Health Savings Accounts: Early Enrollee Experiences with Accounts and Eligible Health Plans
Published: 2006-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Health savings accounts (HSA) and the high-deductible health insurance plans that are eligible to be coupled with them are a new type of consumer-directed health plan attracting interest among employers and consumers. HSA-eligible plans constitute a small but growing share of the private insurance market, and the novel structure of the plans has raised questions about how they could affect enrollees' health care purchasing decisions and costs. This statement is based on GAO's August 2006 report entitled "Consumer-Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans" (GAO-06-798). In this report, GAO reviewed (1) the financial features of HSA-eligible plans in comparison with those of traditional plans, such as preferred provider organizations (PPO); (2) the characteristics of HSA-eligible plan enrollees in comparison with those of traditional plan enrollees or others; (3) HSA funding and use; and (4) enrollees' experiences with HSA-eligible plans.
section_title: What GAO Found
paragraphs: HSA-eligible plans had lower premiums, higher deductibles, and higher out-of-pocket spending limits than did traditional plans in 2005, but both plan types covered similar services, including preventive services. For the three employers' health plans GAO reviewed to illustrate enrollees' potential health care costs, GAO estimated that HSA-eligible plan enrollees would incur higher annual costs than PPO enrollees for extensive use of health care, but would incur lower annual costs than PPO enrollees for low to moderate use of health care. HSA-eligible plan enrollees generally had higher incomes than comparison groups, but data on age differences were inconclusive. In 2004, 51 percent of tax filers reporting an HSA contribution had an adjusted gross income of $75,000 or more, compared with 18 percent of all tax filers under 65 years old. Two of the three employers GAO reviewed, the Federal Employees Health Benefits Program, and a national broker of health insurance also reported that HSA-eligible plan enrollees had higher incomes than traditional plan enrollees in 2005. Just over half of all HSA-eligible plan enrollees and most employers contributed to HSAs, and account holders used their HSA funds to pay for medical care and accumulate savings. About 55 percent of HSA-eligible plan enrollees reported HSA contributions to the Internal Revenue Service in 2004, and about two-thirds of employers offering HSA-eligible plans contributed to their employees' HSAs. About 45 percent of tax filers reporting 2004 HSA contributions also reported that they withdrew funds in that year, and 90 percent of these funds were withdrawn for qualified medical expenses. The other 55 percent of those reporting HSA contributions did not withdraw any funds from their HSA in 2004. HSA-eligible plan enrollees who participated in GAO's focus groups generally reported positive experiences, but most would not recommend the plans to all consumers. Few participants reported researching cost before obtaining health care services, although many researched the cost of prescription drugs. Most participants were satisfied with their HSA-eligible plans and would recommend them to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the findings from our August 2006  report entitled Consumer-Directed Health Plans: Early Enrollee  Experiences with Health Savings Accounts and Eligible Health Plans. In  this report, we examined enrollees’ experiences with health savings  accounts (HSA) and the high-deductible health insurance plans that are  eligible to be coupled with them. Since tax-advantaged HSAs were made  available in 2004, this new type of consumer-directed health plan has been  attracting interest among employers and enrollees. HSA-eligible plans now  constitute a small but growing share of the private health insurance  market. The number of enrollees and dependents covered by an HSA- eligible plan increased from about 438,000 in September 2004 to about   3 million in January 2006. Both employers and plan enrollees may  contribute to tax-advantaged HSAs, and enrollees can use the accounts to  pay for their health care expenses. The high-deductible health plans  typically have lower premiums than other types of health plans because  high-deductible health plan enrollees bear a greater share of the initial  costs of care.
The novel structure of HSA-eligible plans has raised questions regarding  how the plans and HSAs will affect enrollees’ health care purchasing  decisions and costs. Proponents of HSA-eligible plans believe that the high  deductibles will encourage enrollees to become more astute health care  consumers and thus restrain health care spending increases. However,  some critics contend that the plans may attract a disproportionate share of  wealthier enrollees who seek to use the HSA as a tax-advantaged savings  vehicle, or healthier or younger individuals who use fewer health care  services. If this occurred, premiums for traditional health insurance plans,  such as preferred provider organizations (PPO), could rise faster than  they otherwise would because of the disproportionate share of enrollees  with higher health care expenses remaining in those plans.
My remarks today will focus on (1) the financial features of HSA-eligible  plans in comparison with those of traditional plans, (2) the characteristics  of HSA-eligible plan enrollees in comparison with those of traditional plan  enrollees or others, (3) HSA funding and use, and (4) enrollees’  experiences with HSA-eligible plans. These remarks are based on  information contained in our August 2006 report.
In conducting our work, we analyzed data regarding HSA-eligible and  traditional plans and enrollees from two national employer health benefits  surveys; three selected large employers; and eHealthInsurance, a large,  national broker of individual and small business health insurance. To  illustrate the potential health care costs faced by HSA-eligible and  traditional plan enrollees, we estimated the total annual costs incurred by  enrollees of the three employers’ 2005 HSA-eligible and PPO plans,  considering different levels of health care utilization. We compared  Internal Revenue Service (IRS) data for tax filers reporting HSA  contributions with corresponding data for all tax filers under 65 years old.  We also conducted focus groups with employees of the three employers. A  detailed explanation of our scope and methodology is included in the  report’s appendix I. This report is the most recent of several related  reports GAO has issued within the last year. The work done for these  reports was performed from November 2004 through July 2006 in  accordance with generally accepted government auditing standards.
In summary, we found that HSA-eligible plans had lower premiums, higher  deductibles, and higher out-of-pocket spending limits than did traditional  plans in 2005, but both plan types covered similar services, including  preventive services. Our illustration of enrollees’ potential health care  costs for the three employers’ 2005 health plans we reviewed showed that  HSA-eligible plan enrollees would incur higher annual costs than PPO plan  enrollees for extensive amounts of health care, but would incur lower  annual costs than PPO enrollees for low to moderate use of health care.  HSA-eligible plan enrollees generally had higher incomes than comparison  groups, but data on age differences were inconclusive. Just over half of all  HSA-eligible plan enrollees and most employers contributed to HSAs.  About 45 percent of tax filers reporting 2004 HSA contributions also  reported that they withdrew funds in 2004, and 90 percent of withdrawn  funds were used for qualified medical expenses. HSA-eligible plan  enrollees who participated in our focus groups generally reported positive  experiences, but most would not recommend the plans to all consumers.  Most participants said they would recommend the plans to healthy  consumers, but not to those who use maintenance medications, have a  chronic condition, have children, or may not have the funds to meet the  high deductible.
subsections: section_title: Background
paragraphs: Consumer-directed health plans generally include three components: a  health plan with a high deductible, a savings account—such as an HSA—to  pay for health care expenses, and enrollee decision-support tools.
An insurance plan with a high-deductible. HSA-eligible plans are  required to meet certain statutory criteria. The plans must have a  minimum deductible amount—$1,050 for single coverage and $2,100 for  family coverage in 2006—and a maximum limit on enrollee out-of-pocket  spending—$5,250 for single coverage and $10,500 for family coverage in  2006. Preventive care services may be exempted from the deductible  requirement, but coverage of most other services, including prescription  drugs, is subject to the deductible. After meeting the deductible, the HSA- eligible plan pays for most of the cost of covered services until the  enrollee meets the out-of-pocket spending limit, at which point the plan  pays 100 percent of the cost of covered services.
A savings account to pay for health care expenses. There are several  types of savings accounts that may be associated with consumer-directed  health plans, with HSAs being among the most prominent. An HSA is a tax- advantaged savings account established for paying qualified medical  expenses. Individuals are eligible to open an HSA if they are enrolled in  an HSA-eligible plan and have no other health coverage, with limited  exceptions. HSAs are owned by the account holder, and the accounts are  portable—individuals may keep their accounts if they switch jobs or enroll  in a non-HSA-eligible health plan. Both employers and individuals may  contribute to HSAs, and individuals may claim a deduction on their federal  income taxes for their HSA contributions. HSA balances can earn interest;  roll over from year to year; and be invested in a variety of financial  instruments, such as mutual funds. HSA-eligible plan enrollees who  choose to pay for medical expenses from their HSA may access their  account funds by check, by debit card, or by authorizing insurance carriers  to allow providers to directly debit their account funds. HSAs are subject  to annual contribution limits. In 2006, contributions were limited to   100 percent of the deductible, but not more than $2,700 for single coverage  or $5,450 for family coverage. Contributions, earned interest, and  withdrawals for qualified medical expenses are not subject to federal  income taxation. A financial institution, such as a bank or insurance  company, typically administers the account.
Decision-support tools. HSA-eligible plans typically provide enrollee  decision-support tools that include, to some extent, information on the  cost of health care services and the quality of health care providers.  Experts suggest that reliable information about the cost of particular  health care services and the quality of specific health care providers would  help enrollees become more actively engaged in making health care  purchasing decisions. These tools may be provided by health insurance  carriers to all health insurance plan enrollees, but are likely to be more  important to enrollees of HSA-eligible plans who have a greater financial  incentive to make informed decisions about the quality and costs of health  care providers and services.
section_title: Financial Features of HSA-Eligible Plans Differed From Those of Traditional Plans, but Covered Services Were Similar
paragraphs: HSA-eligible plans had lower premiums, higher deductibles, and higher  out-of-pocket spending limits than traditional plans in 2005. Specifically,  data from national employer health benefits surveys regarding plans  offered in the group market indicate:    Premiums for HSA-eligible plans averaged 35 percent less than employers’  traditional plan premiums for single coverage and 29 percent less for  family coverage in 2005.
Annual deductibles for HSA-eligible plans averaged $1,901 for single  coverage and $4,070 for family coverage in 2005—nearly six times greater  than those of employers’ traditional plans.
The median annual out-of-pocket spending limit for HSA-eligible plans  offered by large employers was $3,500 for single coverage in 2005, which  was higher than the median out-of-pocket spending limit of $1,960  reported for traditional plans.
The HSA-eligible and traditional plans we reviewed covered the same  broad categories of services, including preventive services, and also used  similar provider networks in 2005.
Our illustration of enrollees’ potential health care costs—including  premiums, deductibles, and other out-of-pocket costs for covered  services—for the three employers’ 2005 health plans we reviewed showed  that HSA-eligible plan enrollees would incur higher annual costs than PPO  enrollees for extensive use of health care, but would incur lower annual  costs than PPO enrollees for low to moderate use of health care.  Specifically, we estimated that in the event of an illness or injury resulting  in a hospitalization costing $20,000, the total costs incurred by the three  employers’ HSA-eligible plan enrollees would be 47 to 83 percent higher  than those faced by the employers’ PPO enrollees. In contrast, we  estimated that the total costs paid by HSA-eligible plan enrollees who used  low to moderate amounts of health care, visiting the doctor for illnesses or  injuries six times in one year, would be 48 to 58 percent lower than the  costs paid by the PPO enrollees. If HSA-eligible plan enrollees used tax- advantaged funds that they, or someone other than their employer,  contributed to their HSA, their costs could have been lower than our  estimates.
section_title: HSA-Eligible Plan Enrollees Had Higher Incomes than Comparison Groups, but Data on Age Differences Were Inconclusive
paragraphs: HSA-eligible plan enrollees generally had higher incomes than comparison  groups. The average adjusted gross income of the estimated 108,000 tax  filers reporting HSA contributions in 2004 was about $133,000, compared  with $51,000 for all tax filers under age 65, according to IRS data.  Moreover, 51 percent of tax filers reporting HSA contributions had an  adjusted gross income of $75,000 or more, compared with 18 percent of all  tax filers under age 65. (See fig. 1.)
We also found similar income differences between HSA-eligible plan and  traditional plan enrollees when we examined other data sources from the  group and individual markets. Among Federal Employees Health Benefits  Program (FEHBP) enrollees actively employed by the federal government,  43 percent of HSA-eligible plan enrollees earned federal incomes of  $75,000 or more, compared with 23 percent for all enrollees in 2005.  Additionally, two of the three employers we reviewed and  eHealthInsurance reported that HSA-eligible plan enrollees had higher  incomes than did traditional plan enrollees in 2005.
The data sources we examined did not conclusively indicate whether HSA- eligible plan enrollees were older or younger than comparison groups. IRS  data suggest that the average age of tax filers who reported HSA  contributions was about 9 years higher than the average age of all tax  filers under age 65 in 2004. Similarly, eHealthInsurance reported that in  the individual market the average age of its HSA-eligible plan enrollees  was 5 years higher than that of its traditional plan enrollees in 2005. In  contrast, data from FEHBP and the three employers we reviewed indicate  that the average age of HSA-eligible plan enrollees, excluding retirees, was  2 to 6 years lower than that of comparison groups of enrollees.
section_title: Just Over Half of Enrollees and Most Employers Contributed to HSAs, and These Funds Were Used to Pay for Medical Care and to Accumulate Savings
paragraphs: Just over half of HSA-eligible plan enrollees and most employers  contributed to HSAs. About 55 percent of HSA-eligible plan enrollees  reported HSA contributions in 2004, according to our analysis of data  obtained from IRS and a publicly available survey. HSA-eligible plan  enrollees from the employers we reviewed were more likely to contribute  to an HSA when their employer also offered account contributions. Among  tax filers who claimed a deduction for an HSA in 2004, the average  deduction was about $2,100 and the average amount deducted increased  with income. About two-thirds of employers offering HSA-eligible plans  contributed to their employees’ HSAs in 2005, according to two national  employer health benefits surveys. In 2004, the average employer HSA  contribution reported to IRS was about $1,064.
Account holders used HSA funds to pay for medical care and to  accumulate savings. About 45 percent of tax filers reporting an HSA  contribution in 2004—made by themselves, their employers, or others on  their behalf—also reported withdrawing funds in 2004. The average annual  amount withdrawn by these tax filers was about $1,910. About 90 percent  of these withdrawn funds were used to pay for expenses identified under  the Internal Revenue Code as eligible medical expenses. IRS data show  that about 40 percent of all funds contributed to HSAs in 2004 were  withdrawn from the accounts by the end of the year. In addition to using  HSAs for medical and other expenses, account holders appeared to use  their HSA as a savings vehicle. About 55 percent of tax filers reporting  HSA contributions in 2004 withdrew no money from their account in 2004.  We could not determine whether HSA-eligible plan enrollees accumulated  balances because they did not need to use their accounts (that is, they  paid for care from out-of-pocket sources or did not need health care  during the year) or because they reduced their health care spending as a  result of financial incentives associated with the HSA-eligible plan and  HSA. However, many focus group participants reported using their HSA as  a tax-advantaged savings vehicle, accumulating HSA funds for future use.
section_title: Focus Group Participants Were Generally Satisfied with HSA-Eligible Plans, but Would Not Recommend Them to All Consumers
paragraphs: HSA-eligible plan enrollees who participated in our focus groups at the  three employers we reviewed generally reported positive experiences with  their plans. These focus group participants, who had voluntarily elected to  enroll in HSA-eligible plans as one of several choices offered by their  employers, cited the ability to accumulate savings, the tax advantages of  having an HSA, and the ability to use an HSA debit card as positive aspects  of HSAs. Participants reported few problems obtaining care, and when  given a choice, many reported that they had reenrolled in the HSA-eligible  plan.
While focus group participants enrolled in HSA-eligible plans generally  understood the key attributes of their plan, such as low premiums, high  deductibles, and the mechanics of using the HSA, they were confused  about certain other features. For example, many participants understood  that certain preventive services were covered free of charge, but they also  had trouble distinguishing between the preventive services and other  services provided during a preventive office visit. Moreover, many  participants were unsure what medical expenses qualified for payment  using their HSA.
Few participants researched the cost of hospital or physician services  before obtaining care, although many participants researched the cost of  prescription drugs. A few participants reported asking physicians about  the cost of services, but others expressed discomfort with asking  physicians about cost. For example, one participant said, “Americans don’t  negotiate. It’s not polite to question the value of  work.”  Participants of one focus group also reported not initially understanding  the extent to which they needed to manage and take responsibility for  their health care, including by asking questions about the cost of services  and medications. Participants also reported that only limited information  was available regarding key quality measures for hospitals and physicians,  such as the volume of procedures performed and the outcomes of those  procedures. The decision-support tools provided with consumer-directed  health plans we previously reviewed were limited and did not provide  sufficient information to allow enrollees to fully assess cost and quality  trade-offs of health care purchasing decisions.
Most participants reported that they would not recommend HSA-eligible  plans to all consumers. Some participants said they enrolled in the HSA- eligible plan specifically because they did not anticipate getting sick, and  many said they considered themselves and their families as being fairly  healthy. Most participants would recommend the plans to healthy  consumers, but not to those who use maintenance medication, have a  chronic condition, have children, or may not have the funds to meet the  high deductible.
section_title: Concluding Observations
paragraphs: In closing, as more individuals face the choice of enrolling in HSA-eligible  plans or other consumer-directed health plans, they will likely weigh the  savings potential and financial risks associated with these plans in relation  to their own health care needs and financial circumstances. Because  healthier individuals who use little health care could incur lower costs  under HSA-eligible plans than under traditional plans, when given a choice  they may be more likely to select an HSA-eligible plan than will less  healthy individuals who use greater amounts of health care. It will be  important to monitor enrollment trends and assess their implications for  the cost of health care coverage for all HSA-eligible and traditional plan  enrollees.
Few of the HSA-eligible plan enrollees who participated in our focus  groups researched cost before obtaining health care services. This may be  due in part to a reluctance of consumers to question health care providers  about the cost of their services and the dearth of information provided by  insurance carriers to their enrollees about the cost of health care services  under their plans—a limitation that insurance carriers are beginning to  address. According to proponents, an increase in such health care  consumerism can help restrain health care spending increases under the  plans. Such an increase will likely require time, education, and improved  decision-support tools that provide enrollees with more information about  the cost and quality of health care providers and services.
Finally, while HSA-eligible plan enrollees we spoke with were generally  satisfied with their plans, it is notable that these enrollees each had a  choice of health plans and voluntarily selected the HSA-eligible plan. Their  caution that HSA-eligible plans may not be appropriate for everyone  suggests that satisfaction may be lower when employees are not given a  choice or when employer contributions to premiums or accounts do not  sufficiently offset the potentially greater costs faced by HSA-eligible plan  enrollees.
Mr. Chairman, this concludes my prepared remarks. I would be happy to  answer any questions that you or other Members of the Subcommittee  may have.
section_title: Contacts and Acknowledgments
paragraphs: For future contacts regarding this testimony, please contact John E.  Dicken at (202) 512-7119 or at dickenj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Randy DiRosa, Assistant Director; Pamela N.  Roberto; and Patricia Roy made key contributions to this statement.
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