Paul Fronstin, Director of the Health Research Program at Employee Benefit Research Institute, discusses the latest on how consumers are using HSA’s, the effectiveness of use and the notion of HSA have’s and have not’s.
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Nate: I'm honored to be joined by Paul Fronstin, associate editor of Benefits Quarterly, advisory board member of the University of Michigan Center for Value-Based Insurance Design. He's on the board of governors for the National Alliance of Healthcare Purchaser Coalitions, and he's the director of Health Research Program at Employee Benefits Research Institute where he's served for over 26 years. Paul, thank you for joining me today.
Paul: Thank you so much for inviting me.
Nate: You guys have always done amazing work over at EBRI, I don't know if anybody else refers to it that way, but I have done so for a while, and you guys have been doing this work for a long time.
Nate: Just today there's a nice piece in Forbes entitled "HSAs Provide a Sweet Tax Break, But Some May Increase Healthcare Spending." It's always fascinating to me that many years down the road we're still trying to understand HSAs, we're still trying to get adoption up, we're still trying to figure out what these things are all about, so what's the latest, what are enrollment trends looking like?
Paul: So, HSAs have been around since 2004, they became available as part of the Medicare Modernization Act of 2003. But here we are, 15 years later, and most people that are in an HSA-eligible health plan haven't been in it for very long. So we're first starting to get good data on their experience regarding what impact the health plan has had on them, and what their experience is with the account.
Paul: As far as enrollment goes, most trends in benefits and enrollment in HSA-eligible health plans included don't take off like the Space Shuttle. They don't go straight up. They take off like an airplane, it's slow and steady growth. And I don't think we've got to the point yet where enrollment in HSA-eligible health plans has reached cruising altitude. We still see people going into these plans, there seems to be a healthy amount of new entrance every year.
Paul: But what got me interested in this a couple of years ago was that we do our own survey, and as part of that survey we try to figure out how many people are in these plans, because there's no great source for this information. All of the information out there has its shortcomings.
Paul: And EBRI is a membership organization, and my members said to me one year, "we think your survey is wrong. You're not showing any growth in this marketplace." And I was thinking the same thing, they didn't have to tell me that there might be something wrong with my surveys. So I looked at the survey, couldn't figure out anything. Looked at other surveys, and they all seemed to be showing the same thing, which was that when you just looked at the number of people or the percentage of the marketplace in these plans from year to year, there doesn't seem to be much going on in terms of growth.
Paul: So that led me to question not just my own survey, first of all I was like "yes, my surveys are wrong. If it is, they're all wrong." But we started looking at other things, so in the same survey we asked people how long they had been in their health plan. And about 20% of the people in HSA-eligible health plans said they were in the plan for about a year.
Paul: So there are your new entrants. Right, if you look at data from Devenir, which collects information from HSA providers on the number of accounts that there are out there, you find a large increase each year in the number of accounts, which would suggest new entrants into the health plans.
Paul: And basically what my survey and the other surveys weren't capturing was the fact that people leave their health plan. So you've got new people going in, but you've got some people going out. And the some people going out are to a large degree, not completely but to a large degree offsetting the new entrants. Therefore, just looking at the number at a point in time and comparing that with other points in time isn't picking up that dynamic.
Paul: So you've got a lot of growth. Or at least you got- well maybe growth isn't the right word, you've got a lot of new entrants every year, but you've got some people leaving. They may be leaving because they become eligible for Medicare, they may be leaving because they changed jobs and took a job that didn't offer an HSA-eligible health plan. Or they may be leaving because they took a new job that offered one but they chose not to enroll in it, or when Open Enrollment came around they just chose a different plan for whatever reason.
Nate: Yeah, it's interesting when, if I turn the time machine on here and go back to when HSAs were first available, I was with Washington Mutual, and we were one of the very first companies to put in HSAs. And I think the first year out of 36,000 employees we had like 105 enroll.
Nate: You know, it was really disappointing, I assume most of them were either in Executive Management who were sponsoring this change or HR. But you fast forward, and we are getting more enrollment in these plans, but for years I've said, and I think this is pretty common knowledge now, that if you're at a certain income level, it doesn't make any sense not to be in an HSA if it's available to you.
Nate: Looking at some of your results here, when it comes to account balances there's some really interesting stuff going on. Does it appear to you that potentially we're getting to a point with high deductible health plans and HSAs where it's a case of the haves and the have nots? So if you've got enough disposable income, and you build up these accounts, you're one of the haves who's going to be consuming, and if you're not, then you're not, and you're not going to be going to the doctor appropriately. What are you seeing on those impacts of account balances and income, and things like that?
Paul: Yeah, well there's no doubt that people with higher incomes have the potential for higher account balances, simply because they've got more money to contribute. And when they do use health care services, it's easier for them not to touch the account.
Paul: But even for people with lower income, one- they're likely to have an employer contribution. Well, regardless of income, in any given year most people are healthy and don't use a lot of health care.
Paul: Right? You've got your 80/20 rule. 80% of the population account for 20% of the spending. And that 80%, if they've got money going into the account- but in most part they're going to build up an account balance, regardless of their income. If their lower incomes could be tougher for them to put their own money in, but employer money is likely to be going in. So I think about 80% of people have an employer contribution.
Paul: So they will be able to build up a balance, but certainly not as fast as somebody who is higher income. But note that one of the interesting things about the tax advantage of these accounts is if you're above the Social Security wage base, you don't get the savings from FICA or from Social Security, whereas if you're below it you do. So that doesn't equalize the tax benefits, but it certainly offsets some of the tax benefits that the higher income get.
Nate: Yeah, and we're still a long ways from being able to find, let's say out-of-pocket retirement healthcare costs through HSAs on average, is that correct? I mean, these balances are extremely low when you compare them to some of the numbers I've seen out there of $300,000 in retirement expenses, medical expenses out of your own pocket, some of those.
Paul: Yeah, well the accounts haven't been around long enough for most people to build up an account balance, but I think the main reason why HSAs are never going to be sufficient, I mean you're never going to get there to build up enough money to cover your healthcare costs of retirement. Because you're capped by the contribution limit, and that-
Nate: Right, so that's-
Paul: But that's statutory, right, unless Congress doubles the contribution limits, which there has been talk about doing, you can only accumulate so much. Capital appreciation is only going to get you so far.
Nate: Right. So how about usage, and how people are using these HSAs accounts? If they do have balances, are they using HSAs effectively? What are the trends you're seeing there?
Paul: Yeah, there's a number of things going on. First of all, like I said, most people are new to these health plans and to these accounts. They're new, they're confusing, people don't necessarily know exactly how they work.
Paul: I was first eligible for an HSA plan in 2007, went to an Open Enrollment meeting, and I saw first-hand why people may not be using the accounts right or using the health plan right. There was a lot of poor information given to plan participants, especially with something so new and different and complicated.
Paul: A couple things going on. One- when you look at the experience people are having with their accounts, over time you do see more and more people taking advantage of the benefits in the account, basically moving in the direction of doing the right thing with the account. What I mean by that is, what we find is the longer people have had an account, the more money they put in, so they're taking advantage of the Triple Tax Advantage. Maybe they're putting in more money after a few years compared to what they initially went in doing because they finally realized there's no use it or lose it rule, so they're less afraid. They're more likely to invest the longer they've had an account, though the percentage of investors is still low among those who have had an account for a long time. But it's much higher than among those who have only had an account for a year or two.
Paul: So it's good news bad news. Good news is people move in the right direction over time, bad news maybe they're not moving there quite fast enough. So that's one aspect of the way people are using HSAs. And then there's another aspect which we've recently looked at, which is how accumulating account balances will affect use of services. The question we went into this study with was whether or not account balances do affect use of services. We didn't know.
Paul: This has been my dream study since 2009, and I finally got the data to pull this study off and release the report last month in May. Basically, we know what deductibles do. When you move people to a high deductible, they cut back on their use of healthcare services. But we don't know what happens over time as people build up account balances, and like we said before most people will build an account balances, because most people are healthy, don't use a lot of healthcare in a year.
Paul: So we don't know if after two, three, four years when people have enough money to cover their deductible, do they use more healthcare services than they otherwise would. Because the balance-offset effect of the deductible. And we find that for certain healthcare services it certainly does. You see more people going to the doctor more frequently, getting some discretionary services like lab work and imaging because they have higher account balances after a number of years.
Paul: And there's some things employers can do about that. One thing they can do is raise deductibles. Right, if I voluntarily, say, choose an HSA plan with a $2000 deductible for the first time and no money in my account, well when I get to the point where I have $2000 in my account, I might be willing to go up to a $4000 if that option is available.
Paul: That's not something we've been able to look at, but I think that's something employers may start to look at when they see the results for our study. We have found that over the last 15 years or so, there have been increases in deductibles, but not that fast. They're not going up as quickly as deductibles are going up in non-HSA-eligible health plans.
Nate: It's an interesting notion, this idea of consumerism, which is what high deductible health plans and HSAs were sort of founded on. And I guess it's not surprising, although a little bit counterintuitive, if you step back and look at it from the outside, that once a consumer has a bunch of money in their account they might act like a consumer and go buy some services.
Nate: And it's a fascinating thing. So do you also- or is this sort of out there in the future to be determined, know anything around are these people consuming services because they a) now have some money to go do them, they've saved up enough, and b) they have not been using services up until now, so they've maybe deferred some care?
Paul: It's probably a combination of both, and we haven't been able to dig into it that deeply.
Nate: In your opinion, you've been around this game for a long time, what is the best way to use a high deductible health plan with an HSA? You alluded to some people doing some right things, and I think we can pull those nuggets out, but if you were to tell a young person exactly how to set themselves up for future success, what would that look like?
Paul: Well, it's certainly easier for people with higher incomes to be successful with this, because they can take advantage of the HSA, they can max out their contributions, they can invest the money, and if they need health care services, they may be in a position to pay for them without tapping the account.
Paul: For people not in that position, which is most people, it's harder. It's harder because you're dealing with the high deductible. Aside from the HSA, you have to pay these out-of-pocket expenses if you incur them. And many employers are going to high deductibles whether they're with the HSAs or not. We're at the point now where about half the privately insured population is in a plan with a deductible high enough to be HSA-eligible, and you got a lot more people with just high deductibles that aren't quite HSA-eligible deductibles.
Paul: And I think for a lot of those people, they may not have money to put into the HSA to save it, but they should still be using the HSA to pay their out-of-pocket expenses, even if it just means making a contribution when they need to pay a bill, and taking the money right out.
Paul: Because at a minimum, they may not build up an account balance, they may not be able to invest, but at least they're getting the tax break on their out-of-pocket contributions. And the advantage that they have is that you can make a contribution any time, you don't have to do it through payroll, but you can, and like an IRA, you have until April 15th of this year to make contributions that counted against 2018. So there's a lot of flexibility around when you can put the money in, there's a lot of flexibility around when you can take the money out. Because you don't have to take the money out when you need healthcare, you could wait and reimburse yourself at any time.
Paul: So I think that's the thing people need to look at, is how much flexibility there is with the accounts and how they can take advantage of that for their own personal circumstances.
Nate: Yeah, absolutely. And so as you look forward, obviously this is painted greatly by public policy, and I'd love to hear your thoughts on what you see happening there, but do you see a world where deductibles keep rising, the HSA and the high deductible health plan becomes the account and the way that healthcare is funded, or what do you predict if you could crystal-ball this?
Paul: Yeah, so keep in mind I'm an economist, nobody believes me when I look into my crystal ball and tell them what I see.
Paul: So, a couple things. One- put aside public policy for a minute, a lot of employers have moved their employees to high deductible plans that are not HSA-eligible health plans. And I think that over time you're going to see a lot of those plans become HSA-eligible, simply because the easiest thing for an employer to do when they want to save money or manage their cost increases is to increase the deductible. They only have to change one number in their health plan.
Paul: Adding an HSA just adds a layer of complication. But as deductibles go up, workers are going to want some relief, and the HSA gives them some relief, because they can pay their out-of-pocket expenses on pre-tax basis. So I think the next logical step for people in high deductibles that are not HSA-eligible is to make those plans HSA-eligible. And I think that has the potential for growing the number of people in HSA-eligible health plans.
Paul: As far as public policy goes, last summer the House of Representatives, the US House of Representatives, passed a couple of bills that would have certainly made HSA plans more attractive. One of the criticisms of HSA-eligible health plans is that the deductible has to cover everything except certain preventive services. And one of the things holding back enrollment, both among employers offering and among employees taking it, is that high-valued services that treat a disease cannot be excluded from the deductible. For example, you can't exclude your annual eye exam for someone with diabetes from the deductible, even though it's a recommended service, it's considered a high-valued service.
Paul: So the House bill would have given some relief towards that, there's been bipartisan support for giving relief towards that. Supposedly the Trump Administration's been interested in doing the same thing potentially through regulations instead of an act of Congress. But the law passed during the last Congress, and it's unclear whether or not this Congress is interested in going in that direction. The House flipped from Republicans to Democrats. We'll see. There's certainly a lot of talk, and a lot of efforts to push that along, but I don't want to go out on a limb and predict that it's going to happen, despite the interest.
Nate: Yeah... it doesn't seem like they're voting on very much right now.
Paul: Right. Right. And one of the things that you can do- a lot of the issues around HSAs aren't with the account, it's around the deductible. And deductibles in general, and some of the side effects of deductibles, and some of the interest out there is to change the definition of what's an HSA-eligible health plan, and to base it on, instead of the deductible levels, to base it on the actuarial value of the plan- so the percentage of the plan's health expenses that are paid for by the plan. And I think if that happened, you'd see a lot more plans and a lot more experimentation with HSA-eligible health plans that aren't necessarily tied to a deductible or a high deductible.
Paul: But that doesn't mean cost sharing goes away, it just means cost sharing changes into something different than what people are used to seeing. So instead of a deductible, maybe there's a plan with... and I don't know what the right levels are, but I'm just making this up, maybe the right healthcare plan is a plan with fifty percent coinsurance, but no deductible. Right, there's still out-of-pocket-expenses, the out-of-pocket-expense is still being used to engage people in their health, but that may work better. We just don't know. But I think you'd see a lot more experimentation, and along with that a lot more people in HSA-eligible health plans, would just look different than they look today.
Nate: Yeah, we're definitely hamstrung a little bit by the current regulations out there. You could really get so creative and still be offering a qualified health plan. I love all of these ideas.
Nate: Well Paul, thank you very much for joining me, I really appreciate it.
Paul: Thank you. I appreciate you inviting me today.