June 30, 2009
Health Savings Accounts Can Save Michigan Money (Mr. Michael D. LaFaive and Mr. James Porterfield, June 30, 2009, Mackinac Center)
(Editor's note: The following is an edited transcript of testimony Fiscal Policy Director Michael D. LaFaive to the Michigan House Tax Policy Committee on June 21, 2009.) [...]
A Health Savings Account (HSA) is a thrice blessed tax-advantaged account into which money is placed by an employer and or an employee to pay for ongoing medical expenses. These accounts are married to a qualified consumer-directed health plan (CDHP) insurance policy to cover unpredictable big-ticket expenses.
Most people have become familiar with the general concept: The money in the HSA is spent for routine or less costly types of care, up to the point at which the deductible is met and then the actual insurance kicks in. For example, a 2009 federal law requires that HSA deductibles be at least $1,150 for self-coverage and $2,300 for family coverage. There are ceilings, too. These accounts are "thrice blessed" because money going in is untaxed by the federal government, it earns interest tax free, and it can be withdrawn and used for qualified medical expenses tax free.
Savings accrue to employers because high deductible insurance premiums cost less than premiums associated with more traditional insurance, including PPOs or HMOs. The opportunity to rein in health care costs and also provide consumers with greater health care choices has led to an explosion of growth in the use of HSAs. An estimate by the AHIP Center for Policy and Research indicates that the number of people using HSA/CDHPs has grown from 1 million in early 2005 to more than 8 million by January 2009. In 2008, large and small group HSA coverage leapt 35 percent and 34 percent respectively.
In the fall of 2007, my colleague James Porterfield and I published a short essay that included very conservative estimates on what the state could save if it adopted HSAs for all its civil service employees. We estimated savings of $16.2 million in the first year with total savings growing to $1.1 billion through 2015. The assumptions included the state (as employer) paying 100 percent of the legally allowable contributions to the employees' HSAs, and 100 percent of the premiums associated with the high-deductible insurance policy. As an aside, this is a very rare occurrence. A survey of 6,000 employers nationwide published by Information Strategies Inc. indicated that fewer than 10 percent provided employees with 100 percent premium support.
We are in the process of revisiting the HSA concept and recalculating our numbers based on insurance costs more in line with those for private sector employees. We do so knowing that state employees currently make premium contributions of 5 percent to 10 percent depending on their coverage. Under our assumptions the state would pay 100 percent of the premiums for the HDIP and fund 75 percent of the legally allowable employee contributions to each civil servant.
Based on these and other assumptions, we estimate first-year savings of $106 million from moving state civil servants into HSAs, and cumulative savings of up to $5.9 billion through 2021. This staggering figure represents the difference between estimated costs of CDHPs at a 3.5 percent annual increase (an upper bound for such plans) versus the upper limit of 9 percent annual increases projected for PPO premiums by the Citizens Research Council of Michigan.
Want to reduce spending on health care? Let us keep the money we don't spend. Posted by Orrin Judd at June 30, 2009 7:35 AM