INTRODUCTION

A Health Savings Account (HSA) is a new form of health insurance that is designed to help individuals obtain affordable health care services while saving for retirement. President George W. Bush cited these personal accounts for health insurance purposes in his second inaugural address as a key component of his efforts to support an “ownership society” in the United States.

Instead of paying a health insurer thousands of dollars to pay for many (although not all) medically necessary services, an individual with an HSA (and/or his or her employer) would receive a large discount off the premium in exchange for accepting a very high deductible. However, the individual would also be able to establish a savings account out of which he or she could pay for all medical expenses not covered by the insurer. Amounts invested in the savings account would not be taxed if used to pay for medical expenses, and could be carried forward as a retirement account (in which case withdrawals would be taxed on a deferred basis in the same manner as 401(k) or IRA withdrawals).

Proponents of HSAs argue that individuals would be incentivized to manage their health care dollars wisely because they would be permitted to keep any amounts that need not be spent on medical services. Such terms represent a dramatic improvement over the “use it or lose it” restrictions of Archer Medical Savings Accounts or Flexible Spending Accounts, which require individuals to turn over any unspent funds to the federal government at the end of every year.

However, opponents of HSAs argue that individuals might skimp on medically necessary services, thus costing the health system more in the long run because untreated conditions may degenerate into serious illnesses. Furthermore, opponents do not necessarily believe that individuals possess the knowledge and training to make informed decisions about medical services and investment management decisions.

The purpose of this proposed study is to assess the ability of such individuals to self-manage the clinical and financial requirements of HSAs. We will attempt to determine whether individuals allow their medical conditions to unduly influence their investment decisions and, conversely, whether they allow their investment needs to unduly influence their medical decisions.

INSURANCE MARKET

Insurance protects us against catastrophic losses. If we become disabled in an automobile accident, or become fatally injured when our home catches on fire, we can rely on health, disability, life, and property insurance to reimburse us and our families for unforeseen costs and lost incomes.

Insurance companies establish premiums (i.e. prices) for their policies by grouping individuals into risk pools and establishing premium levels that can generate sufficient funds to cover claim payments. For instance, if one million individuals each wish to purchase a $1 million life insurance policy while taking a cruise, but only one (i.e. “1 in a million”) individual is expected to perish while on board, then the premium would equal one dollar per individual. The vast majority of all individuals never expect (and do not hope) to file any claims, but they all may desire the coverage to manage the risk of an unforeseen death.

Premium pricing policies are more complicated in a competitive market. For instance, all insurance companies increase their premiums to cover capital requirements, administrative costs, and minimum profit needs. Some also adjust their premiums in the face of competition (or a lack of competition) for obtaining and retaining customers. In general, though, all insurers attempt to establish premium levels that are sufficient to cover policyholder claims and other requirements.

ADVERSE SELECTION

Insurers often attempt to reduce their claim expenses by encouraging policyholders to behave in a prudent and risk-averse manner. For instance, many educate individuals about the benefits of increasing exercise, losing weight, inflating automobile tires, and installing home fire detectors.

Sometimes, though, individuals only decide to purchase insurance policies when they learn that they have some chronic illness, or they are otherwise at some significant risk to suffer from some catastrophic loss. In addition, some individuals behave in a lackadaisacal and risky manner because they know that they have the security of insurance to cover their costs. When risk-averse individuals decline to purchase insurance, and only risky (and costly) individuals decide to purchase insurance, claim costs and premiums soar because there are fewer policyholders to pay higher costs.

This phenomenon is called “adverse selection” because it creates perverse incentives for prudent, risk-averse individuals to avoid the insurance system entirely. Ultimately, insurance systems may collapse under such pressures.

HEALTH INSURANCE MARKET

The health insurance market in the United States has experienced significant cost inflation for the past thirty years. Factors such as the aging of the baby boomer population, the introduction of costly technology, and the development of expensive drugs have all conspired to drive up the costs of health care, leading employers and insurers to seek new approaches for encouraging employees to manage their health care costs as frugally as possible.

Most of these methods of encouragement involve requiring employees to pay some type of fee for services that they use, whether these services be preventive (i.e. well care), diagnostic (i.e. testing), or treatment (i.e. sickness care) in nature. Such fees may involve copayments (small dollar amounts paid to medical providers at every visit, such as $5 or $25), deductibles (a cumulative dollar amount representing what each employee must pay out-of-pocket before receiving any health care coverage at all, such as $500 or $5,000 annually), and/or coinsurance (a percentage of each health care claim that employees must pay themselves, such as 10% or 30%).

Insurers hope that the fiscal pain of paying for medical services out-of-pocket can motivate employees to “shop around” for physicians, clinics, and hospitals that charge lower prices. To add a proverbial “carrot” to this “stick” of fiscal pain, insurers have begun offering Health Savings Accounts (HSAs); these permit individuals to deposit pre-tax wages into special bank accounts for use in paying for health costs that fall within the high deductibles.

To further entice individuals into accepting high deductible plans and self-funded HSAs, insurers are offering additional incentives. For instance, many types of health care expenditures that would never be covered by traditional health plans (such as over the counter drugs and medical devices, laser eye surgeries, and contact lens supplies) can be financed through HSA withdrawals. Furthermore, HSA funds can be invested and rolled forward from year to year, making possible their use as supplemental vehicles for investing retirement savings.

RISK MANAGEMENT

When insurers force employees to pay for services even though they are covered by health insurance policies, they can reduce their claim expenses and thus reduce their premium prices as well. Employers and/or employees who cannot afford traditional health insurance plan premiums may thus be able to afford the lower HSA plan premiums.

However, when insurers increase risk pool deductibles to levels that exceed average expected claim costs, they are also effectively transferring insurance risk to employees. In other words, employees must then manage their risk of incurring higher-than-average claim costs by remaining healthy and/or by “shopping around” for inexpensive providers.

This transfer of risk creates tension between employees and insurers, given that many employees may not feel qualified to make their own health care purchasing decisions. Although some insurers are offering free wellness services and decision support systems to employees in HSA plans, some employers and employees believe that they are better off paying higher premiums for $0 deductible plans, thereby shifting insurance risk back to the health insurers themselves.

AN EXAMPLE

Let's assume that you and two of your colleagues decide to launch an entrepreneurial business. You agree to purchase health insurance for yourselves as a business with three employees, but like any new entity, you are conscious about the importance of minimizing your costs.

Your local health plan offers you a traditional policy with no deductibles, no coinsurance terms, and no copayments. The premium cost per employee is $750 per month for this coverage.

Your local plan also offers you an alternative policy with a $10,000 per employee annual deductible, no coinsurance terms, and no copayments. The premium cost per employee is $150 per month for this coverage, and each employee is eligible to deposit up to $2,600 annually in a HSA. The plan informs you that the $2,600 deposit ceiling is fixed by law, but that all other amounts can be negotiated and adjusted, including the imposition of deductibles, coinsurance terms, copayments, and/or payroll withholdings to pass along a portion of the premium cost to employees. Any such adjustments, of course, would impact the premium cost paid by the business.

Based on this information, the cost of the traditional policy to your business would be $27,000 annually, with no additional costs paid by employees. The cost of the alternative policy to you business would be only $5,400 annually, but each employee would need to spend between $0 and $10,000 for health services. Nevertheless, each employee could gain a tax advantage by: (a) paying for over the counter drugs and medical devices, laser eye surgery, contact lens supplies, and other items with their HSA deposits, and/or (b) rolling forward their HSA deposits for retirement purposes.

QUESTIONS

For questions in sections A through D, please answer from your perspective as an employee of the business. In other words, prepare your answers as if you are simply earnings employee wages and do not own 1/3 of the business.

A. On a scale of 1 to 10, where 1 means most likely the traditional plan and 10 means most likely the alternative plan, in which direction:

A-1. Are you likely to lean when choosing a plan?

B. On a scale of 1 to 10, where 1 means not confident at all and 10 means fully and completely confident, how confident are you in your ability to:

B-1. Select your own health providers and manage your own health care?

B-2. Establish your own HSA investment policy and manage your own funds?

C. On a scale of 1 to 10, where 1 means not important at all and 10 means extremely important, how important is the following factor to your choice of health plans?

C-1. The premium paid by the employer?

C-2. The paycheck withholdings policy?

C-3. The coinsurance policy?

C-4. The deductible policy?

C-5. The copayment policy?

C-6. The legal HSA contribution ceiling?

C-7. Your right to spend HSA funds on items not covered by traditional plans?

C-8. Your right to roll forward HSA funds for retirement purposes?

C-9. The “gap” between the legal HSA contribution ceiling and the deductible?

C-10. The existence of free insurer wellness services?

C-11. The existence of free insurer decision support systems?

C-12. The current state of your own personal health?

C-13. The current state of your own personal retirement funds?

C-14. Any willingness by your employer to “kick in” bonus HSA contributions?

D. On a scale of 1 to 10, where 1 means not important at all and 10 means extremely important, how important are:

D-1. The differences between the two health plans?

For questions in sections E through H, please answer from your perspective as an owner / investor of the business, i.e. respond as if you simply own 1/3 of all future earnings and as if you do not earn employee wages.

E. On a scale of 1 to 10, where 1 means most likely the traditional plan and 10 means most likely the alternative plan, in which direction:

E-1. Are you likely to lean when choosing a plan?

F. On a scale of 1 to 10, where 1 means not confident at all and 10 means fully and completely confident, how confident are you in your employee's ability to:

F-1. Select their own health providers and manage their own health care?

F-2. Establish their own HSA investment policies and manage their own funds?

G. On a scale of 1 to 10, where 1 means not important at all and 10 means extremely important, how important is the following factor to your choice of health plans?

G-1. The premium paid by the employer?

G-2. The paycheck withholdings policy?

G-3. The coinsurance policy?

G-4. The deductible policy?

G-5. The copayment policy?

G-6. The legal HSA contribution ceiling?

G-7. Your employees' right to spend HSA funds on items not covered by

traditional plans?

G-8. Your employee's right to roll forward HSA funds for retirement purposes?

G-9. The “gap” between the legal HSA contribution ceiling and the deductible?

G-10. The existence of free insurer wellness services?

G-11. The existence of free insurer decision support systems?

G-12. The current state of your employees' personal health?

G-13. The current state of your employees' personal retirement funds?

G-14. Any willingness by your fellow owners to “kick in” bonus has

contributions?

H. On a scale of 1 to 10, where 1 means not important at all and 10 means extremely important, how important are:

H-1. The differences between the two health plans?

For question(s) in section I, please pair with a fellow student and flip a coin, with one of you assuming the role of owner's advocate and the other assuming the role of employee's advocate.

I. If the company can only offer one plan:

I-1. Can you jointly choose a plan? Write a brief paragraph to explain your joint decision.

I-2. Name the single most important factor (as listed above in Sections C and G) that influenced your decision.

I-3. Who was your fellow student? Were you the owner's advocate or the employee's advocate?

For questions in section J, please answer the following.

J. These questions are dervied from the Hofstede VSM-94 demographic survey:

J-1. Are you male or female?

J-2. How old are you?

J-3. How many years of formal school education (or their equivalent) did you complete (starting with primary school)?

J-4. If you have (had) a paid job, what kind of job is (was) it? Please select one or more of the following: (a) no paid job (includes full-time students), (b) unskilled or semi-skilled manual worker, (c) generally trained office worker or secretary, (d) vocationally trained craftsperson, technician, informatician, nurse, artist or equivalent, (e) academically trained professional or equivalent (but not a manager of people), (f) manager of one or more subordinates (non-managers), (g) manager of one or more managers.

J-5. What is your nationality right now?

J-6. What was your nationality at birth?