Health Savings Accounts and the FEHBP: Perfect Together

Report Health Care Reform

Health Savings Accounts and the FEHBP: Perfect Together

September 21, 2004 5 min read
Senior Fellow
Moffit specializes in health care and entitlement programs, especially Medicare.

Some members of Congress want to deny federal workers new health benefits that are increasingly popular among workers in the private sector. But keeping Health Savings Accounts (HSAs) out of the Federal Employees Health Benefit Program (FEHBP) or unnecessarily encumbering them with restrictions would be to the detriment of federal employees. Congress should instead welcome the arrival of HSAs to the FEHBP as a natural fit.


Last week, Rep. James Moran (D-VA) offered an amendment to the Treasury and Transportation appropriations bill to block the Office of Personnel Management from offering federal workers in the Federal Employees Health Benefit Program a new type of insurance plan, the Health Savings Account.


The amendment failed.


Now Congressional opponents of HSAs are rallying behind a similar amendment from Eleanor Holmes Norton (D-DC). The Norton amendment would make HSA plans less attractive to federal workers by requiring anyone who enrolls in one to be locked into the plan for three years. This is a restriction that would not apply to any other type of health plan in the FEHBP. It is unprecedented.


HSAs combine a high-deductible, catastrophic policy with a tax-exempt savings account that can be used to pay medical expenses. HSAs "offer Americans a new coverage option for their health care needs," explains Heritage's Nina Owcharenko. "They give them a new choice in coverage design, greater control of their health care spending, and the ability to own their own health care plans." Many health policy analysts consider HSAs to be the first major step towards consumer-driven healthcare.


But some Members of Congress and their allies have a strong ideological interest in preserving and furthering centralized third-party control of health care decision-making. They are strongly opposed to HSAs in particular and want to deny federal workers the right to choose them in FEHBP.


Congressional opponents of HSAs claim that HSAs in the FEHBP would cause 'adverse selection.' They say that healthier and wealthier federal employees would gravitate to HSAs, leaving only poor and sick patients in the traditional comprehensive plans that FEHBP offers. The comprehensive plans, they say, would be stuck with only high-cost patients and have no choice but to raise premiums. This would, in turn, "squeeze the people who need health insurance coverage the most out of the market," as Rep. Moran put it in congressional debate. "The inclusion of these [HSAs] will jeopardize the quality and it will raise the cost, the FEHBP program [sic] will not be as successful as it has been in the past, and many people will suffer as a result," Moran concluded.


Slim Evidence

Congressional opponents present only slim evidence for this 'adverse selection' scenario. HSA opponents are fond of citing Ada County, Idaho, and Jersey City, New Jersey, both of which tried and rejected HSA-style plans. But as the Galen Institute's Greg Scandlen explains, these two localities had very different circumstances than those which prevail in the federal government (e.g., Ada County's health accounts were not even tax deductible). Ultimately, their rejection of HSA-style accounts "was mostly tied up in local politics rather than a reflection of actual experience," writes Scandlen.


Some opponents also cite the experience of Humana, a health insurer. But Humana's product was not like the Health Savings Accounts that Congress enacted. In fact, it was simply an 'allowance' that could be spent only on in-network services. More importantly, the funds in the "allowance" could not be rolled over from year to year.


The Facts

Meanwhile, the facts tell a very different story: HSAs are a boon to all health care consumers. Derek Hunter, for example, wrote in April about the quick take-up of HSAs, noting that, while costs vary, "the majority of enrollees (52.83 percent) pay between $51 and $100 a month," far less than critics had predicted. Over half of HSA purchasers in the same study earn under $50,000 per year.


The Galen Institute describes the experience of Logan Aluminum of Kentucky, a company that was quick to offer its employees HSAs. Logan actually cut its health care costs by 19 percent while helping its employees build up HSAs that can roll over from year to year and follow them if they switch employers. For all of this benefit, employee out-of-pocket expenses have held steady.


The Galen report also cites a study by the insurer Aetna that undermines HSAs opponents' claim that HSAs will somehow drive up the costs of the FEHB. According to the study, "companies that replaced their traditional health insurance with a consumer-directed plan saw their health costs fall by 11 percent." And the level of care offered actually increased: workers' use of preventive services increased by as much as 23 percent. How is this possible? Easy: consumers actually respond favorably to the incentives that HSAs offer.


Thus far, the real experience of HSAs cannot be reconciled with the 'adverse selection' argument of their congressional opponents. The fact is that a majority of the HSA enrollees thus far are over the age of 40. And even enrollees with a history of illness or expectation of high medical expenses can benefit from plans with savings accounts and solid catastrophic coverage. Sicker enrollees often dislike traditional managed care the most because they, even more than other patients, want greater control over their health care decisions.


HSAs offer such consumer choice. And tax deductible accounts that are rolled over from year to year can help patients save money, especially once their accounts are 'cushioned' after a year or two of contributions. Further, the chance to save $1,000 or more annually in an HSA is far more attractive to a low-income beneficiary than a wealthy beneficiary.


A Natural Fit

Allowing HSAs to be offered as alternatives to traditional managed care or preferred provider organizations in the FEHBP makes sense. Unlike conventional employer-based health insurance, the FEHBP offers a wide variety of real choice, more so than any other health plan arrangement. Moreover, the FEHBP is based on the free market principles of real consumer choice are genuine market competition. As Robert Moffit recently observed, FEHBP's superb record of cost control "reflects real conditions of supply and demand in a serious consumer-driven market." Adding HSAs would bolster the competition that drives the FEHBP, to the benefit of federal employees, who would have a new choice, and likely to the benefit of the FEHBP's bottom line. The FEHBP's experience proves that "consumer choice, competition, and light and reasonable regulation can deliver high quality health care and high levels of consumer satisfaction," concludes Moffit. HSAs are the next logical step.


Members of Congress should not deny federal workers these new health benefits that are rapidly becoming available to workers in the private sector.


Andrew Grossman is Senior Writer, and Robert Moffit is Director of the Center for Health Policy Studies, at The Heritage Foundation.


Robert Moffit

Senior Fellow