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Hearing of the Senate Special Committee on Aging - Health Savings Accounts and the New Medicare Law: The Face of Health Care's Future?

Location: Washington, DC

Federal News Service









SEN. LARRY CRAIG (R-ID): Good afternoon, everyone. The Special Committee on Aging of the United States Senate is convened. Rarely I convene one of these hearings with such pleasure. I say that because last fall, as part of the comprehensive new Medicare legislation, Congress enacted into law what I believe to be one of the most innovative reforms to American healthcare in at least a generation.

I am speaking, of course, of health savings accounts. Consumer choice in healthcare is a cause I have been working on nearly all of my years in the United States Congress. And it is deeply gratifying to see it come to fruition in such a dramatic way. To a great degree than ever before, the new health savings accounts will permit individuals to build significant tax free healthcare savings for use in meeting their family's healthcare needs, including long term care.

Together with high deductible insurance for very high expenses and the HSAs help put control of healthcare where it belongs in the hand of the individual citizen. As we will hear this afternoon, the marketplace is greeting the new health insurance or health savings accounts with substantial enthusiasm. Sales of individual and small group health savings accounts has been quite brisk with some companies reporting sales of more than 1,000 health savings accounts in the first week alone of offering. And that's not even counting roll out of health savings accounts in the ever bigger large group markets, which is expected to get underway this summer. Meanwhile, nearly three-quarters of the employees now say they are likely to offer-their employers say they are likely to offer HSAs for their employees by '06.

In the midst of all of this the Department of the Treasury, led by Secretary John Snow, has been moving aggressively to smooth the way toward full health savings account implementation as soon as possible. The secretary, whom we're honored to have with us today, deserves great credit for wielding his regulatory authority with such speed and effectiveness. Health savings accounts offer a meaningful opportunity to give greater control of healthcare to consumers themselves and to begin to move away from the increasingly bureaucratic nature of healthcare today.

Putting people in charge of their own money and their own healthcare promises to realign incentives to better promote both cost savings and quality. The arrival of health savings accounts also offers needed relief to struggling small employers, many such employers today face the agonizing choice paying for traditional insurance they can no longer afford, and dropping healthcare coverage altogether. HSAs offer a promising lifeline to these companies and their workers.

And finally, HSAs in my opinion hold special advantages for older workers and retirees, many of whom face growing healthcare coverage needs as they approach Medicare age. For example, the HSA law especially permits older workers above 55 to make supplemental catch- up contributions into their HSAs as they approach retirement. Health savings accounts have real promise as a tool to transform the way America relates to healthcare. Much work lies ahead, but I believe we are off to a very good start, and I look forward to the testimony of our panelists this afternoon.


SEN. CRAIG: Well, Mr. Secretary, thank you.

There's no question that what we're doing is innovative, it is different and obviously, my friend and colleague is reacting to that probably because it is new and yet to be determined. At the same time, it appears that the market is ripe for that, so let me ask a couple of questions of you in light of what some of the critics are saying. Critics of HSAs are fond of predicting that they might promote adverse selection, for example, by attracting predominantly healthier and wealthier employees, or enrollees, I should say. And yet the actual claims-based data that is available suggests really quite the opposite. Namely that consumers choice approaches like HSAs actually show virtually no evidence of adverse selection. What is the Treasury's assessment of this issue and in your regulations, are you considering that possible action in the market?

MR. SNOW: Mr. Chairman, we have looked at that contention that the HSAs would lead to adverse selection and have found no evidence to suggest that that is the case or would be the case. The federal employees healthcare plan has available to it, as you know, a high deductible provision. High deductibles have been made available and there is a test case of whether or not adverse selection would occur, and whether just the young and the healthy would opt for it, and that has not been the case. No, I think the HSA with the high deductible is a new option that will be used by people in all income classes and people of diverse health status.

SEN. CRAIG: We will hear from many I think probably, Mr. Secretary, on the second panel say that HSAs offer a real lifeline to employers struggling to continue providing insurance to their employees, as well as to the currently uninsured who are looking for affordable coverage. What do you believe will be the effect of the new HSAs on both the employer health market and on a number of the uninsured that many of us are concerned about in our states?

MR. SNOW: I think it's going to reduce the number of uninsured. And I think it will help small business employers continue coverage or extend coverage. When the president was out in Minnesota a month or so ago on the HSAs, he met with somebody named Dan Schmidt, who was owner of the Mercury Office Supply company in Minnesota. A company that had 12 or 13 employees, it's a small office supply retailer, and their premiums in '04 were due to increase to $36,000.

Mr. Schmidt became aware of the opportunities of the HSAs and he looked into it. He was confronted with the possibility, the real possibility, of dropping his healthcare coverage because he couldn't afford the $36,000. By opting for the HSA, and this is a real-life story, the premiums came down to $24,000. He saved that roughly $12,000 and he used it to fund the employees' HSA with a no co-pay plan. So there is a real-life story of how HSAs coupled with the high deductibles can help a small business person reduce the costs of healthcare and take the savings on the premiums and fund the HSA accounts themselves. I think that's a story that we're going to see told over and over and over again in the year-in the months ahead.

SEN. CRAIG: Well, I thank you.


SEN. CRAIG: Well, obviously the other point of view has been clearly heard, and John's well spoken on this issue. I would comment that it is interesting that we make the assumption that-and John used the example of his son. I have a son also who is struggling at this moment with his wife to have adequate healthcare coverage. One of their employers just changed their policy because of the cost and costed them out of the market of it, and so one of them got dropped from that policy. And they're in the market now, searching for something they can afford.

They're both working, they both have excellent jobs, but their employer tipped them upside down on insurance because the employer can no longer afford to offer what they had been offering. And whether this will be an option for them or not, it certainly is an opportunity.

And I've walked them through it as an example, once these vehicles become available they're going to take a look at it, see whether it fits them or not.

Let me ask you this, John, although it is not a focus of today's hearing and it's a separate issue from an HSA in general, I'm interested in the administration's current proposal to go a step further to create tax deductibles for premiums-a premium consumers pay on high deductible plans they would purchase in conjunction, say, with an HSA. It-in what way do you believe this proposal will benefit healthcare consumer and improve healthcare access?

MR. SNOW: Anything that encourages the use of the high deductible health plans is a move in the right direction. The-a larger market, an expanded market for high deductible health plans will bring more people under healthcare coverage, under insurance coverage. And it will create the right incentives for people to think hard about the choices they confront in purchasing healthcare services. What we really need to do I think here, Senator, Mr. Chairman, is to get the power of the-empower the American healthcare recipients to be good consumers. And the more we do that, I'm confident we'll see the healthcare system responding with higher quality and lower costs. And that's the objective here, is to get better quality and lower costs, and more efficient healthcare delivery system and I think it's perfectly appropriate, in fact, it's something to be encouraged here, and that's precisely what the deductibility provision that the president sent to the Congress and this year's budget would do. It would lower the cost by having the deduction on the premium of having these high deductible policies in place. Something very much to be encouraged.

SEN. CRAIG: Well, Mr. Secretary, again we thank you very much for your presence here today and the work that's going on in Treasury right now to move this concept to the marketplace and then both John and I will watch it, I'm sure, very, very closely over the coming months and years to see where it takes us in healthcare and whether it offers what some of us believe it can or whether it doesn't offer that which is being projected. Again, we thank you.

MR. SNOW: Thank you very much, thank you.

SEN. CRAIG: Now let me invite our second panel to the table. I think this group will represent a range of different perspectives and constituencies on healthcare savings accounts.

Our first witness of the second panel today will be John Goodman, president of the National Center for Policy Analysis. Perhaps more than any other individual, Dr. Goodman has devoted much of his professional life to pursuing consumer choice in healthcare. I think it's no surprise that many have called him the father of medical savings accounts, so we're pleased you were able to be with us today.

Our second panelist is Ron Williams, the president of Aetna. Aetna has been a market leader in consumer directed healthcare, both as an insurer offering consumer choice products and as an employer offering such products to its own employees. Next we have Kate Sullivan, executive director of health policy at the U.S. Chamber of Commerce. She is a recognized expert on consumer choice in healthcare and has been among the leaders guiding the Chamber's support for health savings accounts.

Next we have Edward-Ed Langston is a trustee of the American Medical Association with a long standing service to that organization, is also a practicing family physician in Lafayette, Indiana. Finally, I would-let's see, well, we'll go by order of what we have at the table, but anyway, excuse me, Bob. Robert Greenstein is the founder and executive director of the Center on Budget and Policy Priorities, has been invited today at the invitation of our minority, will bring I think the critical voice to the health savings account issue. So we're pleased all of you can be with us today.


SEN. CRAIG: Doctor, thank you very much.

Obviously one of the concerns expressed by critics of this, and you, Mr. Greenstein, have expressed that and it's fair and objective of you to suggest that your expression comes from studies that are in themselves projections and we appreciate that, because there is no evidence. It is simply a projection and that is a concept of adverse selection and the attracting of only the healthier and the wealthier. And yet the actual claim-based data indicates the consumer choice options like HSAs actually show no evidence yet of meaningful adverse selection.

What is each of your assessments of that particular question? And, of course, we'll allow you join in on that, Mr. Greenstein.

Mr. Goodman?

MR. GOODMAN: Well let me just briefly describe what we did for our own employees. We created a $1,500 deductible and we put $1,000 in a medical savings account for each employee and their families. So the person who is healthy and never has a single medical expense at the end of the year had $1,000 in his account. Since this was taxed, they got to take the money home at Christmas time. So yes, the healthy person gets his $1,000.

But the person who's really sick and has lots of medical expenses, goes through the $1,000, pays $500 out of pocket and then he sees the doctor, well the plan pays for everything above that.

But before we had the medical savings account plan, we had a conventional plan with a $500 deductible, a 20 percent co-payment and when the sick person was under that plan, it was a woman in this case, she was out $1,500. So, the sick person saved $1,000 in medical expenses because the exposure was limited under our plan. And there was nothing unusual about our plan, this is the way over the last seven years that most medical savings account plans are structured. They really do benefit the high cost employee, because they limit the out-of-pocket exposure even though they don't build up anything in the account.

SEN. CRAIG: Mr. Williams?

MR. WILLIAMS: Yes. I would say that our experience is in working with very large employers who really often self-insure and therefore assume the insurance risks themselves, who are interested in having a productive and effective workforce, and who see this as one way to get the workforce thinking about the cost of healthcare and discussing different options with their physicians for more cost effective healthcare treatment. I would say our experience is that we do not see adverse selection, we think that consumers make choices for different products based on lots of considerations, their health status may be one but there are lots of others and we don't see any data today that would suggest at adverse selection.

We think that there is a larger percentage of healthcare costs that is discretionary, that many individuals believe. This is not the individual who has a cardiac event or who has a significant health episode. We're talking about the person who has a fairly minor situation and can have a choice, what, do they go to their physician and get the care they need, do they go to an urgent care center and get the care they need, or do they go to an emergency room and get the care they need? And in those circumstances there are very different cost structures and implications for the underlying increase in healthcare costs and therefore for the efficiency of American business.

SEN. CRAIG: Mr. Greenstein?

MR. GREENSTEIN: In fact there really are virtually no claims- based data on wide spread use of something like HSAs. There are some limited data from HRAs but the differences are so significant that I don't think you can simply apply the HRA data. As I noted, because the HRAs do not allow tax deductible deposits by the employee into them and do not provide a way to build up retirement savings that can then be withdrawn in retirement for non-healthcare costs with tax advantages, the tax sheltering aspects of HRAs pale compared to HSAs and it's in significant part this very generous tax shelter and the incentive it provides for healthier, more affluent people to go into HSAs that drives the adverse selection concerns.

Now, in 1996 Congress set up an MSA demonstration project and part of its purpose, a central part of its purpose was to determine whether there are or are not these adverse selection aspects that result from these kinds of accounts. Unfortunately what happened was that the use of MSAs was so limited under that demonstration that the GAO concluded that one couldn't tell. The only evidence and it's-I will readily acknowledge this is very limited, the only thing we have is that a survey of insurers that the GAO contracted for that insurers said that they expected enrollees to be healthier and wealthier and were targeting their promotions accordingly. But the bottom line is we didn't get much out of-we didn't get anything significant --

SEN. CRAIG: Well we did get one thing, didn't we?

MR. GREENSTEIN: Out of that demonstration. Let me just quickly finish the thought --

SEN. CRAIG: Okay, go ahead.

MR. GREENSTEIN: The bottom line is what we really should have done last fall in my view is we should have said, what are the problems with that demonstration project that led to so few people enrolling that we didn't get enough observations to determine what effect on adverse selection these accounts would have had? And we should have done a demonstration project that would have had larger enrollment and given us the answer. Instead we charged ahead and went whole hog. And I think it is worthy of note that while we did not have significant claims-based data to tell us which side of this debate is right that the leading studies I'm aware of, leading projection studies I'm aware of, done by institutions that have no ideological axe to grind pretty much come down on the side that the risks of adverse selection are high.

SEN. CRAIG: Fine. I was only going to make the observation that is it not true that in that demonstration period the largest group that acquired them were the uninsured?


SEN. CRAIG: Predominantly the acquirers of medical savings accounts?

MR. GREENSTEIN: We don't even know that. If we look --

SEN. CRAIG: But some insurance companies tell us that, I don't know whether they're accurate or not.

MR. GREENSTEIN: There's IRS data on this and it's inconsistent. In one year if you use those data, 28 percent of the enrollees were uninsured-previously uninsured, another year 40 percent and another year 73 percent. The differences were so substantial that those data have to be regarded as unreliable. We really don't know.

SEN. CRAIG: All right, we'll leave it at that.

We'll go to you, Kate, to respond to the similar question of adverse selection.

MS. SULLIVAN: I would just note that, I mean, already we have a fifth of employers reporting that they already offer a plan that meets at this deductible threshold. And they're not doing this as an HMO, it's often an HMO alternative. Perhaps if it's a small business it might be the only plan they can find and afford. But those-when those higher deductibles come with a much greater flexibility, you're not restricted to a particular network of physicians with no coverage outside and that has a lot of appeal to employees who have a medical condition, perhaps a chronic condition, they want that flexibility without getting referrals. Perhaps maintaining a relationship with a physician they've had for many years, and so we know that that is-has a lot of appeal to people who are sick as well.

And I would encourage as we go down this road and look, here we are, supposing based on projection or another, let's look and see who's really been electing these plans all along. They are-they tend to be high utilizers. And as well as people who like the additional savings, like, yes, I have to pay more out of my own pocket toward that deductible, but I don't have to pay as much per paycheck to be in that plan to start with.

SEN. CRAIG: Thank you.

Doctor, do you wish to comment on this before I turn to Senator Breaux?

DR. LANGSTON: Well just briefly an observation, because I see patients in the office every day and my experience has been that, frankly, that they are cost sensitive but they're also very healthcare sensitive. And they make their choices based on their needs and the situation in which they find themselves. And we've seen the data from the IRS and it does range from 28 percent to a high of 70 percent. And so we would say that's a significant amount of the uninsured who then did purchase some accounts within MSA and with this more favorable approach.

As you know, in public policy we've used tax incentives to encourage people to address issues that any way from a practicing physician's perspective that we can engage people into our system to provide the healthcare they need, and do that from a preventative perspective that we would certainly support. And that we think this is a step in the right direction and so we encourage that you explore this and consider the expansion of it, Mr. Chair.

SEN. CRAIG: Thank you.


SEN. CRAIG: Thank you, John. I want to put this on the record because my colleague here has suggested that these kinds of tax deductions are extraordinary and somewhat unique --

SEN. BREAUX: Unprecedented.

SEN. CRAIG: Well, let me then suggest this. The Joint Tax-Committee on Taxation estimates that, in FY '03, the federal revenue loss attributed to the exclusion for employer contributions to health insurance, which we'd been doing since World War II cost the U.S. Treasury $75 billion. So what we've been doing-Mr. Goodman speaks to it, third party-is historic.

We've been doing it for a long time. We've just been doing it one way instead of this way. Now we're doing it for everybody, the small employer, the large employer. I find that not unique. I find that equal. That's a different perspective than that reflected by John.

But let's face the fact. There are $75 billion worth of taxes out there that aren't being collected right now. Why? Because we believe it is good for the employer to provide for the employee health insurance and we've done that as a norm since World War II. So, you know, different perspectives, different points of view, that I think are a concern.

Kate, I think the thing that concerns me-and John spoke to it a bit-and that's the commitment of the employer. My frustration in watching this escalating healthcare cost over the years and employers agonize because of the affordability of it and the cutting back and the reshaping of the plan and ejecting the spouse out, or ejecting the spouse and family out of it or an employee, for example, suggesting that they'd really like to move to a new opportunity and a new job but they can't afford to because the healthcare there is less than the one they have. And so they are locked into a healthcare environment or locked into a job because of the healthcare environment as a benefit. I think all of us recognize the phenomenal value of healthcare through the employer to the employee as a tremendous benefit and an incentive.

You and others on the panel argue strongly that HSAs offer significant help to the employers struggling to continue providing insurance to their employees as well as to the currently uninsured. What exactly do you believe will be the effect of the new HSA on the employer health market and on the number of the uninsured as we look at this?

MS. SULLIVAN: In the marketplace, we've already seen this this year for small businesses. As you have new carriers come into states where they have not been because they are carriers that specialize in these types of plan. There's been a lot of consolidation and a lot of regulation by the states. So pretty much, they've been down to one or two dominant insurance carriers in any given market. Now there's a new guy coming in, saying, We specialize in this product. Take a look at it. And then, guess what happens? They are a long-time carrier that has a more traditional PPO or HMO. There's been one such company. Hey, we can make this available to you also.

Then, all of a sudden, you've got some competition for dollars. We have not seen that in years. Health plans also come with lower premium dollars, lower costs and some employers are finding that the savings is so much that they can then help fund that deductible-encouraging those younger employers or employees who may not have the money to get into it and providing an incentive for older employees who have health conditions to also make this option because it offers more flexibility.

I think that that competition is very welcome and these larger employers, as they begin planning for 2005 and 2006, are recognizing also, let's also look at some of the data and what happens with consumer behavior in terms of helping make this more affordable long- run.

SEN. CRAIG: Doctor, I think all of our frustration over time has been that the-with the third party payment presence that somehow the patient client is kind of taken out of the picture in part and healthcare costs are negotiated. Your reaction to how doctors will look at this and the treatment of choices in relation to the patient, if that patient is there with an HSA, for example, and they are still spending their dollars and are not in the catastrophic environment.

DR. LANGSTON: I think one of the things that we're going to see there is behavior that you see now, for instance, when patients are engaged in some of the traditional plans that we have with regard to either deductibles or, say, costs of their medications. And I think they are much more knowledgeable and I think they ask the questions. For instance, is there an alternative that will do as adequate a job at a certain price because I have a contract that would support that?

So, as a clinician on a daily basis, I certainly try to accommodate the patient in making those decisions, if there are alternatives that make sense based on their contract. I'm a pharmacist as well as a physician and I use a lot of generic medication in my practice and I obviously use a lot of the pioneer drugs. But that's just one area where the patient, when informed, participate in the decision making. The other issue is that I see patients in my office on a daily basis that decisions are made on can we-are there some things that we can address because I'm a small businessman and I have to have a very high deductible to make this work. I bought catastrophic insurance. How can I address what my needs are?

And my experience over 25 years has been that every time my patient-and some would call them consumers-my patient has been informed about therapies and about cost, they are more engaged in their care and I think help make those decisions. It puts more stress on me as a physician. But quite frankly, it's made me a better doctor over the years. I now carry a PDA in one pocket and formulas in the other pocket so that, if a patient has specific requests based on their contract, I can say, All right, here's the way I can make this work for you and for the medication.

I teach in the school of pharmacy at Purdue and have PharmD residents who rotate with me on a monthly basis, six to eight months a year. And so the young people who frankly brought me into that environment and I use it on a daily basis.

If I leave my PDA at home, for instance, I am without a very reasonable opportunity to see what I can do because I can put costs in there, I can put choices but I also have the paper models in my other pocket. So, the patients are more informed. They participate and anything we can do to make that happen, frankly, I think the physicians of America will be supportive. It creates change. But, frankly, we've changed in the past. We'll change in the future.

SEN. CRAIG: Senator Breaux and I have been duelers over PDAs for a good long period of time. I think he has out-bested at the moment. He has a slightly newer model than mine and I find him more competitive. My last question and it pertains really to the more directly, if you will, at the subject of this committee, as it relates to long-term care. And we know that, in this proposal, that the new HSA program provides that funds in the HSA can be used, not just for regular medical expenses, but for long-term care. And that's something that we believe-I certainly believe, I don't think my colleague disagrees with me-the more older Americans we can get onto that system, the better they're going to be, the less impact they will have on their government as they age with that kind of ability.

To what extent do you believe this feature may help families ease the burden oftentimes of the long-term care costs? Reaction by anyone here. Doctor?

DR. LANGSTON: If I may speak to that briefly. Engaging the patient in whatever model is chosen-and this is the first step in this direction-to be involved in healthcare decisions is terribly important. We have a mentality, I think, in the United States that if I can take a pill or do something like that, I can certainly correct whatever my problem is. Well, one of the interesting things when you start making decisions and spending some of your healthcare dollars, we might in fact take a hard look at some of our lifestyle issues.

Let's take cardiovascular disease, the biggest killer in the United States. The five major variables there are weight and diabetes and hypertension and smoking and cholesterol, all modifiable kinds of issues that we don't have to spend extra money on. If we can engage our patients into making that choice, and many of us believe that finding a model that has them involved in spending their own money will do that, in the long run, we're going to be better off. We think this is a step in that direction and are supportive of that. And those are big issues for us.

MR. WILLIAMS: Senator, in response to long-term care, I think it's a very important issue. Most Americans do not have sufficient long-term care coverage. Most Americans are uninformed about the nature of how their long-term care needs will be met. Many are confused about the nature of government programs for this. I think it is a significant accomplishment to have long-term premiums included in this and we would really advocate direct inclusion of qualified long- term care as a permitted benefit in cafeteria plans.

I think it's a huge issue and I believe that this notion of letting retirees catch up their contributions into the health savings account funds would also be an important addition. There are some acceleration features. But if you take someone today who's retiring by 2009, 2010 and you think about the $80,000 of care that may be unfunded as a result of their inability to have thought about and provide for this earlier, there's a huge opportunity to think about giving retirees the opportunity to catch up.

We also see many people who are over 65, who are actively at work and who no longer would be able to contribute to their health savings account. What we're seeing in our work is that about 50 percent of people in these type plans are rolling over funds from year to year and this is the really big, big idea. Consumers don't really differentiate as much between HRAs and HSAs as one might do from tax policy, particularly those people who see that as their money and think about managing it in a prudent way, consistent with their healthcare needs but really thinking about their long-term needs as well.

SEN. CRAIG: Yes, Mr. Greenstein.

MR. GREENSTEIN: Long-term care is clearly a very important issue and an unmet need. But if we try to do it through HSAs, the people who are most likely, over the course of time, to build up large balances in their HSAs as they head toward their retirement years are going to be higher income people who can afford to put a lot of money in the HSAs and to let it build up and not dip into it that much for other kinds of healthcare costs. But they are not the people who are most in need of help in affording long-term care or long-term care insurance.

I wouldn't rule out a tax-based approach to helping people afford long-term care insurance although we'd also need to deal with the fact that most employers don't offer long-term care insurance and policies are basically available on the unregulated individual market. And there's a lot of cherry picking and variations based on people's health status. But if we wanted to do a tax-based approach, it would be much better to look at a refundable tax credit tied to long-term care than to try to do it through these kinds of accounts.

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