Health Savings Accounts: The News Keeps Getting Better

There is good news in the world of health insurance. While premiums for traditional insurance continue to rise, premiums for one kind of insurance are decreasing. That option, the Health Savings Account, gives consumers real choice, offering a variety of plans to fit a wide range of needs and budgets.

HSAs were created as part of the Medicare Modernization Act of 2003 and offer consumers new, more affordable options in health insurance. HSAs allow their owners to save money tax-free, and their employers to contribute to those savings tax-free, when they purchase a qualified high-deductible health insurance plan. These savings, in turn, can be used to cover out-of-pocket health care expenses. Qualified high-deductible plans must have deductibles between $1,000 and $2,650 for individuals and between $2,000 and $5,250 for families, bringing maximum total out-of-pocket expenses (including deductibles, co-pays, and co-insurance) to $5,100 for individuals and $10,200 for families.[1]

HSAs and Premiums

Average premiums for employer-sponsored health insurance have been rising steadily since 1996. They rose 11.2 percent in 2004, a slight decrease from 2003's 13.9 percent increase but still significantly above inflation.[2] While the data available on HSAs is limited, as they have been available for less than 2 years, the early results are promising.

According to sales data from ehealthinsurance.com, the average premium for an individual HSA-qualified high-deductible plan dropped 19 percent in the first 6 months of 2005 relative to the 2004 price, from $137.94 to $111.57 per month.[3] Total savings from this drop, on average, amount to $316.44 per year.

Those aged 45 to 64 and purchasing HSAs saw the most dramatic price reductions, with average monthly premiums falling from $225.05 in 2004 to $187.07 in the first six months of 2005. That works out to annual average savings of $455.76.[4]

One of the most appealing aspects of high-deductible health plans is that purchasers can choose what level of deductible they wish to carry, balancing the chance of higher-than-expected health care expenses against savings from lower premiums. The data show that consumers are taking full advantage of this choice. Among the HSA-eligible high-deductible plans sold by ehealthinsurance.com in the first half of 2005, 14.9 percent cost less than $50 or less, 47.7 percent cost $51 to $100 per month, and 30.1 percent cost $101 to $200 per month.[5]

These figures contrast sharply with premiums for other types of health insurance. A survey of employer-provided health insurance premiums shows these plans to be significantly more expensive than HSA-coupled high-deductible plans. In 2004, the average monthly premium for an individual with employer provided traditional, HMO, PPO, and POS insurance plans totaled $308 per month-almost $200 more than the latest average premium for HSA-coupled plans.[6]

HSA plans are also less expensive than traditional insurance purchased in the individual market. People enter the individual market for many reasons-it may be, for example, because they cannot get health insurance through their workplace, do not think the insurance offered by their employer meets their needs, or are self-employed. According to a recent study, while traditional insurance in the individual market, with an average premium of $3,368 per year[7], costs less than employer-provided plans, it is still more expensive than HSA-eligible plans. The good news in this data is consumers have more options than they may realize in the individual market.

The premium difference between HSA plans and traditional plans holds steady as individuals age. For those between 45 and 64 and purchasing an HSA-eligible plan, annual premiums ($2,244, on average) are roughly 3 times what an individual between 18 and 24 would pay ($786).[8] For those between 45 and 64 and purchasing a traditional plan, annual premiums ($3,470) are roughly 3 times what an individual between 18 and 24 would pay ($1,170).[9]

These differences in the costs of traditional insurance plans versus HSA-eligible plans add up to real consumer choice. HSA-eligible plans are less expensive than traditional plans, but the consumer can decide whether lower premiums are worth higher out-of-pocket costs. Some consumers may decide that the ability to save for out-of-pocket costs tax-free and roll over unspent monies from year to year is the right choice for them-with HSAs, they have that choice.  

Out-of-Pocket Choice

By definition, high-deductible health insurance plans come with higher out-of-pocket costs than traditional insurance, and this is why their premiums are significantly lower than traditional health insurance premiums. With HSAs, consumers can choose the level of maximum out-of-pocket expense that they find comfortable and can afford. Meanwhile, individuals and their employers can set aside money in an HSA, tax-free, to cover some or all of these out-of-pocket costs. Of the plans sold by ehealthinsurance.com to individuals in the first half of 2005, 51.1 percent limited out-of-pocket expenses to $5,100 (the maximum allowed by law), 32 percent limited out-of-pocket expenses to between $2,500 and $5,099, and 16.8 percent limited out-of-pocket expenses to between $1,000 (the minimum to qualify for an HSA by law) and $2,499.[10]

Similar diversity was also evident among family plans. Nearly one-third of family plans sold, 31.6 percent, came with out-of-pocket maximums of $10,000 or more ($10,200 is the maximum allowed by law), while 41.6 percent limited out-of-pocket expenses to between $5,000 and $9,999, and 19 percent to between $2,500 and $4,999.[11]

HSAs and the Uninsured

With HSA-eligible plans costing significantly less than traditional insurance plans, many uninsured individuals are getting into HSAs. Just under half of ehealthinsurance.com's HSA customers in the first half of 2005 with incomes below $15,000 were uninsured for at least 6 months.[12] For those with incomes between $15,001 and $35,000, 43.4 percent were previously uninsured.[13]

Even some higher-income individuals who were previously uninsured purchased HSA-eligible health plans. Over 20 percent of ehealthinsurance.com's customers earning over $100,000 had been uninsured for at least the previous 6 months.[14]

Conclusion

The evidence that Health Savings Accounts can make health insurance more affordable, give consumers greater choice and flexibility, and thereby reduce the number of uninsured is mounting. While the critics have been mostly wrong in their predictions-for example, that HSAs would serve only the healthy, wealthy, and young-HSA proponents have seen the accounts' promise quickly fulfilled.

Health Savings Accounts are not the silver bullet of health policy but a tool with the potential to make a positive difference in Americans' lives. Broader reform of the tax treatment of health insurance and health care is essential to make markets work better while expanding access and choice of insurance coverage options. Still, as more and more people choose HSAs, premiums will become even more competitive, perhaps even falling further as their market share grows. While not a panacea, health savings accounts are a valuable part of the continuing effort to bring affordable health insurance to more Americans.

Derek Hunter is a Research Associate in the Center for Health Policy Studies at The Heritage Foundation.