Cheap Trick

Back in 1996, Terry Johnson, the human-resources director for Ada County, Idaho, was excited about his new health-care coverage. He had just helped the county become the first in the United States to offer employees a medical savings account (MSA) as an alternative to traditional indemnity health insurance, and he was eager to try it. The accounts would be exempt from state taxes up to $2,000.

Under the program, Johnson would contribute $900 to this account and his employer, the county, would contribute the remaining $1,100. Johnson could use that money for medical expenses, and if he remained healthy and didn't use it up that year, it would carry over to the next year. He could even withdraw the money for any other use, although he would pay taxes on it (and if he was not yet 59, he would also pay a 10-percent penalty). Along with this he would have an insurance plan. The one catch: He would be responsible for the first $2,000 in costs should he become sick. But the idea was that the MSA would be there to cover this high deductible.

“So I was thinking it's going to be great for me because at least I would have something to show for my good health at the end of the year,” says Johnson. As a generally healthy person, he says, he felt that traditional insurance was a waste. “I just never got anything out of that benefit.”

But Johnson made a bad gamble. That year, he decided to go hang gliding. “I broke my ankle,” he notes ruefully. “And that pretty much ate up the funds because I had to have two operations.” Because the county paid into the savings account in installments, and had only put in $400 when Johnson sought medical care, not only did he have to pay the $900 deductible employees were responsible for, he also had to front the full $2,000 deductible “right off the bat.” If he had stayed in his traditional insurance plan, he would have had a $100 deductible and 20-percent co-payments for doctor services, up to an $800 limit. While both plans may have cost him about the same amount in the end (it is unclear what the co-payments would have amounted to under the traditional plan), the MSA was definitely not the boon he had hoped for.

Things did not go much better for the county. It did save $39,000 in insurance premiums for its employees, but that was only about half what it had expected, as fewer people than anticipated enrolled in the catastrophic insurance. Worse, Ada officials were shocked that, as a result of the MSA, premiums for the employees who remained in the traditional insurance plan were going to skyrocket. “There was cherry-picking,” Johnson told me, “because the MSAs drew all the healthy folks that would otherwise subsidize those that stayed in the rich traditional plan.” With the traditional plan serving only the sicker employees, its costs mounted. In fact, the insurance company Regence Blue Shield of Idaho told the county that if it continued with the MSAs, it could expect premiums to jump an astronomical 15 percent -- at a time when health-insurance-premium increases were the lowest in 30 years. (Nationally, employer premiums increased 2.1 percent in 1997 and 0.5 percent in 1996, according to a KPMG Peat Marwick survey.) At the end of 1997, the county dropped the MSA option.

Despite skepticism of MSAs by many employers, unions, and workers, promotion of such tax-free savings accounts and high-deductible insurance plans has lived on thanks to a band of ideologically minded conservative Republicans who have pressed for legislation and regulations to make them more attractive. With the arrival of George W. Bush in the White House, their efforts succeeded. Now, with health-care costs rising at double-digit rates and the latest data available showing more than 43 million Americans uninsured in 2002, health care is again a major campaign issue. And at the core of Bush's health-care campaign platform is expansion of these schemes.

Bush called for that in his State of the Union address and lauds them at virtually every campaign stop. In March, at a discussion sponsored by the Chamber of Commerce, he declared, “I've made my stand. I believe that the best health-care policy is one that trusts and empowers consumers, and one that understands the market.”

Tax-free MSAs, along with high-deductible plans, are simply a way to make individuals pay a larger share of their health-care costs. Conservatives put a pretty face on the system, calling it “consumer-directed health care,” a term designed to play off the public backlash against the tight restrictions that were imposed in the past by HMOs. They argue that consumers, not insurers, should determine what care they need. And they should pay for it themselves, with money that employers and employees put aside in various tax-free accounts. People will become wise shoppers, they argue, look for bargains, and purchase only the care they need. Conservatives predict that this will drive down costs. And for major medical problems, they argue, people will have catastrophic insurance.

Nixon administration economist Jesse Hixson is often credited with developing the concept of health banks to fund health care. But it was Patrick Rooney, former head of Golden Rule Insurance Company, who spearheaded the political organizing that ultimately got state and then federal action. Rooney has poured more than a million dollars into Republican coffers since 1989. Golden Rule, now part of UnitedHealthcare and run by Rooney's daughter, was a pioneer in health savings account (HSA) schemes. Rooney's zeal for MSAs dates to a 1990 meeting with John Goodman, founder of the National Center for Policy Analysis (NCPA), who in turn had been converted to the cause by Hixson. Rooney joined the center's board and helped fund it. The NCPA, along with a bevy of conservative think tanks -- including the Galen Institute, the American Enterprise Institute, the Cato Institute, and The Heritage Foundation -- are the champions of consumer-directed care. Rooney also pulled together a group of small insurers, which founded the Council for Affordable Health Insurance in 1992, to promote it.

Despite those efforts, the brave new world of consumer health care didn't really begin on the national level until 1996. (A number of states like Idaho had already allowed accounts exempt from state taxes to be used for health expenses.) After a fierce partisan battle, Republicans enacted legislation to allow tax-free accounts, called MSAs, but only for small businesses and self-insured people. Consumers were also required to buy high deductible insurance, which also required consumer co-payments. Democratic opposition, led by Senator Ted Kennedy, limited the number of people in such plans to 750,000. The Government Accounting Office reported that after two years, only 50,172 people were enrolled.

Then Bush, pressured by conservative Republicans on Capitol Hill and pro-tax-cut and small-business groups, came into office, determined to dramatically speed up the adoption of these tax breaks and insurance schemes. First the Treasury Department, in 2002, approved Health Reimbursement Accounts, another form of tax-free fund. Paid by employers, employees can use them to pay health-care costs. But these were limited in appeal because they were not portable from job to job and workers could not contribute to them.

Then, last November, with strong help from the White House, Republican congressional leaders succeeded in attaching to the Medicare prescription-drug bill a tax-free account that corrects these problems and threatens to dramatically alter health insurance as we know it. Former House Speaker Newt Gingrich, a strong opponent of a government-run Medicare program and of comprehensive employer insurance programs, was instrumental in persuading reluctant Republicans to vote for the Medicare bill because it allows these tax-free funds, dubbed HSAs. Gingrich lauds them as “the single most important change in health-care policy in 60 years.” The new law now allows funds to be contributed by both employers and employees, rolled over if not used, and taken from job to job. It's also available to everyone. But it requires people with the savings accounts to have only a catastrophic insurance plan with a high deductible.

Experts believe that, thanks to the new law, consumer-directed health care is about to take off. Strapped with 14-percent premium increases in 2003, employers are desperate for a strategy to cut costs, and HSAs are a more subtle way to shift costs on to workers than merely raising premiums. Many employers appear ready to offer the HSA–catastrophic plans as an option alongside traditional insurance, but others will offer employees various savings-account–high-deductible insurance options only.

President Bush and administration officials are on a crusade to get the word out to employers. Almost immediately after Bush signed the Medicare law in December, the Treasury Department issued guidelines to jumpstart the plans and, in all, eight have been issued in the eight months since the law passed. On May 19, Treasury Secretary John Snow told a Senate Aging Committee hearing that HSAs are “one of the single best ideas” to deal with rising health-care costs.

Republicans also see HSAs as a way to slash budgets for federal and state employees, both by shifting health costs on to workers and by reducing overall utilization. They would like to use them in Medicaid and Medicare, too. In April, the Office of Personnel Management asked insurance carriers for proposals to offer HSAs to federal employees next year. Gingrich, now at his own think tank, has launched a project to promote these accounts to states. It's aimed at having all state-employee health plans and Medicaid programs offer HSAs within three years. Gingrich is also lobbying Congress to open Medicare to HSAs. And Lumenos Inc., which administers consumer-directed plans for employers who directly pay employee health expenses, has already been talking with top officials in three states about setting up such a plan for disabled Medicaid enrollees.

On a state level, no one has been a more ardent supporter of HSAs than the president's brother, Florida Governor Jeb Bush. After signing legislation June 14 requiring all insurers in Florida to offer HSAs to small businesses, he started a two-month road show, hosting town-hall meetings throughout the state to promote them. Press reports indicate that Bush wants to provide HSA–type accounts for Florida's Medicaid recipients as well.

The problem is, these accounts may be “one of the single best ideas,” as Snow put it, to deal with rising health-care costs for employers, but they are one of the worst for individual employees. While Terry Johnson was lucky to have an insurance package that limited his liability to $900, most employers will not be so generous, leaving anyone foolish enough to sign up for an HSA with the possibility of enormous health-care debts. First, the new Medicare law calls on families to pay at least the first $2,000 in costs; individuals must pay, at a minimum, the first $1,000, but the deductible is up to the employer, and many plans will likely require much higher ones. The current average deductible in insurance plans is $300 for an individual and $600 for families.

Supporters argue that employers can offset these costs by contributing to the savings account. But the whole premise of this approach is that people must feel some pain in paying for health care or they won't be wise consumers, so no employer is going to totally cover the deductible. In fact, a survey of almost 1,000 companies, most with more than 500 employees, conducted by Mercer Human Resource Consulting and released in April, found that 39 percent did not anticipate putting any money into savings accounts.

Besides the huge deductibles, consumers will have co-payments as well. While the law does set limits for total out-of-pocket spending, deductibles, and co-payments for in- network care, these are set at a high $5,000 for individuals and a whopping $10,000 for families. In fact, consumers can get stuck with even higher medical bills. First, the liability limits only apply if people use doctors and hospitals in the insurer's approved network. If a person decides, for whatever reason, to go to a provider outside the network, there is no ceiling on what he or she pays out of his or her own pocket. What's more, the insurance and spending caps only apply to “covered” care. Republicans are already trying to reduce the scope of care that insurers are required to cover. In that regard, House Speaker Dennis Hastert has endorsed legislation to allow people to buy insurance in other states if their own imposes too many mandates on insurers.

While some supporters argue that employees will have lower premiums to pay, even if their deductibles and co-pays rise, that is not necessarily so. How much employees pay in premiums will be up to the employer. More generally, “Employers will use it as a reason to shift costs on to employees or get out of the business altogether,” says JoAnn Volk, legislative representative for the AFL-CIO. “And they will say, ‘I'll make a contribution to your account, [then] you're on your own.'” Neil Trautwein, the National Association of Manufacturers' assistant vice president for human-resources policy, agrees. “We see the wheels coming off employer-based health care,” he says. “Costs have risen to such an extent, and Americans are aging. We really see increasing problems with maintaining the employer-based model into the future.” He worries that unless Americans can be persuaded to buy into the idea of consumer-directed care, “increasingly calls will come for a government-run system.”

Chris Jennings, deputy assistant to President Clinton on health policy and now an informal adviser to the John Kerry campaign, says that concern about workers losing employer insurance coverage is one of Kerry's problems with HSAs. Jennings points to a recent study by MIT economist Jonathan Gruber, which warned that HSAs could increase the number of uninsured as employers use HSAs as an excuse not to provide coverage.

Some smaller employers have started to use HSAs in the six months the law has been in effect, although the law passed too late in the benefit enrollment cycle for most large employers to make the shift. But it looks like they'll catch up next year. The Mercer survey found that nearly 75 percent are “very or somewhat likely” to offer an HSA by 2006. Another survey, by the National Business Group on Health, of 159 of the nation's largest companies found one-third expecting to offer a consumer-directed plan next year. The Mercer study also found that nearly half of large employers surveyed hope that HSAs will let them back away from retiree benefits, as workers will now be able to accumulate tax-free cash to pay for retirement health costs.

Forcing workers to shoulder a much larger part of their medical expenses to cut health-care costs for employers is likely to harm consumers in other ways, too. To begin with, Jennings warns that these plans, to the extent that they reduce overall costs, do so by “reduc[ing] the use of desirable as well as undesirable care.” In other words, people will stop getting the care they need in addition to the care they don't need.

Initial results at firms with tax-free accounts show that these accounts cut use of services. People go to the doctor less often, have fewer surgeries, make fewer hospital visits, and use fewer medicines. Textron Inc., which manufactures aircraft and other products, has shifted all its employees into consumer-directed plans. The company started in 2002 with the 1,500 employees in its corporate office center and at Textron Financial. An analysis of two years of claims data for the pilot program enrollees, compared with when they had traditional ppo insurance, found overall medical usage down 7 percent, inpatient hospital admissions down 22 percent, outpatient hospital visits down 6 percent, emergency-room visits for less severe conditions down 9 percent, total surgeries down 11 percent, physician office visits up 3 percent, diagnostic tests down 5 percent, and total prescriptions down 1 percent. Aetna found a similar pattern for 13,500 people who enrolled since January 2003 in its health reimbursement arrangement.

Conservative Republicans would applaud these numbers. But what happens if the upshot is many more people not getting the treatment they need? “It leads to a reduction in care, period, including care that's needed,” warns Karen Davis, president of the Commonwealth Fund, a foundation that sponsors health-policy research. Not only will more people end up waiting until illnesses are urgent before they go for care, she says, but public health could be affected as people avoid going to the doctor for what they think are coughs and colds but turn out to be more serious infectious diseases.

Another long-term drawback of MSAs and high-deductible plans will be rising premiums for those with traditional insurance. Congressional Budget Office analysts, citing Ada County's experience, warned that other such experiences and “economic theory” indicate those who would choose such plans would be the “relatively young and healthy.” Despite denials by HSA advocates, preliminary data confirms this. Humana Chief Actuary John Bertko stated at a Joint Economic Committee hearing in February that at his own company, early evidence showed that those who went into these types of plans “are clearly healthier.”

That leaves the less healthy covered by traditional comprehensive insurance, which drives premiums up. A “death spiral for comprehensive coverage is definitely a risk,” warns Edwin Park of the Center on Budget and Policy Priorities. This breaks down the “basic function of insurance,” warns Davis. “The purpose of insurance is to collect premiums from everyone, healthy and sick, and you use the money to help the sick pay their medical expenses.” Concerned about this, many insurers offer employers -- and employers offer employees -- only these products as a total replacement for traditional insurance. Bertko told the Joint Economic Commission that Humana, for example, would do this in order to “maintain the integrity of this risk pool.”

Even conservative champions of consumer-directed health plans may find them unsatisfactory in the long term, says Republican Liz Fowler, chief health counsel of the Senate Aging Committee. Fowler stood up at a Hill forum on consumer-directed health care, sponsored by the bipartisan Alliance for Health Reform, to tell the panelists who back the concept to try it before they tout it. Fowler said she is enrolled in a health reimbursement account that includes a $1,000 savings account contributed by her employer, the government. She is responsible for another $600 before insurance -- which includes a 20 percent co-payment for in-network care (40 percent for out of network) -- kicks in. How well has it worked?

“Let me tell you,” she said at the gathering, “my experience has been awful. I don't consider it consumer-directed, and it certainly is not consumer-friendly. I have a Ph.D. in health policy and also a law degree, and if that's not an informed consumer … . It's impossible to tell what's covered. I had allergies … [and] a bum knee and needed physical therapy. They still can't tell me exactly how much I owe. Some things are paid for under the $1,000 at first, but not covered if you don't use it in the $1,000 and have to seek care for it later on. Some things make your doughnut grow bigger; for example, if you use out-of-network services. … I found out my allergy shots were $700 and my colleague … who has [the] same doctor, his allergy shots were $400. So I wouldn't say it's an open box, I would say it's a black box.”

Conservatives, however, are hoping that most consumers won't oppose these changes, especially if employers gradually transition to consumer-directed plans and much greater employee costs. “If you put a frog in hot water, it will jump out,” says Dr. David Himmelstein, a founder of Physicians for a National Health Program. “But if you put it in cold water and slowly boil it, you can cook it.” Hopefully consumers will tell employers exactly what they think of these plans before the entire health-care system has been cooked.

Barbara T. Dreyfuss is a freelance writer. She was a Wall Street health-policy analyst for many years.