Across the country, companies are offering a new health care choice during this open enrollment season: health savings accounts, touted by advocates as a powerful tool to cut insurance costs and give workers control over their health care dollars.
But in Rhode Island, a conflict between Internal Revenue Service guidelines and a new state law has apparently made this the only place where HSAs are unavailable.
Built into the U.S. tax code by a law signed by President Bush in December 2003, HSAs are tax-free accounts that workers can use to pay for health care expenses not covered by their insurance. To qualify, they have to enroll in a “high-deductible health plan,” defined as a plan with a minimum deductible of $1,000 per individual or $2,000 per family.
The law specifically exempts “preventive” care from the deductible, so the U.S. Treasury has said policies can pay for annual checkups, routine prenatal care, health screenings and some other services. But treatment of existing injuries, illnesses or conditions, and prescription coverage, cannot be paid for until the deductible has been met.
Because many state laws require so-called “first dollar” (insurer-paid) coverage for some non-preventive services, the IRS and Treasury agreed to allow high-deductible plans in those states to continue to include the mandated services until Jan. 1, 2006. The transitional relief only applied, however, to mandates on the books as of Jan. 1, 2004.
On July 1, a new Rhode Island law went into effect requiring all health policies to cover early intervention services for children with developmental disabilities, starting next Jan. 1. The potential clash with the HSA law didn’t seem to cross anyone’s mind.
Then, a few weeks ago, UnitedHealthcare of New England rolled out a new line of high-deductible policies coupled with HSAs, only to be told they were illegal.
“The laws are pretty clear and specific, and it’s our job to enforce the laws,” said G. Rollin Bartlett, chief life, accident and health insurance analyst at the state Department of Business Regulation. If insurers object to the state mandate that preempts HSAs, Bartlett added, “it would seem they might want to influence the Legislature to change them.”
Asked whether the DBR, knowing the problems created by fast-rising health insurance rates, would want to help make HSAs available, Bartlett said he was sure the department would participate in any discussions of potential policy changes. But he noted that states aren’t required by federal law to allow HSAs, and he reserved judgment on whether HSAs actually deliver their promised benefits.
“I’ve heard arguments on both sides, and this change in the tax code is very new,” he said. “I’m not aware of any experience that would prove which argument is right.”
HSAs are the latest development in a trend toward “consumer-driven” health care, a sharp departure from traditional employer-paid insurance that provides financial incentives for people to keep themselves healthy and minimize their use of costly services.
Traditional insurance is built on the principle of pooling risk. People expected to need a lot of health care are pooled with people who will use very little, paying premiums somewhere in the middle. Low-level users effectively subsidize the sick, but they also have the assurance that if they’re diagnosed, say, with cancer, their high-cost needs will also be met.
“Consumer-driven” plans combine lower premiums with relatively high deductibles – sometimes for all but a few services, sometimes just for hospitalization or other costly items. If a person uses a lot of costly services, the bills will more than offset the premium savings. But those who keep their health costs under control will come out ahead.
Such plans are a direct response to health care usage patterns. James K. Claffey, president of the brokerage Benefits Unlimited in Cranston, said industry figures show about 3 percent of subscribers account for as much as 50 percent of health costs – but “they can’t help it; they need it.” More than 55 percent of subscribers, on the other hand, use “almost nothing.”
Consumer-driven plans, Claffey said, target the people in the middle – the ones who could choose to take generic drugs instead of brand-name ones, or avoid the emergency room for all but true emergencies, or not get an MRI when an X-ray will do fine.
As Claffey sees it, consumer-driven plans can potentially save a lot of money by changing those people’s health care spending habits, and also reward the light users. For the very sick, Claffey acknowledged, the plans are less appealing, though once the deductible has been met, they will get the same coverage as with traditional plans.
Several Rhode Island employers already offer plans like that, often paired up with tax-free, worker-funded “flexible spending accounts” (FSAs) or with employer-funded “health reimbursement accounts” (HRAs). But HSAs, which can be funded by employers and employees alike, carry over from year to year, and can even be used as mini-retirement funds, are more versatile and tax-advantaged. The flipside, Claffey noted, is that the health plans with which they can be used are more limited.
That is a concern at the state Department of Health, which doesn’t control health plans, but does set the state’s public-health policy. Assistant Director Robert J. Marshall Jr. said health officials are concerned about the way consumer-driven plans “distort the basic insurance principle” of pooling risk, and how they shift the burden of health costs from employers to employees. There’s also a question of whether subscribers will still benefit from the discounts that insurers get, he said, and most important, there is concern that the allowed “first dollar” coverage is too limited to ensure people can keep themselves healthy.
HSAs and the accompanying plans could bring about “fundamental changes” in health care, Marshall said, “and we should pursue them carefully.”
At Blue Cross & Blue Shield of Rhode Island, where an HSA product is under development – in case the law changes soon – acting CEO James E. Purcell also questions their cost-saving potential. While high deductibles and co-pays make insurance more affordable for businesses, he said recently, “it just shifts the cost to the employees – or the risk. With a health savings account, you get a tax break, but it’s still your dollars.
At UnitedHealthcare, meanwhile, enthusiasm for HSAs and consumer-driven plans is stronger, fueled by in-house studies showing they reduce costs (see sidebar). Spokeswoman Debora M. Spano also said the company’s products would pass on the insurer’s discounted rates to consumers even before their deductible has been met. Of course for now, the whole issue is moot for all but the largest, self-insured employers, who are exempt from state insurance mandates. Spano said even in that category, she didn’t know of any Rhode Island companies offering HSAs yet.
At Benefits Unlimited, Claffey said interest in HSAs is substantial, though many of his clients – including firms in Connecticut and Massachusetts that could, legally, offer HSAs this year – aren’t quite ready to make the leap.
“I believe that HSAs are going to be very attractive to some buyers, but we don’t know yet – there isn’t enough of a track record,” he said. “We’re doing a lot of educating and not much selling of them. … A lot of people look at it, we price them, and they say, ‘I want to wait one more year. I want to see what other people do.’”
