HSAs, A Model of Healthcare (Part I) - HealthDecisions.org, Opinion, Tom Cochrane

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There are clear and compelling reasons to be excited about Health Savings Accounts (HSAs). Results from the period ranging from the inception of the HSAs in January 2004 through March 2005 lend credibility to this optimism:

• 1,031,000 individual accounts were established during this 16 month period.
  
• 37% of the account holders in the individual market had previously been uninsured.
  
• 27% of the qualified high deductible plans (HDHP) purchased in the small group market were by employers who had not previously offered coverage.
  HSA-based plans have proven affordable, with the vast majority of purchasers paying less than $200 per person per month.
  
• Market growth projections are off the charts, with estimates of compound annual growth rates between 2005 and 2010 in excess of 50%.
  
• There has been a massive amount of investment and activity among health insurers, financial services companies and information technology providers who are focused on creating innovative products and services for the consumer directed health care market.

At the same time, however, critics point to the possibilities of adverse selection, premium death spirals and rising personal bankruptcies attributable to mounting health care bills. Certain authors depict dire scenarios in which flawed health care policies push individuals to the “tipping point” of removing their own teeth rather than visiting a dentist.

So what to make of the HSA in light of this mix of information and opinions—is it a progressive juggernaut or a step to the dark side? Is there a way to cut through the noise and rationally, objectively measure value based on information that is readily available?

What to Measure

It is important to establish from the start what, exactly, will be measured and what will be accomplished. To be clear, we are talking about the financing rather than the delivery of health care products and services. In other words, we will not attempt to measure the relative quality of: health plans, providers, levels of customer service, health outcomes, or various health care products and services

HSAs simply represent an alternative form of health care funding. Health care is an enormous industry with a vast number of issues that extend beyond the financing decision. The objective here is to describe a methodology that is useful in quantifying the relative value of various forms of health care funding.

HSAs are Truly Different

That being said, HSAs certainly throw a new wrinkle into the world of health care finance. Some of the unique features of HSAs include:

• HSAs involve the combination of a highly (triple) tax advantaged personal savings account with a high deductible health insurance plan.
  
• HSAs involve the use of savings rather than insurance to fund the consumption of discretionary health care products and services.
  
• The HSA is a form of private property that is portable between the various employment settings the account owner encounters during his or her lifetime.
  
• Unused funds in an HSA accrue over time and can be invested by the account owner.
  

Essentially, the HSA is a lifelong health care funding vehicle coupled with a catastrophic insurance policy that more than likely renews on an annual basis.

Different Analytical Methods are Required

Consider, for example, the challenge of comparing a fully-funded, low deductible group health plan (a “conventional plan”) with an HDHP/HSA combination (the “HSA” plan). In most instances, the conventional plan will be more expensive than the HSA plan. It seems obvious, though, that simply comparing gross premium costs does not provide nearly enough information to make a reasonable decision regarding the relative value of the two plans.

Many issues arise when comparing a conventional plan to an HSA plan:

• It is almost certain that the HSA plan will result in employee health care expenses that are not covered by insurance. What might these levels of spending look like, and how would one utilize this information to make a reasonable decision about the relative value of various health care funding methods?
  
• On the other hand, HSAs also have the potential to create value for employees since unused balances accrue over time and the accounts are portable. What might these future balances look like on an individual and plan-wide basis, and how would one incorporate this information into the decision making process?
  
• How does one create an equitable and reasonable employee premium contribution formula for a high deductible plan?
  
• How does one structure an employer HSA contribution scheme in a manner that makes the plan attractive while also financially sustainable?
  

Taking all of the above variables into consideration, are there simple and standard measures of value that can be used to effectively compare conventional plans and HSA plans?

A New Approach

There is a clear need for analytical techniques that make the potential benefits of HSA-based plans demonstrable to everyone involved.

In order to address this need, HealthDecisions.org has partnered with Cordova Advisors to provide site visitors with free access to a web-based application that is designed specifically for the analysis of HSA-based plans.

This article and the series that will follow provide a detailed discussion of the HSA Simulator™ application and its underlying methodology. Actual case studies will be examined. The objective of the series of articles is to introduce a methodology and technology that effectively compares various forms of health care financing over time. My goal is to increase awareness and understanding for those who are actively involved in assessing the merits of these new and innovative plans -- including but not limited to employers, insurance brokers, insurance agents, financial planners, and individual consumers.

Thomas Cochrane, CFA, is the Founder of Cordova Advisors, a company that has developed a patent-pending dynamic financial model that simulates the HSA funding approach. Cordova Advisors’ mission is to provide independent, objective advisory services that help employers and their advisors understand and make informed decisions regarding Health Savings Accounts (HSAs).