reporting that they contributed to an

HSA in 2004, about 45 percent also withdrew funds, which were

mainly used to pay medical expenses.

Fourth, to discuss their early experiences with HSA-eligible

plans, we conducted focus groups with enrollees at three large employers. Many focus group participants liked the ability to accumulate savings and the tax advantages of the HSA. Participants also

reported few problems obtaining care. Many participants reenrolled in the HSA-eligible plan when offered the choice.

However, participants noted certain aspects that they did not

like. Some participants said that they would prefer being able to

contribute more to the HSA, while others said they would be willing to pay higher premiums for plans with lower deductibles.

Most participants would recommend their HSA-eligible plans to

healthy consumers, but not to those who have a chronic condition

or may not have the funds to meet the high deductible.

In closing, these early experiences underscore two important lessons. When offered the choice of enrolling in an HSA-eligible plan,

individuals will likely weigh the potential savings and financial

risks in relationship to their own health care needs and financial

circumstances.

10

If healthier individuals anticipate incurring lower costs, they

may be more likely to select an HSA-eligible plan than would less

healthy individuals. This stresses the importance of monitoring enrollment and assessing the cost of health coverage for enrollees in

both HSA-eligible and traditional plans.

Finally, an increase in health care consumerism is key to cost reductions that may occur under these plans, but few participants in

our focus groups researched costs before obtaining health care.

This may be due in part to consumers’ reluctance to question

health care providers about costs and the dearth of readily available, standardized provider-specific information. Overcoming these

barriers will likely require time, education, and improved tools to

provide enrollees with better information about the costs and quality of their health care.

Mr. Chairman, this concludes my statement. I would be happy

to answer any questions you or other members of the subcommittee

may have.

Senator HATCH. Well, thank you, Mr. Dicken.

[The prepared statement of Mr. Dicken appears in the appendix.]

Senator HATCH. Mr. Knight, we look forward to hearing your testimony.

STATEMENT OF JOSEPH V. KNIGHT, CHIEF FINANCIAL

OFFICER, SETPOINT SYSTEMS, OGDEN, UT

Mr. KNIGHT. Thank you. Thank you, Chairman Hatch, Ranking

Member Rockefeller, and members of the subcommittee, who seem

to be on break.

I am Joe Knight, chief financial officer and co-owner of Setpoint

Companies, a small manufacturing company comprised of six subdivisions. Three major businesses that I own are manufacturing

automation—we help companies manufacture in the United States

rather than in China—roller coaster manufacturing, and precision

machining through a company we call Leanwerks.

I am here on behalf of the U.S. Chamber of Commerce. The U.S.

Chamber of Commerce is the world’s largest business federation,

representing more than 3 million businesses and organizations of

every size, sector, and region.

Setpoint, originally founded in 1992 after operating out of a garage, has grown to a company with revenues of over $15 million.

A fast-growing company, our overall organization has grown, in

2000, from 20 employees, to now a total of 60.

I am also pleased to tell you that our company was voted as one

of the best companies to work for in Utah magazine. We were recognized as an INC 500 company. For 4 consecutive years, we were

one of Utah’s 100 fastest-growing companies in the State.

We have grown this company without outside investment and

with our own personal savings and sweat, between my partners

and I.

One of the challenges we have is, we are a high-tech company

and we have employees that, on average, make about $20 an hour

in salary. One of the most important things these employees look

for in employment is benefits, including health care benefits.

Our strategy is to provide benefits that large companies offer as

well and match those benefits. This strategy has served us well, beVerDate 11-MAY-2000 17:51 Mar 06, 2007 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 32156.000 SFIN1 PsN: SFIN1
11

cause we have been able to attract top engineering talent. We have

always paid 100 percent of single coverage and 75 percent of family

coverage for our full-time employees when it comes to health care.

To recruit and keep these top employees, we need to have, and

keep, all of our benefits competitive. Starting in 2003, this became

a serious challenge with our health care coverage. One employee

had a wife with cancer, and another had some serious health issues

with a child. Unfortunately, in a small group like Setpoint’s, these

issues can be disastrous.

In 2004, our PPO premium increased 20 percent, with a higher

deductible and co-pay. Then in 2005, we were hit with a 49-percent

increase in our plan. The 49-percent increase was especially devastating to our business, because our health care costs were much

higher than the large employers in our area. Consequently, the employee portion of health care and the level of coverage was not competitive, and we had trouble recruiting talent.

After considering several options for the 2005 plan, my agent informed me about the new health savings account high-deductible

plan alternative. After looking at this option, we found that we

could offer a plan with a $3,500 deductible for singles, and $7,000

for families, through United Healthcare. These plans allowed us to

avoid the 49-percent increase in premiums and allowed 100-percent

coverage for preventive medicine.

Now, I am a finance guy, so I started looking at the alternatives

and the options and started calculating comparative data to see

which plan I deemed would be best for my employees, and also for

our company. I was surprised to find that the HSA option was far

better financially for all of my people, especially those employees

who had serious health issues.

We rolled out the new plan with a lot of education, because initially some of our employees were skeptical. This included one-onone discussions, modeling medical costs, and offering comparative

analysis on the different plans.

Now that we are nearly through our second year with the HSA,

everyone is happy with the change. As an employer, we are able

to use our savings in the HSA premium to increase our contributions, which are now $1,200 per family per year, and $600 for individuals. Consequently, all of our savings and premiums as an employer went directly to the employee’s HSA accounts.

On a personal level, I am very pleased with this type of coverage.

I have seven children, ranging in age from 18 to 4. Consequently,

my wife is a very good budgeter and is very careful with our

money. The HSA has made my wife a real shopper when it comes

to health care.

When we needed a minor surgery for one of my children, my wife

shopped for doctors and the costs that she would be comfortable

with. She was able to save on our health care costs by managing

that use.

Whether it is finding the right doctor or asking for generic medication when possible, she is in control of our spending with the

HSA. If the doctors are aware that you have an HSA and are willing to pay cash, they often offer a cash discount beyond the UHC

discount we are already provided.

12

I think this new type of plan is putting decisions back into the

hands of the consumer, and this will lead to more prudent utilization and ultimately help to control the increasing health care costs.

Both my employees and I are delighted with the health savings

accounts that allow us to benefit from our health care spending decisions and the use of pre-tax dollars. When the health care plans

are paired with these HSAs, it puts the consumer in charge.

There are ways to make these HSAs more appealing to employees and employers, many of which are contained in Senator Hatch’s

bill and mentioned in my written testimony.

On behalf of Setpoint Systems and our employees, I would like

to thank this committee for the work you have done in enacting

this legislation into law and considering the possible improvements.

Having health savings accounts as a viable health care option

has allowed Setpoint to curb the increases in our health care premiums, while enhancing our ability to hire and retain employees.

Thank you.

Senator HATCH. Thank you, Mr. Knight.

[The prepared statement of Mr. Knight appears in the appendix.]

Senator HATCH. Dr. Collins, we will take your testimony.

STATEMENT OF DR. SARA R. COLLINS, ASSISTANT VICE PRESIDENT, PROGRAM FOR THE FUTURE OF HEALTH INSURANCE,

THE COMMONWEALTH FUND, NEW YORK, NY

Dr. COLLINS. Thank you, Mr. Chairman, Ranking Member Rockefeller, members of the subcommittee.

The subcommittee is to be commended for focusing attention on

the manifold problems confronting the U.S. health care system:

steady growth in the number of uninsured, rising health care costs

and premiums, wide variation in the quality and cost of care, and

inefficiencies in care delivery and administration.

Some maintain that HSAs, coupled with high-deductible health

plans, are an important part of the solution to our health systems

problems. Asking families to pay more out-of-pocket, the reasoning

goes, will create more prudent consumers of health care, driving

down cost growth and improving the quality of care as providers

compete for patients.

The tax incentives associated with HSAs will lure previously uninsured people into the individual market, reducing the numbers of

families without health insurance.

While it is comforting to believe that such a simple idea could

help solve our health care problems, nearly all evidence gathered

to date about HSAs and high-deductible health plans points to the

contrary.

Indeed, there is evidence that encouraging people to join such

health plans will exacerbate some of the very maladies that undermine our health system’s ability to perform at its highest level.

Americans already pay far more out-of-pocket for their health care

than residents of other industrialized countries.

The Commonwealth Fund’s Biennial Health Insurance Survey

found that, in 2005, 60 percent of privately insured adults with annual household incomes of under $40,000 spent 5 percent or more

13

of their income on out-of-pocket expenses and their premiums, and

40 percent spent 10 percent or more.

There is considerable evidence that high out-of-pocket costs lead

patients to decide against getting the health care that they need.

There is also evidence that rising cost exposure leads people to accumulate medical debt, take on credit card debt, and reduce their

savings.

The Employee Benefit Research Institute and The Commonwealth Fund Consumerism in Health Care Survey found, in 2005,

that people enrolled in HSA-eligible high-deductible health plans

were much less satisfied with many aspects of their health care

than adults in more comprehensive plans. People in the plans allocate substantial amounts of income to their health care, particularly those who have poor health and low incomes.

Adults in the plans are far more likely to delay or avoid getting

needed care or to skip medications because of the costs. Problems

are particularly pronounced among those with poorer health or

lower incomes.

Few Americans in any health plan have the cost and quality information they need to make decisions, but patients’ use of information alone is not likely to dramatically reduce health care costs

or improve quality. Most health care costs are incurred by people

who are very ill, often in emergencies.

Payors, Federal and State governments, accrediting organizations, and professional societies are much better positioned to insist

on high quality and efficiency.

HSAs will not solve our uninsured problem. Fewer than a million

currently uninsured Americans are expected to gain coverage as a

result of HSAs. This is primarily because, as Senator Rockefeller

pointed out, 71 percent of uninsured are in the 10-percent or lower

income tax bracket, and thus would benefit little from the tax savings associated with HSAs.

The individual insurance market is not an efficient or equitable

solution to the uninsured problem. The Commonwealth Fund survey found that nearly 90 percent of adults who sought coverage in

the individual insurance market in the last 3 years never ended up

buying a plan.

Nearly 3 of 5 adults who sought coverage found it very difficult

or impossible to find a plan they could afford. The problem was

particularly acute among people with health problems or who had

low incomes.

The administrative costs of individual coverage consume an estimated 25 to 40 percent of each premium dollar, compared to 10

percent for group coverage. We as a Nation should focus on more

promising strategies for expanding coverage and improving affordability, quality, and efficiency.

These strategies include: expanding group forms of insurance

coverage, like employer-based coverage; eliminating Medicare’s 2-

year waiting period for coverage of the disabled, letting older adults

buy into Medicare; building on Medicaid and the State Children’s

Health Insurance Program to cover greater numbers of people; ensuring affordable coverage for families by placing limits on health

care costs as a percent of income; greater transparency with regard

to provider quality and the total cost of care; pay-for-performance

14

incentives to reward health care providers that deliver high quality

and high efficiency; development of value networks of high-performing providers under Medicare, Medicaid, and private insurance; better management of chronic health conditions; improved access to primary care and preventive services; and investment in

health information technology.

Thank you.

Senator HATCH. Thank you.

[The prepared statement of Dr. Collins appears in the appendix.]

Senator HATCH. Dr. Goodman?

STATEMENT OF DR. JOHN C. GOODMAN, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, NATIONAL CENTER FOR POLICY ANALYSIS, WASHINGTON, DC

Dr. GOODMAN. Thank you, Mr. Chairman, Senator Rockefeller.

Professor Kotlikoff and his colleagues at Boston University are

predicting that, in just 5 decades, government at all levels will be

spending a third of the GDP on health care.

Yet government spending today for all purposes is a third of the

GDP, so the path we are on is for health care to crowd out, literally, everything else that government does.

If the private sector keeps pace with the government, and it has

for the past 30 years, then by mid-century health care will crowd

out every other form of consumption. We will have no food, no

clothing, no housing. We will have only health care.

Now, this, of course, is an impossible path, yet it is the path we

are on. We cannot get off of this path unless someone chooses between health care and other uses of money.

The question is, who will that someone be? Too often, the critics

of health savings accounts are given a free pass. They do not want

patients to make these decisions, but only a few years ago some of

these very same people were irate when employers and insurance

companies were making these decisions. They would probably be

equally irate if government made them.

We cannot have a serious conversation about health care unless

we address how we are going to choose between health care and

other uses of money. For my part, I want as many of these choices

as possible to be made by patients, in consultation with doctors,

rather than by impersonal bureaucracies.

This is not an unusual idea. Twelve billion times a year, Americans buy over-the-counter drugs. Before they engage in these acts

of self-medication, why do they not seek professional advice from

a physician? Presumably because they do not want to incur the

time or the expense.

Yet in making these decisions 12 billion times a year, Americans

are choosing between physician care and other uses of time and

money. That is a good thing, not a bad thing, because, if they all

went to the doctor on all these occasions, we would need 25 times

the number of primary care physicians we have in this country.

Do people always make good decisions? No. Do their mistakes

sometimes have tragic consequences? Of course. But the answer

there is not to discourage choice, it is to help people make better

choices.

15

From the large to the small, Americans have shown a willingness

and an ability to trade off health care dollars against other uses

of money. To help them make these choices, individual self-insurance through health accounts and third-party insurance should be

on a level playing field under the tax law.

When does it make sense to have individuals manage their own

health care dollars, and when does it make sense to have those dollars managed by third parties? These are decisions that should be

made in the marketplace and not by Congressional committees.

We have more than a decade of experience with health accounts

in South Africa, where two-thirds of the private marketplace now

is in a health savings account plan. We have 7 years’ experience

with the MSA pilot program, 3 years with HSAs, and 41⁄2 years

with HRAs.

As a result of all this, we know a lot more than some of you may

think. The GAO study we heard about looked at three companies

for 1 year, and the companies were not typical. But AHIP has

looked at thousands of companies, covering 2.3 million people.

On top of that, we have dozens of reports and studies done by

companies in the industry, independent analysts, think tanks, and

many more coming forth every day. Here is the thrust of what the

great bulk of these studies find: that when people manage their

own health care they do common-sense things.

They cut back on unnecessary doctor visits. They cut back on

drugs they were not planning to take anyway. They switch from

brand-name drugs to generic drugs. There is no real evidence that

they are skimping on preventive medicine. Even the worst studies

do not find any harm to the health care of any people in these

plans.

People enrolled in these plans represent a broad cross-section of

people by age, income, and health. One-third of them were previously uninsured. I do not know why some people making $75,000

a year would not recommend one of these plans to other people, but

I can introduce that high-income person to literally thousands of

Medicaid disabled patients who today are managing their own

health care dollars in the Cash and Counsel program. The satisfaction rates among these Medicaid patients are almost 100 percent.

As good as all these results are, we have barely begun to take

advantage of these accounts. What we need for the future is flexibility, especially for the chronically ill, because this is where our

greatest opportunity lies. For the healthy person, the HSA is, for

the moment, a savings account. But for the chronic patient, this is

an opportunity to manage their own health care.

Self-management of care will be the next great wave of change

in the health care marketplace. We now have devices that allow

diabetics to monitor their own glucose level. Asthmatics can monitor their own peak air flow. Parents can buy devices that tell them

whether their child’s sore throat is a strep infection. Another device

tells them whether the child’s ear ache is an infection.

New products are coming on the market every day. But to make

all of this work, the patient who manages his own care must also

manage the funds that pay for that care. That will be the promise

of health savings accounts in the future.

Thank you, Mr. Chairman.

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[The prepared statement of Dr. Goodman appears in the appendix.]

Senator HATCH. Thank you.

Mr. Beittel, you will be our concluding witness.

STATEMENT OF ERIC C. BEITTEL, ENDERS INSURANCE

ASSOCIATES, HARRISBURG, PA

Mr. BEITTEL. Chairman Hatch, Ranking Member Rockefeller,

and members of the committee, thank you for the honor to address

you today.

My name is Eric Beittel, and I am a self-employed Certified Financial Planner and insurance producer from central Pennsylvania.

My father always said to speak from the heart and your audience

will hear you. I could advise you financially about the many fine

cost-saving attributes of the health savings accounts, or I could tell

you about the various small businesses that I have helped implement HSAs as a way to continue offering employees high-quality

benefits while costs continue to rise.

But those stories, though very meaningful to me, are not entirely

from my heart. Instead, I am going to tell you about my family’s

health savings account and how it has allowed us to live out a few

of our biggest dreams by giving us a financially sensible avenue to

health care.

In the summer of 2003, my wife Jennifer and I had our second

child. Though Jen had a job she loved as a public high school

teacher, she wanted to stay home with our children, knowing firsthand just how important parental involvement is.

But we had a problem. While we figured we could tighten the

belt and live without her income, we could not live without her

health insurance coverage—our health insurance coverage—particularly with two young children.

As a self-employed financial advisor, I did not think that we

could afford the high cost of individual health insurance on one income. When I looked for coverage, I discovered it would cost about

$800 to $1,000 a month, and that coverage did not really compare

to the rich benefits my wife had under her health insurance plan

in her school district.

I then learned about medical savings accounts and the new HSAs

coming in 2004, and I was hooked. We could get insurance for $200

to $250 a month. The monthly savings in cost of coverage would

more than make up for the high deductible.

Although there would be some initial risk in having a large deductible, it gave me an extraordinary opportunity, an opportunity

for my wife to be home with our children: priceless. We still have

an HSA today, and my wife is still at home, now with three children.

Though our family has had a few health bumps in the road, including a gall bladder removal, ear tubes for the baby, and Lyme

disease, we would never switch back to our old insurance. Despite

our high out-of-pocket health costs—we hit our deductible the last

2 years—today we are far more in tune with our health, and we

are savvy consumers.

We research treatments, compare costs, and really consider our

lifestyle choices as part of the complete picture. We have saved a

17

ton of money, which only encourages us to continue weighing in the

many different health and lifestyle options available for our family.

Here is a great example of our newfound attention to detail. My

wife had to take our oldest child to the emergency room while visiting her parents in rural Pennsylvania because he fell and split

open his chin.

Alone on this trip, she frantically called me to check on our insurance. But I told her not to worry, and to give them our insurance card and to get our son the care he needed. Fortunately, our

son did not require stitches. The physician assistant who saw our

son sealed his chin with DermabondTM and kept it closed with

strips.

It took all of about two minutes. About a month later, we got the bill from the hospital. The total charge was about $630. While it

is difficult to walk into an ER and not accrue such charges, I found

two interesting items on the itemized bill. First, there was a fee for

a specialist physician when my son was seen by a PA; second, was

for sutures, which my son definitely did not receive.

I made one very patient call to the hospital to discuss these

charges. The hospital took a day or two to research my concern,

that I was charged for services my son did not receive. When they

called me back they stated the charges were incorrect and our bill

would be adjusted. The end result? Our bill was adjusted from $630 to $304. In the

day of our old health insurance, we never would have read the

itemized section of the bill or explanation of benefits. We would

have just read the ‘‘insured responsibility’’ section to verify our copay and deductible.

Additionally, after this experience in the ER, my wife added the

over-the-counter SteristripsTM and DermabondTM to the first aid kit

she carries. [Laughter.] If there is a next time, she will be ready.

But what really do our experiences with our health savings accounts have to do with living our dreams? It is my wife’s dream

to be at home with our kids while they are young, and there she

is, loving nearly every minute of it. It allows me to concentrate on

growing my business instead of juggling a family life with two

working parents and three young children.

The quality of family time that we have because one parent can

fully devote her time and energy to our children and our household

is an amazing blessing that should be achievable for any family in

America. I speak from the heart about health savings accounts.

They have helped our family live out many of our dreams, and

they can help many more Americans do the same. My family has

had an HSA for nearly 3 years, and I have helped hundreds of people in dozens of businesses evaluate and implement HSAs. I have

seen it all.

However, until last week I had no idea there were any bills proposing improvements to HSAs. I was pleased to learn about many

valuable improvements proposed in legislation sponsored by Senator Hatch, Representatives Kantor and Ryan, and other members

of the Congress.

In particular, as policy makers look to improve HSAs, I believe

the following changes would go a long way to expand access to

HSAs for those who need them most: increase the limit on HSA

18

contributions, especially for those with high health costs, and permit those who enroll in a high-deductible health plan mid-year and

are subject to the full annual deductible to be able to make that

full annual contribution to their HSA.

Thank you for the honor of addressing you today. I would be

happy to answer any questions the members of the committee have

for me.

[The prepared statement of Mr. Beittel appears in the appendix.]

Senator HATCH. Well, thank you, Mr. Beittel. We appreciate the

testimony of all of you. We are really interested in trying to find

the best ways we can to help our country and to help each individual citizen.

Dr. Carroll, you have listened to all of the testimony here today.

Would you care to comment on any of it, in light of what your findings are?

Dr. CARROLL. I think, listening to the testimony, HSAs clearly do

provide more options to individuals. They give individuals a greater

stake in their health care decisions, and I think it is the case that

when individuals have more at stake in their health care decisions,

they will tend to make better decisions, more informed decisions.

I think HSAs are certainly an important part of the health care solution to help control health care costs.

Senator HATCH. What about some of the issues Dr. Collins has

raised?

Dr. CARROLL. She raised a number of issues. One issue is, who

is benefitting from HSAs? I think the early evidence on HSAs,

which is still fairly early, indicates that a fairly broad spectrum of

the population is benefitting from HSAs.

The statistics that I have seen suggest that roughly 42 percent of those with HSAs have incomes below $50,000, indicating that

HSAs are being used by lower-income and moderate-income individuals, and I think that is very, very significant.

The data that I have seen suggest that roughly half of those individuals with HSAs are 40 or over, suggesting that a portion of the

older population, as well as the younger population, is taking advantage of HSAs.

It was mentioned earlier that for those purchasing HSAs in the

non-group market, industry data suggest that perhaps as many as

one-third of those individuals were previously uninsured, again

suggesting that, in terms of addressing the uninsured problem,

HSAs are a significant part of the solution.

Senator HATCH. You testified that data showed that about onethird of those who purchased HSA-eligible health plans in the nongroup market were previously uninsured. I do not know if we have

any data on what percentage of those in the group market were

previously uninsured. But would we not expect it to be even higher?

Let me ask one other thing. After all, is it not one of the goals

of health savings accounts to make insurance more affordable to

those who do not have it? Therefore, even if only one-third of HSA

owners were previously uninsured, do you not agree with me that

this is really a significant factor?

Dr. CARROLL. I think that is a very significant finding. It is fairly

early evidence. I think as time goes on and we have a better expeVerDate 11-MAY-2000 17:51 Mar 06, 2007 Jkt 095484 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 32156.000 SFIN1 PsN: SFIN1
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rience with HSAs, I think that is something that we want to continue to look at very carefully, the number of folks who have HSAs

who were previously uninsured.

Senator HATCH. All right.

Mr. Knight, in your small business case, what were the largest

challenges in connection with offering health savings accounts?

What did you find to be the biggest challenge?

Mr. KNIGHT. Well, the largest challenge for us was educating the

employees and helping them understand the differences between

the plans. In 2006, the case was so compelling that what I actually

did was offer an evening session, with pizza, for employees and

their spouses to come and go over the traditional plan versus the

HSA plan, and look at the financial ramifications.

I have heard some of the testimony here. I can only speak to my

specific plan. But financially, my $4,000-deductible family plan,

when you take into account the savings in premiums, as well as

the contribution we made as an employer into that plan, there was

no possible scenario I could come up with that would make the employee worse off at any income level with the traditional plan.

So once I got through that information and presented it to my

employees and they understood that, it really overcame a lot of obstacles. But I think the biggest challenge with these plans, offering

it to a company with employees who are used to more traditional

plans, is education and helping them understand the difference in

the plans and the way an HSA works.

Another thing that occurs to me, Senator Hatch, is that we are

looking at the first year here. As employees build up money into

that account, these accounts can greatly exceed the amount of the

deductible, which means that our employees or the people that

work in my company will be 100-percent covered in the future as

these plans accumulate.

Finally, by far, the people who are best off financially when I

modeled it were those who had the most chronic and serious health

care problems, and that is primarily because the co-pays do not

count towards deductibles.

Since the PPO plan we were forced to go on because of our health

problems had a high deductible and high co-pays, that created a

situation where their out-of-pocket was greatly increased because

of their severe health care problems, when compared to an HSA.

Senator HATCH. Could I ask one more question before I turn to

you?

Senator ROCKEFELLER. Sure.

Senator HATCH. My question is, why do you offer health insurance at all to your employees? The reason I ask this is that there

seems to be an unstated assumption among some HSA critics that

these plans are the first step towards doing away with employerprovided health insurance altogether. What benefits do you get as

a company from providing health insurance to your employees?

Mr. KNIGHT. As a company? Well, first of all, I would argue exactly the opposite. Having an HSA option made it more likely that

I could offer health care to my employees and made it possible for

me to keep the coverage with the same amount of funding that I

could have handled otherwise.

20

That 49 percent increase would eat into my profits, but it is also

something the employees had to handle, Senator Hatch. So offering

the plan to my employees and having employees have health care

not only is critical and made possible through the HSA, but, if I

did not offer that, I would lose employees at every level of my company.

We have a lot of blue collar employees, and we also have some

professionals that work in engineering, and they expect to have

health care coverage. You take that away, and I cannot compete

with some of my competitors who are able to offer coverage.

So I never thought of not offering health care coverage as an option in my business because of the types of people we hire, and the

fact that it is so important to retain employees in a technologybased business, that you cannot handle the turnover that comes

with offering limited benefits and not offering insurance.

Senator HATCH. Well, thank you.

Senator Rockefeller? Then I will have some more questions.

Senator ROCKEFELLER. Yes. I think, there just being two of us

here, we should be able to proceed.

Senator HATCH. Keep going?

Senator ROCKEFELLER. Yes.

Senator HATCH. Go ahead.

Senator ROCKEFELLER. Dr. Carroll, the President’s fiscal year

2007 budget includes two main proposals allegedly aimed at increasing health insurance coverage, an individual tax credit and

expansion of HSAs.

Now, these proposals are not news to us. They have been included in previous budget requests as well. However, there is a

question that I have been trying to get for the better part of several

years and I have not gotten an answer. I think I can predict your

answer that I have a question about.

I asked former Treasury Secretary Snow and current Secretary

of Treasury Paulson by letter, and no one was able to answer this

question, even though it is fundamental to the analysis of health

savings accounts, so, I am hoping you are going to answer my question today.

The question is, how many currently uninsured Americans do

you estimate each of these initiatives, health savings accounts and

individual tax credits, would cover?

Dr. CARROLL. It is a very, very difficult question. It is very, very

difficult to quantify the effects on the number of insured, particularly the way that we do the modeling at Treasury.

First, I should point out that we very much view this as a package. There are actually five different proposals. There are two deductions, one for high-deductible health insurance premiums, one

for a higher level of out-of-pocket expenses for high-deductible

health plans or HSAs, contributions into HSAs. Then there are

three refundable credits: one credit for payroll taxes paid on premiums, another refundable credit for payroll taxes paid on out-ofpocket expenses, and the third credit—which is probably familiar

to you having been in a number of budgets, although this year it

is focused on high-deductible health plans—a refundable tax credit

targeted to the lowest-income individuals to help them afford

health care.

21

We view this very much as a package, and so it is very, very difficult to disentangle the effects of any one particular provision.

Just as an illustration of this, in the blue book that Treasury

produced to accompany the budget, we show the revenue effect of

the refundable tax credit targeted to low-income individuals to help

them better afford health insurance. We estimated that credit to

cost in the neighborhood of $22 to $25 billion.

The way we did the estimates, it is stacked after all of the other

elements of the package that I described, so it presumes that all

of the other elements, for the purposes of the estimate, have already been enacted.

If we were to estimate the effect of that one proposal relative to

current law, presuming that none of those other proposals were enacted, instead of costing $22 to $25 billion, it would cost over $50

billion. The interactions between the proposals are very, very important.

Senator ROCKEFELLER. You have made your point on interactions, and therefore not being able to come up with answers. You

work for the Treasury Department. You are a highly trained professional. You ought to be able to answer my question. If you cannot, I will for you.

Dr. CARROLL. Again, I do not think we are able to put a specific

number on how the proposals would affect the number of uninsured. I think what we can do, and what we have done, is provide

a qualitative answer: by controlling the rise in health care costs,

the initiative will help increase the number of newly insured. So,

that much we can say.

Again, I think the root problem in health care is that health care

costs are rising considerably faster than incomes, and, in any country where health care costs continue to rise at 2 percent above GDP

for a long period of time, we are always going to have an increasing

number of uninsured in terms of an absolute number, or relative

to the size of the population.

Senator ROCKEFELLER. May I just interrupt to say that you are

not going to answer my question. I am not being—well, I am being

a little bit, I guess, abrupt, and I apologize.

I suggest that you look at the number 3.2 million. I think that

is what the answer is probably close to being. I would then point

out to you that most of those will have been, were previously, already insured.

I would just appreciate, when you are creating public policy, you

may be doing it for a whole subject, but the incremental parts of

it each are public policy discussions within themselves and ought

to have statistical consequences and answers.

So I think that is approximately what you are going to come up

with. Then if you come anywhere close to that, the fact that they

previously had health insurance, maybe you could respond to me

by letter about that problem.

Dr. CARROLL. All right.

Senator ROCKEFELLER. Thank you.

For John Dicken and for Dr. Sara Collins, this has to do with income levels of HSA purchasers.

Mr. Dicken, GAO’s findings seem to suggest that higher-income

individuals are more likely to enroll in HSA-eligible plans. Your reVerDate 11-MAY-2000 17:51 Mar 06, 2007 Jkt 095484 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 32156.000 SFIN1 PsN: SFIN1
22

port specifically mentioned that HSA purchasers had an average

adjusted gross income of $133,000 in 2004.

Mr. KNIGHT. Yes.

Senator ROCKEFELLER. Now, when you talked about your employees, Mr. Knight, you said they were very happy with the switch

to HSA coverage, but you also mentioned that the family deductible

under your new plan is $7,000. So that would lead me, I think, inexorably to the question of, what is the average age of your employees? You have, what, 34?

Mr. KNIGHT. Yes, in the plan. The average age is early 40s, probably, mid-40s.

Senator ROCKEFELLER. Early 40s. Would you call that relatively

young and relatively healthy?

Mr. KNIGHT. No, I would not. Not my plan.

Senator ROCKEFELLER. You would not?

Mr. KNIGHT. No. Not with the problems we have. Not relatively

healthy.

Senator ROCKEFELLER. All right. Do you believe that if one of

your lower-wage workers—if you have such; I do not know what

your structure is——

Mr. KNIGHT. We do. We have workers in the $7 per hour range.

That is where we start.

Senator ROCKEFELLER. All right.

Do you think they would still be pleased, if they experienced a

catastrophic new medical problem? Would your lower-income employees have $7,000 in available disposable income to cover that?

Mr. KNIGHT. Yes. Let me answer that. The answer is, they would

be better off.

Senator ROCKEFELLER. Do you see what I am getting at?

Mr. KNIGHT. I understand what you are getting at. The answer

is, they would be much better off with the HSA, and here is why.

First of all, the plan has two deductibles, a $4,000 and a $7,000.

You can decide by premium. The problem is, because of our problems, our PPO plan had a $3,500 deductible.

So, to go from the $3,500 to the $7,000 deductible, that differential was offset by the fact that we put $1,200 in their HSA account,

plus they save $100 a month in premium.

When you add the savings together and take that into account,

it is actually less of a burden for them to cover the $7,000 than it

would have been to cover the $3,500.

In addition to that, the co-pays, for example, when they get a

prescription or when they go to a doctor’s appointment, do not

count towards that $3,500, Senator Rockefeller.

So comparing the two together, my employees that use the plan

a lot, even at the lowest income levels, come out better off because

of the PPO plan that I was offering to them and the fact that it

was a high-cost plan.

Senator ROCKEFELLER. You had a problem before and you consider this to be marginally better.

Mr. KNIGHT. Let me explain further.

Senator ROCKEFELLER. Then, Dr. Collins, I want you to comment.

Mr. KNIGHT. We had a plan that was of typical cost, and then

we had two terrible medical situations in our small group. For that

reason, the carrier started raising our premiums dramatically. Not

23

only did they raise our premiums, but they also said we are going

to go to a higher co-pay, so instead of $25 for a doctor visit, it is

going to be $50; instead of $15 or $25 for a prescription, it is going

to be $45. So they raised that.

They also raised our premium as well. So we are at this highcost PPO plan, whereas if I go to the HSA, the increase in premium came down a little bit, but I still had that high deductible.

I had one $7,000 deductible, but the co-pays and everything else

went away in the HSA.

However, when that low-income employee starts spending money, every dollar they spend goes towards that $7,000 deductible. Whereas, in the PPO plan, all of those co-pays—which, frankly, I know this is staggering, but for one of my employees, they

were spending $900 a month in medical co-pays, on average. That

does not count towards the deductible in a PPO plan. It did in the

HSA.

So this employee who had a chronic health problem was saving thousands and thousands of dollars by going to a $7,000-deductible

plan. Thousands. And that employee was elated by going to an

HSA. He had a large family. One of the children had a serious

health problem and they needed numerous prescriptions every

month.

Senator ROCKEFELLER. Dr. Collins, how would you react to that?

Dr. COLLINS. I do not think that either situation was particularly

beneficial, either for the firm or for the employee. It is hard to see

how going to yet a higher-deductible plan is better for the employee.

I mean, if you look at the considerable amount of evidence that

there is on people’s out-of-pocket spending and what it does to their

health care behavior, there is incontrovertible evidence that people

delay care or do not get care if they have high out-of-pocket costs,

including high deductibles. So it is hard to see that this is a much

better situation for the employees.

The other thing that high-deductible plans do and high out-ofpocket costs do is, they prevent people from saving, so they are

shifting resources into their health care and not saving.

Mr. KNIGHT. Dr. Collins used very general information. I am

talking very specifically about my cases. And I am a finance guy.

When my employees have more money in their pocket, they are

better off, period. That is what happened with the HSAs.

Senator ROCKEFELLER. Well, you are talking about specific cases.

We are talking about an entire country.

Mr. KNIGHT. I understand. I understand. I am just talking about

my experience with my two or three families that had chronic problems. That is exactly right, Senator. I understand.

Senator ROCKEFELLER. I respect what you say.

Mr. KNIGHT. Fair enough.

Senator ROCKEFELLER. And my time is well over.

Senator HATCH. Well, thank you, Senator.

Let me go to Mr. Dicken here now. Your study drew some comparisons in the income of HSA-eligible plan enrollees and enrollees

in traditional health plans.

However, I am troubled by the logic of the comparisons. For example, on page 6 of your testimony you mentioned that ‘‘the adVerDate 11-MAY-2000 17:51 Mar 06, 2007 Jkt 095484 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 32156.000 SFIN1 PsN: SFIN1
24

justed gross income of the estimated 108,000 tax filers reporting

HSA contributions in 2004 was about $133,000, compared with just

$51,000 for all tax filers under age 65.’’

Now, rather than comparing the HSA enrollees to traditional

plan enrollees, you are comparing them to all filers. Now, this

seems to me to be an invalid comparison. Should we not be comparing the $133,000 figure to the AGI of traditional plan enrollees

and not all filers under age 65?

My guess is, the AGI of traditional plan enrollees is also going

to be far in excess of the $51,000 average, because many filers do

not have health insurance at all.

Now, the report makes the same mistake, in my opinion, on page

7, when you compare the income from the other data sources. This

does seem to be a major flaw. What is your response on that?

Mr. DICKEN. Thank you, Mr. Chairman. Certainly we draw a

number of different comparisons in looking at credible data that

look at the income of people that purchase HSA-eligible plans. The

IRS data, as you indicate, do compare those that make contributions to their HSAs to all tax filers. Unfortunately, the IRS data

do not allow us to look specifically at those who would have insurance, and we recognize that limitation in our report.

But to bolster that, we make a number of other comparisons,

looking at Federal employees who have selected a health savings

account compared to others who purchased traditional plans, looking at two employers, and data from a national insurance broker,

and they all come to the same conclusion, that these are higherincome people purchasing the HSA-eligible plans than traditional

plans or PPOs.

Senator HATCH. Well, Drs. Collins and Goodman, let me throw

one to both of you. Could you please describe for me the evidence

that HSAs are creating a distortion in the insurance pools that will

lead to higher premiums and a greater number of uninsured? And

were these not the same charges that were made when we moved

toward managed care? Dr. Goodman?

Dr. GOODMAN. Absolutely. And there was some evidence that

healthy people joined HMOs. But many of the people who today

criticize HSAs on those grounds never had one unkind word to say

about the HMO form of delivery, so they are cherry-picking the occasions on which they want to make this allegation.

Probably the best evidence we have on how all this is going to

work is, surprisingly enough, South Africa. Because about the time

that Nelson Mandela became president, they deregulated their insurance industry.

Virtually every product that we have in the United States competed on a level playing field in South Africa. There were not a lot

of government regulations saying what the HSA had to look like.

It was pretty much a free market.

Over the next decade, the HSAs captured most of the market. In

fact, I think today they have two-thirds of the entire market. But

there is no evidence of all the healthy people running one way or

all the sick people going the other way. These are plans that, as

I said earlier, appeal to a broad cross-section of people.

25

The problem with the GAO study is, when you see numbers that

are just way out of whack with what we know from other experiences, they just chose unrepresentative companies.

If GAO had chosen to survey Whole Foods, they would have discovered there are tens of thousands of employees making $20,000

a year who are in HSA accounts. And not only that, but at Whole

Foods the employees get to vote on whether they want to switch

back to the old health plan. Eighty-five percent of those employees

voted to stay with their health savings account product.

So I would say that GAO study, the answers they got, are simply

a function of which companies they chose and are not representative of the market as a whole.

Senator HATCH. Dr. Collins?

Dr. COLLINS. I think the experience of the FEBHP, the Federal

Employees Health Benefit Program, product shows that in an employer group plan, people who are offered a high-deductible health

plan HSA product and choose to go into the product tend to be

younger. So if you look at just an employer-based plan, enrollees

do tend to be younger, they do tend to be higher-income.

So if you put that experience in a small employer firm context

so that a small employer offers an HSA product and a lowerdeductible product, the HSA/high-deductible product will probably

attract a younger and more affluent member of the company.

To the extent that the youngest and healthiest workers go into

that product, leaving the older and less wealthy and sicker employees in the other product, you could have a situation where the premiums become so expensive in the other product, the lower-deductible product, that it is no longer a viable insurance product.

To the extent that a small employer only offers a high-deductible

plan, it would surely benefit their higher-income employees, their

healthier employees over their lower-income and sicker employees,

leaving few options for that group of employees.

Senator HATCH. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

Dr. Goodman, a question for you. In your testimony you made a

very interesting comparison. You stated that ‘‘HSAs are like Medicaid Cash and Counseling.’’ I strongly disagree with you.

I think that comparing HSAs to Medicaid Cash and Counseling

is an apples to oranges comparison at best. Individuals with diabetes who participate in Cash and Counseling have a personal care

manager to help them plan their health care budgets.

Are you suggesting that every HSA enrollee in America has access to a personal care manager to plan their budgets? This is the

argument in this so-called 4 to 2 panel, 4 in favor, 2 with questions.

I do not think this is the case. Prima facie, it is not the case because the argument is that the individuals can make the best

choice themselves and do not need to have these personal counselors.

Also, Cash and Counseling is for personal care only in your example, not health care. Personal care is washing, feeding, transportation to the doctor’s office, et cetera. So do you not think it is

somewhat of an overstatement to say that these two are alike?

26

Dr. GOODMAN. No. But that is an interesting metaphor that you

used, the apples and oranges, because that is what has been happening up and down the table throughout this hearing. We keep

talking about these plans as though they are all alike, and they are

not all alike.

At my organization, the National Center for Policy Analysis, we

fully fund our health savings account; at Mr. Knight’s place of employment, they do not. So these are two completely different plans,

even though both involve patients managing their own money.

Now, there are health savings account plans out there where the

diabetics do have a counselor in the private sector. What I meant

to say in my testimony is we have not taken advantage of how to

use these accounts. In the Medicaid program, you are right, it

started out as custodial care.

I have been told by HHS that now they have moved into real

health care dollars, so in many of these experiments it is more

than just custodial care. If I am wrong about that, then I stand corrected, but I have been told that it now involves more than just

that.

In any event, the principle is the same, that you empower patients, you give them the opportunity to manage their own money,

where it is appropriate for them to do it. We have not made enough

of a distinction here. We do not want patients to make every decision.

If you are unconscious on the gurney, you are not in the right

place to be making health care choices. But on how to handle a lot

of diabetic problems, on what drug to take for relief from arthritic

pain, those are cases where patients can manage their own care

and make a lot of their own decisions.

Senator ROCKEFELLER. Dr. Collins?

Dr. COLLINS. The thing that is hard to understand when we talk

about diabetic care and chronic care in the framework of these

plans is that the law is explicit about not covering prescription

drugs that would take care of those very chronic conditions, so I

do not understand the logic about this being good for people who

have chronic health conditions.

If you look at the data, when people with chronic health problems face high out-of-pocket costs, face caps on their drug benefits

in the case of Medicare beneficiaries, certain studies have shown

this, that people tend not to get the drugs that they need to take

care of diabetes, to take care of heart disease, and it ends up costing the health system more down the line. So again, it is hard to

understand that logic.

Senator ROCKEFELLER. Mr. Chairman, my time is over.

Senator HATCH. Well, thank you.

Let me go to you again, Dr. Collins. You cite the RAND Health

Insurance Experiment as evidence that greater cost-sharing reduced the amount of health care that people obtained.

Now, what did this study, or any other subsequent studies, reveal about the subsequent health outcomes of those people with

greater cost-sharing as compared to those who participate in lowdeductible health insurance plans?

Dr. COLLINS. There are a couple of recent studies, one by John

Hsu at Kaiser-Permanente that looked at capping the Medicare

27

drug benefit and the effect that it would have on Medicare beneficiaries’ use of prescription drugs.

They do find a statistically significant and substantial reduction

in the use of chronic care medications that led to adverse health

events for those Medicare beneficiaries, who reduced their use of

prescription drugs, ending up in the hospital, not being able to control their blood pressure, trips to the emergency room. There was

another study in Canada that looked at the effect of higher deductibles on prescription drugs and found similar evidence.

Senator HATCH. Dr. Carroll, let me just ask you this. Would you

care to comment on that first?

Dr. CARROLL. Yes, I would. If you go back to the RAND study,

as I understand it, they did not find any statistical difference in

the outcomes.

Senator HATCH. That is right.

Dr. CARROLL. But they did find that plans with no cost-sharing

spend 45 percent overall on health care than individuals in plans

that had a high degree of co-insurance, which was very substantial.

I did want to mention one other point that is related to a number

of comments that have been made about preventive care. There is

what appears to be some fairly recent research that finds that

HDHPs, high-deductible health plans, may in fact encourage preventive care. Preventive care can be covered under a high-deductible plan, of course.

This is a very important finding. A recent study found that 5 percent more individuals sought preventive care with an HDHP than

with a traditional PPO. The intuition behind that actually makes

some sense.

For somebody who has a stake, who has to pay out-of-pocket for

their medical care, they actually have a self-interest in receiving

and obtaining preventive care in order to lower their future health

care costs.

This is exactly the sort of market efficiency, if you will, that we

want to encourage through HSAs. Some early evidence suggests

that preventive care may actually be sought more frequently under

those with HSAs than those with traditional PPOs.

Senator HATCH. Let me ask you, at Treasury, what efforts are

you making through regulation to make these plans better?

Dr. CARROLL. We have been very aggressive. The approach we

have taken is to issue regulatory guidance early and often, as we

say. The regulatory guidance is really handled more on the legal

side of the office as opposed to the economic side that I head up.

But one good example is preventive care. Early on there were

some questions about what type of preventive care could be covered

under high-deductible plans that would qualify for HSA contributions, and we worked very, very quickly to provide clarification of

that through regulatory guidance.

Senator HATCH. Let me ask you this, Mr. Beittel. We have kind

of ignored you here, but we have not meant to ignore you. We just

had a lot of these technical questions to ask folks.

But I would like to ask you a question that is pretty practical in

nature. That is, among the principal charges against HSAs plans

is that they are only for the wealthy, or they mostly benefit the

wealthy.

28

Also, the unstated assumption is that somehow they are sub-par

plans that do not cover anything and that do not include employer

contributions for the deductible. Now, do these charges jibe with

your experience?

Mr. BEITTEL. Not at all. Employers are very concerned about still

giving quality benefits with the lowest cost to the employee as possible. I have many companies which have tailor-made their HSA

contribution to be similar to the type of resource contribution they

had made to their previous health care plan.

I think Dr. Goodman made a great point, that comparing one

HSA plan to another HSA plan is kind of like comparing apples to

oranges. Of course, if an employer does not add any money to it,

it is disappointing, to say the least, but most employers add quite

a bit.

I had one employer fully fund it, and it still resulted in about an

8 percent savings overall to their previous plan. So, everybody won

in that situation. The employees paid less, the employer paid less,

and still high-quality care was there. For me personally, to take on

$2,400 for my family, I saved roughly $3,600 a year in insurance

premiums.

Senator HATCH. That is pretty impressive.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you.

Dr. Carroll, I just want to make an observation. You know, there

is no question, I am a Democrat, he is a Republican, we are very

good friends. We agree, and we have created some amazing programs together here in Congress.

But there is no question that one of the problems is that the administration’s focus, to our way of thinking, on high-income people,

particularly through the tax cuts, which are incomprehensible to

me—Senator Hatch will have a very different view, and I understand that—so that it seems like over the recent years we have

been through a series of situations which continue to help those

that are either younger, healthier, or have higher incomes. I think

this is another example.

Now, you said something very interesting, which I want to explore, not with you but with my staff. That is that HSAs encourage

wellness or prevention of illness as opposed to curing of illness, or

both.

But the wellness factor, prevention factor, is enormous, in my

mind, how that can get done, how we can get people to do that. So,

one of the things I am just going to say to you that we are going

to do, is to look at what you said with respect to that wellness factor. If you are right, that is very significant, and I need to take that

into account. All right.

Mr. Beittel, I do not want this to come out wrong, and it is going

to, so forgive me for that. I am glad you are here. I am glad you

are telling us about your experience with HSAs. It is valuable for

us to hear from somebody like you who participates in an HSA.

A couple of questions, however. You are an insurance salesman,

working for Enders Insurance Associates, are you not?

Mr. BEITTEL. Yes.

Senator ROCKEFELLER. And could you please tell the committee

whether you sell HSA products?

29

Mr. BEITTEL. I sell the high-deductible health plans that go along

with the health savings accounts. Yes.

Senator ROCKEFELLER. That just needs to be said, without prejudice. Your answer needs to be heard. It becomes a little bit more

difficult for you to tackle your own product.

Mr. BEITTEL. Have you ever tried to sell health insurance or

manage it?

Senator ROCKEFELLER. No.

Mr. BEITTEL. It is no fun.

Senator ROCKEFELLER. I do not expect you to have a fun-filled

life.

Mr. BEITTEL. I would truly rather be working in other fields of

my expertise.

Senator ROCKEFELLER. I understand. But you are not. One of the

things you are doing is selling HSAs. I just want that on the

record, without any prejudice to you. You have a right to do anything you want in life. But you are before this committee testifying

on HSAs, and that needs to be said.

Dr. GOODMAN. May I say something about that? If he was a normal insurance agent, his commission is lower on the health savings

account plans than on any other insurance he sells. Is that not

right?

Mr. BEITTEL. For most companies, that is correct. When the insurance premium is 30 percent less, that means I generally make

30 percent less.

Senator ROCKEFELLER. That does not change my point of view.

I appreciate the intervention. I do not appreciate the use of my

time, but fair enough. Whether you make more or less is not a concern to me. It is the fact that you sell the product and that you

are here before us, and I think that is valid.

I have a question, again, for Dr. Carroll. Although more than 3

years have passed since the trade adjustment assistance, the TAA

Health Coverage Tax Credit that began in late 2003, I think, the

program still serves very few—in fact, less than 10 percent—of the

displaced workers and early retirees who receive notices of potential eligibility. So, let us look at that for a second.

I think, Dr. Carroll, that the HCTC program is a good example

of what happens when you use the tax code to try to expand health

insurance coverage. People do not get the health care they need.

The nature of a tax deduction is that it is more valuable to people

who pay higher taxes at a marginal tax rate. I do not think that

is disputable.

The value of deduction to a high-income worker is, as I think you

indicated, more than three times the value to a low-income worker.

Or maybe that was Dr. Collins who indicated that. It seems to me

to be a bad public policy to offer large subsidies to more affluent

people, those who need less subsidy, to afford health insurance in

general.

So my question is, if a person does not have enough income to

be liable for any Federal income tax—and I addressed that in my

opening statement—then are the HSA tax benefits of any value to

that worker?

Dr. CARROLL. Well, I would focus on two different points.

30

Senator ROCKEFELLER. And I am assuming that 55 percent of uninsured Americans do not make enough income to pay Federal income tax. Right?

Dr. CARROLL. I think the average family of four begins paying in- come taxes when they have about $41,000, $42,000 of income,

which I think is consistent with your comments.

HSAs not only provide tax advantages, they also provide more

flexibility to workers. As I mentioned in my opening statement and

in more detail in my written remarks, one of the features of HSAs

is that they are portable.

An individual owns the HSA, as distinct from FSAs and HRAs.

When an individual leaves a job, they take the HSA with them, so

that affords more flexibility to workers, where over time in this

economy we have had an increasing number of workers who have

switched jobs.

HSAs also provide the opportunity for some savings. We have

heard a number of individuals on the panel talk about the lower

premiums that result from HSAs. There is an actuarial relationship between the higher deductible and lower premiums under

HSAs, as well as the employer contributions that are often made

into HSAs.

I would just remark that Mr. Knight’s experience for his firm is

actually fairly close to the average for the economy. The numbers

I have seen suggest that, for singles, employers, on average, contribute $580; for families, employers, on average, contribute $1,092.

So to summarize, HSAs provide, I think, a broader set of benefits

than just the tax advantages. What is interesting about the IRS

data from 2004 that Mr. Dicken has in the GAO report is that a

significant number of lower-income taxpayers have HSAs, even

though they may in fact have no income tax liability. So, that

might be an indication that there are non-tax benefits associated

with HSAs that individuals benefit from.

The second point I want to mention is, the President’s initiative

really does realign HSAs in an effort to reduce or eliminate the tax

disincentive for high-deductible plans or tax incentive for first dollar coverage.

It tries to create a level playing field, if you will, between insurance purchased through employers and insurance or health care

purchased directly by individuals.

It does so for those with high-deductible plans, but through a series of credits and deductions, eliminating the income taxes, as well

as the payroll taxes. Because it is eliminating the payroll taxes,

one of the benefits of the proposal, if you will, is that it realigns

the distributional effects of HSAs.

There is a table in my written testimony on page 14 that illustrates for a typical family of four with high and low medical expenses the tax benefits that a typical couple could expect to receive

under the President’s initiative.

What you see is, for an individual with typical medical expenses,

lower-income individuals will actually receive a higher dollar tax

benefit than higher-income individuals. When you look at the person with higher expenses, you cannot exactly say that.

You cannot say that the lower-income individual will receive a

higher dollar benefit. But the relationship is not very different. The

31

lower-income individual receives almost as much in terms of a dollar benefit as a higher-income individual.

The point of all that is that, because of the payroll tax credits

or the tax credits for payroll taxes paid on premiums, out-of-pocket,

and the targeted tax credit for lower-income Americans, the initiative really does realign the distributional effects of HSAs, I think,

in an important way.

Senator ROCKEFELLER. Mr. Chairman, can I ask one more question of Dr. Collins?

Senator HATCH. Sure.

Senator ROCKEFELLER. Thank you.

I would like to explore a very important argument that HSA

folks say, and that is that their HSA accounts would drive down

the cost of health care by having consumers be more price sensitive. I would like to have you comment on this.

It has been argued that patients will be more careful about what

health care they receive if they personally must pay the bills as

part of a high-deductible plan. I personally am skeptical of this, for

several reasons.

I understand that 70 percent of all health care costs are paid by

the sickest 10 percent of Americans. People who have chronic conditions or a catastrophic medical event will quickly exceed their deductible, even in plans with high deductibles.

So my question to you is, will the HSA model actually impose

any pricing pressure for those patients who already have exceeded

their deductible? If the data is correct, that 70 percent of the costs

are incurred by a small share of the total patient population, then

is it realistic to expect that price pressure will affect more than

one-third of health care expenditures?

And Mr. Knight, I have a written question which I will send to

you.

[The question and answer appear in the appendix.]

Dr. COLLINS. The EBRI Commonwealth Fund survey does show

that people in high-deductible health plans are somewhat more

cost-conscious. They tend to talk over treatment options with their

physicians, and are more likely to ask for lower-cost drugs.

We also show in the survey that only 14 to 16 percent of people

have any cost or quality information available to them to use, so,

even if people wanted information about the cost of their physicians, they would not be able to find it because it is simply not provided by their health plans.

But even if people had full information about prices and quality,

it is unreasonable to expect, given the point that you make about

the large share of health care costs that are borne by very sick people, that high-deductible health plans, health savings accounts,

would have a transformational impact on the health care cost problems that we currently have and on the quality problem we have.

Increased transparency, both on prices and quality, is very good

policy for the health system in the United States. We want people

to know more about the cost of their health care. We want employers to know more about the cost of their health care.

We want buyers and purchasers to know more about the cost of

health care, and we want people to know more about the quality

of the providers that they are going to. But research has shown

32

that public information on quality is more often used by the providers who are required to provide information about the quality of

their care to improve quality of care, rather than patients. Focusing on provider use of quality of care information and cost information will have the most important impact on quality and costs in

the health care system. Patients are really in the weakest position

to demand high quality and efficiency from their providers.

Senator ROCKEFELLER. I thank you.

Thank you, Mr. Chairman.

Senator HATCH. Thank you, Senator Rockefeller.

Dr. Goodman, would you care to respond to that? Then my last

question to you is, are these plans working?

Dr. GOODMAN. I think Senator Rockefeller’s question is very interesting. We have a market in which physicians do not really compete for patients on the basis of price or quality, nor do hospitals.

The reason is because the third parties have all the money and

pay all the bills. Basically we ration the physicians’ time by waiting in this country, the same way Canadians ration it. Although we

like to think our system is very different, it really is not.

If we empower the patient, I expect, eventually, radical changes.

However, only about 20 percent of those changes are going to occur

because patients have changed. Eighty percent of the change is

going to come on the provider side.

Once you let the diabetic control his own dollars, then you are

going to find physicians who say, ‘‘Oh, by the way, I know none of

my colleagues will talk to you on the phone or talk to you by email, but I will do that. I know my colleagues do not keep your

records on computer and they do not electronically order your prescriptions, but I am going to do that and you will get safer care,

and you will be getting better care.’’

You will actually have a market in which people compete for the

business of diabetics, whereas, in today’s market they run away

from them. No one wants the sickest patients. But with consumerdriven health care, you could have a real market for sick people.

We are beginning to see right now, Senator Hatch, the beginnings of a change on the supply side, I think, in response to patients controlling more dollars. The Minute Clinics in the upper

midwest, the Call-a-Docs where you can pay to talk to a doctor on

the phone, Wal-Mart offering generic drugs at $4, all of the new

innovations in medical tourism, I think all of this is a response to

consumers controlling more dollars.

I think we are going to fast approach a tipping point where you

get huge changes on the supply side, and the medical marketplace

will begin to look more like other markets instead of the bureaucratic market that it now is.

Senator HATCH. That is great.

Now, Mr. Beittel, do not feel badly that Senator Rockefeller

pointed out how you work. Every one on this panel works in their

own special way. Dr. Goodman, of course, is president and chief executive officer of the National Center for Policy Analysis.

Dr. Collins, just to mention one other, is Assistant Vice President

of the Program for the Future of Health Insurance. So you are all

experts in your own field, and that is why we have you here. You

33

have added a particularly interesting element to this hearing, so

we are very appreciative of it.

I would just like to ask one other question, and I will start with

you, Dr. Goodman, but I would like all of you to respond to this

question if you could.

I was intrigued by your suggestion that the participation of the

chronically ill in the HSA would have the broadest impact on national health care savings. But we have also heard today that the

chronically ill might not see the benefits of an HSA. You would, as

I understand it, overcome this difficulty by allowing greater health

care contributions by employers for chronically ill employees.

I would like to know what you have to say about that. Then I

would like to know what the rest of the panel thinks about this.

Is there evidence to suggest that persons with preexisting conditions are finding it more difficult to get into a low-cost, highdeductible health plan? There are two questions there, and maybe

more than two.

Dr. GOODMAN. To the point of what needs to be done for the

chronically ill, I think someone has said that the chronic patients

spend 70 percent of the health care dollars, so, if you want to take

full advantage of the account, you want to make the account work

for the patients who are spending all of that money.

Now, the basic design of the health savings account, and I was

involved in helping design it, did not have the chronic patient in

mind, quite frankly. This is just one way to start out with a health

savings account.

But if you want the chronic patient to benefit and use intelligently these accounts, it seems to me you have to make different

deposits to the accounts of different employees. If one employee is

spending a lot more money than another employee, the third party

insurance money is not the same for the two employees, so why

should the deposit to the account be the same for the two employees?

It seems to me what we need to do is have special accounts for

people with different chronic problems. There is a lot of literature

that shows that diabetics can manage their own health care and

get as good or better results than in traditional care, the same for

asthmatics and other chronic conditions. So, we know that patients

are willing and able to do this.

If you want them to do it well, you need to empower them. When

they make decisions, they need to financially benefit from their

good decisions and bear costs when they make bad ones. I think

there is a tremendous opportunity here. I think you would find

these accounts would be welcomed in the chronic community.

A chronic patient in the individual market is going to have a

hard time getting low-cost insurance because you have individual

underwriting in most States, whereas, in the employer market he

cannot be discriminated against.

But in my ideal health insurance world, we not only want doctors

competing for the sick patient, we want insurers competing for

them as well. If you create a system in which people have perverse

incentives to avoid the sick person, then they are going to run from

them. But if insurers and doctors can profit from solving the probVerDate 11-MAY-2000 17:51 Mar 06, 2007 Jkt 095484 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 32156.000 SFIN1 PsN: SFIN1
34

lems of people who are ill, then they will compete vigorously for

their business, and that should be our end goal.

Senator HATCH. Thank you.

Mr. Beittel? Then we will go to Dr. Collins, on across that way.

Mr. BEITTEL. I was born and raised in Lancaster County, which

has a large Amish and Mennonite population. My father was a pediatrician who treated many of them. He said that they operated

a little bit differently than the rest of us when it came to their

health care. They wanted the most affordable, effective treatment.

People with traditional health insurance usually do not care about

affordable.

But with the Amish and the Mennonite, there are limitations as

far as insurance because of their religion and they are much more

of a self-pay. They were concerned about those things and they

would take much better care of following treatments because their

money was on the line. I think the same thing goes with HSAs.

Senator HATCH. Thank you.

Dr. Collins? By the way, I appreciate that because that is a perfect illustration of when people are taking care of themselves and

doing everything they can to have great health care, and it is because they are personally concerned about every dime that is involved. The more we get people concerned about that, the better off

we are all going to be. Naturally, Senator Rockefeller and I want

to make sure everybody has——

Senator ROCKEFELLER. And would that we could all be Amish or

Mennonite. [Laughter.]

Senator HATCH. Well, I am still hoping for you, I will tell you.

[Laughter.]

Dr. Collins?

Dr. COLLINS. Just to address the point about buying high-deductible health plans in the individual insurance market, and people

with chronic health conditions. A report based on the Commonwealth Fund Biennial Health Insurance survey that the Commonwealth Fund released a couple of weeks ago questioned people who

had ever sought health insurance in the individual market over the

last 3 years, and 70 percent of people who had health problems

said they found it very difficult or impossible to find a plan in this

market that was affordable.

AHIP, the trade association for health insurance plans, found in

just a subset of their membership, 30 percent of people were either

denied health care because of a preexisting condition, or were

charged a higher premium, or had a condition excluded because of

a preexisting condition.

So they found about 100,000 people in their sample over a given

year were denied coverage in the individual insurance market, so

it is not a particularly good market for people who have chronic

health conditions.

In terms of getting employers to add more dollars to the accounts

of people with chronic health conditions, you are still allowing this

to be a voluntary contribution. About 37 percent of employers now

do not contribute to people’s health savings accounts.

Those that do, the savings, I think was mentioned earlier today, is about $689, on average, about a third of the average deductible

in these plans. So, just telling employers that they are allowed to

35

contribute dollars for employees with chronic health conditions

does not guarantee that people with chronic health conditions will

have adequate access to the health care that the need.

Senator HATCH. All right.

Mr. Knight?

Mr. KNIGHT. I have a point of clarification. I think, Dr. Carroll, you said it was about $1,000, right?

Dr. CARROLL. Yes. It is $1,092 for families, roughly $600 for singles.

Mr. KNIGHT. Right. Right.

Senator HATCH. So your testimony is very important because you

are living it every day.

Mr. KNIGHT. Yes.

Senator HATCH. And your business depends on how you handle

it.

Mr. KNIGHT. Yes. I will just make a quick comment on this issue,

if I could. Sadly, the employee that I mentioned had a wife with

cancer. His wife passed away this year. This employee went

through about 3 years of very, very difficult times, obviously.

It was difficult to watch him go through that. Perhaps if we had

an option to fully fund his HSA account or put more money in beyond what the limit was, we would have chosen to do that, simply

to take the stress off of him and to get him through that.

Now, I do not want you to believe that I am completely just trying to take care of people and love people. I do, but I am also a

businessman. When you have a business with technical people—

and this particular person was a CAD designer that did very highend design for us—you need their mind in the game. You need

their long-term commitment.

So, I feel like taking care of people at that level in these kinds

of businesses that we have is good for business in the long run, and

making profit. So, having that option, with special cases with employees, is actually a benefit to me as a business person in helping

to keep my business strong and vibrant, not just this year, but in

the long run. So, I think it would be a nice option to have.

Senator HATCH. Thank you.

Mr. Dicken?

Mr. DICKEN. As we talked to participants that have high-deductible health plans and talked to industry experts, there were cautions about recommending these to individuals with chronic illness,

and there are several aspects that may, under current law and current IRS guidelines, limit the attractiveness to those with chronic

illness.

One is what you have identified, which is that currently employers are not able to contribute more to those individuals with chronic illness. Another issue is that of maintenance medications.

Prescription drugs cannot be covered under the deductible, and

so people may be on maintenance medications. They are not considered preventive, and they may not be able to get those covered

until they have reached their deductible or they are paying fully

out-of-pocket.

So, certainly we did hear from experts and from individuals that

those were the types of things that they would look for to try to

improve the attractiveness for those with chronic illness.

36

The other comment I think both Dr. Goodman and Dr. Collins

mentioned is that certainly, in the first year of HSA, most of these

accounts were in the individual insurance market. Over time, enrollment has increasingly been in the employer market. Certainly

there are issues about those with chronic illness being underwritten in individual markets to get the high-deductible health

plans.

Senator HATCH. Thank you.

Dr. Carroll, you are the last one.

Dr. CARROLL. Yes. The comments by Mr. Dicken are exactly

right. The current comparability rules prevent employers from distinguishing between their HSA contributions. They have to provide

the same percentage, the same amount of HSA contributions to all

employees, with comparable high-deductible health plan coverage.

The President’s proposal would change that and allow employers

of individuals who are chronically ill to contribute at a higher level,

so I think that is an important feature of the President’s proposal.

I think, by and large, many employers do want to provide more

HSA funds to employees who have higher expenses because of

chronic illness. I think that change would help make HSAs more

attractive.

Another point I wanted to mention is the statistic that we have

heard on the panel, that a very large fraction of the health care expenditures are borne by a very small group of people. The statistic

I have heard is that 20 percent of the population pays 80 percent

of the health care expenses.

I think there are a couple of points to make about that statistic.

One point is, first, a significant portion of health care spending occurs below the HSA out-of-pocket maximum, so even if that statistic were accurate, there would still be significant cost-sharing.

There would be significant exposure to price for people below the

HSA out-of-pocket maximum under, let us say, the President’s initiative.

The second point to make, I think, is really important. Many people will not be able to predict at the beginning of the year that they

will be over the HSA limit, so, when you start off at the beginning

of the year, you have to evaluate whether HSAs will increase price

sensitivity.

It is really those people who know, at the beginning of the year,

that they are going to be over the limit—that is where you would

think there would be less sensitivity as opposed to more. Those

people who cannot forecast it, and have an extraordinarily high

level of expenses, that is where you would think you would have

greater sensitivity.

Based on the Medical Expenditure Panel Survey, and this is a

very interesting statistic, of those with spending over the HSA outof-pocket maximum in 1 year, only 21 percent had spending that

exceeded that limit in the prior year.

So, empirically, I think it may well be the case that the 20 percent who pay 80 percent of the health care expenses, more often

than not, are simply not the same people year after year.

Senator HATCH. Well, like Senator Rockefeller, I have a lot more

questions. We will submit them in writing.

[The questions appear in the appendix.]

37

Senator HATCH. But let me just say, I think both of us feel that

this panel has been an excellent one in trying to help us understand these issues and to sift through them. I, for one, am very appreciative of having you all here.

Senator ROCKEFELLER. And I, for two. We do not do enough of

this. Actually, it is kind of a joy when you do not have everybody

here so we can just sit and ask the questions we want. You have

been excellent. Some of you have come long distances. I think both

Senator Hatch and I appreciate that. I think it has been a very,

very good hearing.

Senator HATCH. All right. Thank you so much. We appreciate all

of you.

With that, we will end this hearing. Thank you again for being

here. We appreciate all of your testimony.

[Whereupon, at 4:25 p.m., the hearing was concluded.]

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