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Are health savings accounts the answer?

Michael Fine, M.D.

By Miriam Reisman.

The goal of consumer-driven health plans (CDHPs) is to provide patients with enough information about cost and quality of care to make smarter choices about their use of services, which proponents contend will help reduce over-utilization, increase access to health care, improve the physician-patient relationship, and lower overall health care costs. Critics, however, argue that the plans jeopardize patients’ access to quality care and may actually end up increasing health expenses in the long term.

While some employers are cautiously waiting for proof that altering consumers’ spending habits will really save money, an increasing number are looking to CDHPs as a way to combat the fourth consecutive year of double-digit rate growth rate in health insurance premiums. In 2004, about 10 percent of large employers (1,000 or more employees) that offer health coverage to their employees made a CDHP plan available, according to a study released in September by the Kaiser Family Foundation and the Health Research and Educational Trust. While that number may seem low, it represents a doubling of employers over the previous year, indicating a real shift towards consumer-driven health care.

The most popular type of CDHP model currently offered by employers pairs a tax-advantaged health savings account (HSA) with a low-premium, high-deductible health plan (HDHP). Both employees and their employers may contribute to the account, from which the employee can make tax-free withdrawals to pay for, or reimburse, qualified medical expenses, such as physician visits or prescription drugs. Preventive care, although not specifically defined by the IRS, is generally paid as first-dollar coverage or after a small deductible or copayment.

The thinking behind HSAs is that patients, as health care consumers, should have more control over their health care dollars, and that they should be able to profit from becoming better shoppers and making better choices about how to spend their own money.

The idea itself isn’t new. Flexible spending accounts (FSAs), a type of “cafeteria plan” authorized under Section 125 of the Internal Revenue Code, were first introduced in the 1970s. Under an FSA, an employee can make pre-tax contributions to an account that is used to pay for qualified medical and dependent care expenses. The main drawback of FSAs, and likely the biggest reason that these plans never caught on with employees, is the “use it or lose it” provision, added in 1984, which prevented participants from carrying forward unused account balances to later years.

In 1996, Congress created medical savings accounts (MSAs) as a “safer” investment alternative to FSAs. Instead of the “use it or lose it” feature, the tax-advantaged MSA offers a “save it for later use” option, permitting employees to carry over their unused balances to subsequent years, thus giving them more incentive to shop around for better prices. In response to criticisms that the MSA would become merely a tax shelter for the healthy and wealthy, the HIPAA law capped the number of allowable MSAs at 750,000 and limited them to self-employed individuals or employers with less than 50 workers. It also imposed minimum deductible requirements and restrictions on amounts that could be contributed to accounts. Touted as promising increased choice for consumers, MSAs actually resulted in less choice and more limited services.

The creation of health savings accounts (HSAs) was an effort to remove some of these restrictions, allowing for greater affordability and accessibility. Approved on January 1, 2004, with the passage of the Medicare Act of 2003, the HSA is considered by many to be a significant improvement over its predecessors. Unlike funds in an FSA, HSA funds can be accumulated from year to year and are portable from job to job. And, unlike MSAs, HSAs are available to all market segments, including midsize and large groups – almost anyone with an HSA-eligible high-deductible health plan can get an HSA. In addition, HSA-eligible HDHPs have lower deductible requirements and higher out-of-pocket limits than MSAs, making the accounts more flexible and accessible than MSAs.

Less restrictive and more attractive than previous versions of tax-favored health plans, HSAs have begun to gain real momentum. Less than a year after the IRS legislation creating HRAs, 1.5 million HRAs were established, according to the National Journal. The Consumer Driven Market Report estimates that the number of HSAs will grow as high as five million by 2006.

How HSAs Work

An increasing number of insurance companies are offering HSA-based products in Pennsylvania, including Independence Blue Cross (IBC), Highmark Blue Cross Blue Shield, Aetna, and UnitedHealth. In a unique move, UnitedHealthcare, a subsidiary of UnitedHealth group, recently collaborated with Jefferson Health System, the Philadelphia region’s largest hospital network, on the development of a new consumer-directed health plan known as Definity HSA, which became effective October 1, 2005 for January 1, 2006 enrollment.

While certain aspects of an HSA plan may differ from insurer to insurer, the basic operating principles are similar. To qualify for an HSA plan, the policy’s single deductible for an individual must be a minimum of $1,000 (for 2005) and can be any deductible up to the maximum out-of-pocket limit of $5,100; the single deductible for a family must be at least $2,000 up to the maximum out-of-pocket limit of $10,200. The annual deductible must be satisfied each year before the insurance company pays on any medical claims, with the exception of basic preventive care, such as immunizations and routine mammography, which can be provided without having to meet the deductible first.

Any unused balances in the account roll over from year to year, allowing employees the ability to save for future medical expenses. Funds in an HSA that are not used during a person’s working years can be used tax free in later life for health care and long-term care. Once the individual turns age 65, he or she can use money from the account to pay for non-health-related expenses, although it will be subject to income tax; employees under 65 are subject to an additional 10 percent tax penalty on the amount withdrawn.

HSA accounts are typically administered by banks or other financial institutions chosen by the health plan (although members can theoretically work with the bank of their choice). For instance, UnitedHealth uses Exante Bank as its HSA administrator; Highmark has partnered with PFPC Trust Company (a subsidiary of The PNC Financial Services Group) to handle the transactions associated with its BlueAccount HSA plan; and IBC’s preferred HSA vendor is Bancorp Bank. However, in some cases, such as the Aetna HealthFund HSA, the health plan handles both the banking function and the underlying insurance policy function internally in an effort to unify and simplify the plan for both members and providers. HSA members are typically issued debit cards that draw directly from their HSA account. These so-called “smart cards” are designed to offer convenience for health plan members and less administrative hassle for physician offices and third-party plan administrators.

According to the Pa. insurers interviewed, HSAs offer members similar benefits to their Preferred Provider Organization (PPO) or Point of Service (POS) plans, including the freedom to choose any recognized provider, participating or non-participating, at the time medical care is needed. For instance, IBC’s HSA plan, launched in 2004, is a variation of its Personal Choice PPO plan, according to Scott Post, IBC’s Vice President of Marketing Administration. According to Post, IBC members enrolled in an HSA plan have access to the same national Blue Cross/Blue Shield network of providers and are able to receive in-network and out-of-network benefits constructed to meet the HSA-qualified parameters.

In addition, say insurers, providers are reimbursed for their services using the same contracted fee schedules that are in place for their PPOs. The member is charged the same discounted rate that the health plan has negotiated with providers, both before and after the deductible has been met.

“There is a contractual obligation to use the allowable amounts even within the deductible periods,” as long as a patient pays the physician within a certain time parameter, typically 60 or 90 days, according to Kim Bellard, Vice-President, eMarketing for Highmark. “We are not yet encouraging price competition across physician practices, but rather are promoting price awareness of patient treatment options as part of the shared decision-making process. If and when we do get to more provider-specific price competition, it is likely to be not so much in the context of unit charges, but rather episodes of care/treatment options that take into account treatment patterns. How this can be done in a way that is consumer-friendly and fair to providers is the hard part, and will take some time,” Bellard adds.

Typically, after the service is provided, the provider submits a claim to the insurance carrier or claims administrator, and the claim is counted toward the member’s deductible. Once the deductibles, co-pays and out-of-pocket limits have been met, the insurance plan pays for all of the charges; however, if the deductible has not been met, which is usually the case in a high-deductible plan, especially early in the year, it is the member’s responsibility to pay his or her portion of the liability to the provider.

IBC’s Post acknowledges that physician practices could face some administrative challenges associated with the “bridge” period between the time that funds in the HSA are exhausted and the deductible is reached. For instance, the patient may be paying for health care expenses out-of-pocket at the point of care, but because the provider may not have real-time access to co-pay and deductible amounts for patients enrolled in HSAs, he or she may not know what to charge the patient.

“Physicians are used to being able to identify and clearly determine at the point of service through managed care programs how much co-pay to collect, so that’s going to be more difficult to perform now,” says Post. “In a high-deductible program, you’re not going to know right off the bat how much money to take from the member, so that’s something that we have to begin to research and address in terms of how that could be made more effective.”

One way that IBC is addressing this issue is through the use of NaviNet, a Web-based provider application that allows real-time transactions in a range of administrative functions. Later this year, says Post, IBC plans to roll out the ability for physicians, at the time of service, to use NaviNet to access patients’ deductible amounts in order to determine payment.

Whether or not HSAs will create additional administrative hassles for providers, is still too early to tell, says Meredith Baratz, Vice President of Market Solutions for Definity Health, a UnitedHealth Group company. She does note that HRAs, which are similar in structure to HSAs and have been available to UnitedHealth members since 2001, have not, to her knowledge, increased administrative burdens and expenses for physician practices. “However, we recognize that this is a concern to the physician community,” says Baratz, “and we are looking at different ways that we can minimize the impact.”

Highmark has also developed some innovative solutions to ease the burden on both HSA patients and their physicians, according to Bellard. The company’s BlueAccount HSA plan allows members, using an ID and password, to access their personal HSA online, where they can check account balances as well as view deposits and a history of their transactions. If they choose to use the funds in their HSA, they can use their HSA debit card, submit their claim online to the account administrator or submit a paper claim. Members can also elect to have all claims automatically submitted to their HSA for reimbursement.

Says Bellard, BlueAccount and other CDHPs, as part of a broader “consumerism” strategy, are helping to foster a demand for health information and support tools, as well as better data on costs and quality, all of which he says will create a more informed and effective consumer of health care services.

Health Care Utilization

A proposed upside to CDHPs is that increased patient cost-consciousness will reduce over-utilization of health care services and ultimately bring down their costs. The downside, say critics, is that when patients are paying for a substantial portion of their health care out of their own pockets, or from their HSAs, they may avoid visits, opt out of lab work or skip their medication, especially when their incomes don’t allow them to spend more on needed medical care.

According to Mila Kofman, J.D., assistant research professor of the Health Policy Institute at Georgetown University, this is not only a dangerous downside, but a costly one if, for instance, a patient chooses not to seek needed care or not to adhere to medication regimens and his or her condition worsens.

“I know that there’s this idea that we spend too much on medical care,” says Kofman, “but I don’t agree with it. I don’t know anyone who runs to the doctor’s office because they like to hang out in the doctor’s office or gets a bizillion tests because they like to do that. We all do that because that’s what our physicians advise us to do, and we have to assume that much of that is appropriate and needed.”

According to Kofman, HSAs may make it more difficult for physicians to treat HSA patients, particularly those who can’t afford the out-of-pocket costs of certain treatments or procedures. “They will have to get very creative in how they diagnose and try to treat patients who have significant financial constraints on themselves,” she says. “If an MRI is required, for instance, the physician will have to find a way to convince the patient that the expensive diagnostic procedure is necessary.”

According to some insurers, utilization of health services is, in fact, shifting as a result of CDHPs, but in a positive way, as members are encouraged to make more cost-effective decisions regarding their own care. According to Aetna’s Liss, there is clear evidence that consumers are approaching the health system more prudently.

“In our preliminary studies of HRAs,” he notes, “we didn’t see any decrement in preventive services and services related to chronic care that we had seen previously, though we did see that consumers were using the tools that were available to them for pricing and research.” In a 2004 study of Aetna’s HealthFund HRA, general adult use of preventive care increased by as much as 23 percent, compared to similar members.

Resources offered by Aetna include “Estimate the Cost of Care,” an online tool that offers patients cost information on prescription drugs, medical procedures, dental procedures, office visits, medical tests, diseases and conditions, and “Simple Steps To A Healthier Life,” an interactive, online health risk assessment program.

Kofman agrees that information about prices and quality can be a good thing for consumers but not when it comes at a cost. “I don’t think the price tag for that should be cost-shifting onto consumers,” she says. “I think we should have price transparency and good information available for patients to make good decisions, but they shouldn’t have to pay an arm and a leg for that information.”

In some cases, says Kofman, more information for patients could even be dangerous, specifically for the health-illiterate consumer, who has difficulty understanding basic instructions, such as those on a prescription label. According to the Institutes of Medicine, nearly half of all American adults, or 90 million people, suffer from health illiteracy. Says Kofman, “To give them more information may not get you the kind of outcome you’re looking for.”

According to Michael Fine, M.D., physician-in-chief of the Family and Community Medicine Department at Rhode Island Hospital and The Miriam Hospital, the outcome of HSAs may not be reduced utilization, but rather redirected utilization, as patients begin to discover the higher cost-effectiveness of primary care compared to specialized care. Fine describes himself as a “long-time health activist and an advocate for health care reform,” established the Hillside Access Alliance, which helps provide primary care to uninsured patients, and led an effort to create The Scituate Health plan, a locally controlled population-based health care program in Rhode Island which draws on the idea of patient savings accounts. While he says there is no data yet to support this theory, Fine believes HSAs will result in patients using their primary care physicians first and being much more judicious about their use of specialists and expensive diagnostic tests.

“If you have to choose between seeing five specialists at $150 each and seeing a primary care physician who looks at your rash, thinks about your back pain, suggests a treatment for insomnia, as well as one for a post-nasal drip, and charges [anywhere from $10 to $75], and it’s your money, which path would you choose?”

Physician income can be expected to shift over time, as well, from the specialty sector to the primary care sector, predicts Fine. He offers two reasons for this redirection of income: 1) a volume of services shift, moving many more services into the primary care arena and away from specialists, and (2) a specialty price deflation phenomena, where specialists have to compete more aggressively for those patients who are spending their own money and practicing comparison shopping.

Access to Care

HSA proponents argue that, in addition to encouraging more responsible use of health care, the low-premium plans will offer a new insurance option that will expand the number of Americans with coverage. According to the National Coalition on Healthcare, 27 million workers were uninsured in 2003 because not all businesses offer health benefits, not all workers qualify for coverage and many employees cannot afford their share of the health insurance premium. The American Medical Association (AMA) has said that it is encouraged that HSAs will possibly “cut the ranks of the uninsured.” But critics are quick to disagree.

“Very unlikely,” says Sherry Glied, Ph.D., professor and chair of the Department of Health Policy at Columbia University. “It’s not clear that uninsured people have the capacity to save the kind of money that would make HSAs a meaningful alternative for them. There are very few uninsured people for whom this would be a desirable thing.”

In addition, says Glied, while HSAs have been marketed as a way to save money on a tax-free basis, more than one-half of uninsured people have no federal income tax liability and therefore would not benefit from the tax incentives of these plans. An April 2005 report co-authored by Glied (“The Effect of Health Savings Accounts on Health Insurance Coverage,” The Commonwealth Fund), estimates that fewer than one million of the nation’s 45 million uninsured are likely to get new health coverage as a result of HSAs paired with high-deductible health plans. The report also suggests that HSAs might eventually result in a destabilization of the small-group health insurance market as healthy, high-income employees abandon their job-based coverage for HSAs.

Fine acknowledges that the impact of HSAs on the uninsured is difficult to predict. However, he suggests that a consumer-driven movement may have the long-term positive effect of making specialized health services more accessible to those with financial constraints. If specialty service and imaging utilization goes down due to more informed patient decision-making, says Fine, the result may be competitive pricing, greater transparency, and a reduction in overall costs. “Services that are presently unaffordable by the uninsured will become affordable.”

Patient-Physician-Insurer Relationship

The AMA has suggested that HSAs might reduce the role of managed care organizations and other third party payers, thus enhancing the physician-patient relationship. In fact, studies have shown that restrictions that require patients to obtain authorization for specialty care referrals were associated with a low patient-practitioner relationship rating. But, as critics point out, HSAs have not completely loosened these restrictions and may actually put more strain on all of the parties involved by increasing administrative burdens.

“Physicians have largely gotten out of the business of billing patients directly for services, and they will have to go back into that business,” says Glied. “That is traditionally a very costly practice for them.”

Glied adds that after the deductible is reached, the insurance company will continue to make “medically necessary” coverage decisions. “Physicians are not off the hook completely,” says Glied. “They will still have to deal with insurers, who aren’t completely leaving the scene.”

According to Glied, the impact of HSAs on the patient-physician relationship will depend on a number of factors: how stringently the insurance companies will continue to regulate their business in terms of what they will and will not reimburse, how patients respond to the increased cost-sharing, and how much more likely they are to listen to their physician than to their insurance company when it’s their own money being spent.

“I actually think it will make things worse,” says Kofman, who predicts that physicians will be stuck with bills that patients can’t afford. According to Kofman, while there’s no strong data yet showing how widespread the problem is becoming, she is learning about it first-hand from doctors. “I’m already hearing anecdotal evidence that physicians, especially primary care physicians, are having problems recovering annual deductibles because they don’t know what the deductible is at the time of care. It’s only after the bill comes through that they find out the patients may not be able to afford to pay.”

According to Kofman, the only patients who will be impacted positively will be those with unlimited financial resources who can pay out of pocket if they choose to do so. “But most of us aren’t in that position, and we rely on health plans to pay for our medical needs,” she says. “All of a sudden, there’s a lot of cost-shifting and a higher financial burden on the patient, and many patients will just not be able to afford it. It’s not a matter of taking your checkbook and writing a check; it just doesnwork that way.”

Recognizing these concerns, the AMA Council on Medical Service, in a report to be presented to the AMA House of Delegates this month, has made a number of policy recommendations to alleviate the administrative hassles for physicians and their practices, including policies that would “educate physicians about health plan practices that may impact physician billing and collection of payment from patients with HSAs” and “oppose health plan requirements that interfere with the ability of physicians to collect out-of-pocket payment from patients at point-of-service.” The Council also proposes a policy that would offer patients enrolled in CDHP plans cash discounts for immediate payment.

As physician practices become more sophisticated about collection procedures, predicts Fine, the problems associated with billing patients directly may not completely disappear, but they will be far easier to deal with than those created by insurance companies.

“Insurers, without meaning to, have made the billing process so cumbersome and chaotic that most physician practices, if given the choice, would prefer to directly bill their patients, with whom they have a regular relationship.”

Fine adds that many of the problems that exist among patients and physicians stem from the fact that, until now, patients have had little control over the financial decisions around their own care. “Involving the patient in the purchasing decisions could improve the dialogue between physician and patient by making it more transparent,” says Fine. “People will actually have to talk about cost. The physician will have to look the patient in the eye and say, ‘This is what I’m going to charge you,’ and the patient has to think about whether that’s worth it. From that perspective, I think there’s a huge potential advantage.”

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