Health Care Issue: Health Savings Account - Research Paper Example

?Health Savings Accounts Executive Summary This paper is an applied project in health care and the health care issue under discussion in the paper isHealth Savings Account (HSA). The main goal of this paper is to give an economic analysis of this issue under the economic theme, opportunity. The paper begins by giving a description of HSA followed by an analysis of the topic. The paper then outlines and explains the economic forces that impact on the topic positively and negatively. An explanation of the topic from an economic perspective is also given and finally, the limitations, assumptions and recommendations from which the constructor could act. Health Savings Accounts Introduction Health care is one of the basic needs and therefore every person is entitled to proper health care. The government may fund medical expenses but that is only to certain limit. This places the responsibility of better and advanced health care in the hands of the individual. In the US, taxpayers enrolled in High Deductible Health Plan (HDHP) have an advantage of benefiting from HSA, a custodial account or tax-advantaged/ tax-exempted medical savings account (Feldstein, 2006). Description of HSA At the time of deposit, funds contributed to HSA are exempted from federal income tax. Unlike the Health Reimbursement Arrangements (HRAs) which are company owned, HSAs are owned by individuals. A qualified trustee for example an insurance company, a bank or anybody who has already been approved by the Individual Retirement Arrangements (IRAs), is required for the setting up of an HSA. Currently, funds in the HSAs can be used to fund qualified medical expenses at any moment without penalty or federal tax liability (Heffley and Miceli, 1997). HSA is important in enhancing the efficiency of the general health care system and reducing growth in the costs of health care (Ozanna, 1996). This account also encourages individuals to save money that will be used for future medical expenses hence they are able to receive the kind of medical care at any time. This means no one can limit the benefits they are allowed to enjoy at any time. It makes people to see the cost of medical procedures or doctors and this motivates them to shop for healthcare and ask related questions just as they do in other expenses. Withdrawals made from the HSA for non-medical expenses done after retirement provide tax advantages just as those in the IRA but if taken earlier, they incur penalties. The attractive advantages provided by HSA have led to its increased consumption. Since the passage of federal legislation that offer incentives to individuals who choose such plans as HSA, there has been a boost in consumer driven health care (CDHC) in the US since 2003. This has led to an increase in the annual consumption of HSA. This is indicated by the consumer surveys data of 2010 and that of 2011 that supports the acceptance of HSA in the US one of the mainstream healthcare options (Tables 1 and 2) (IRS, 2010 and IRS 2011). It is also supported by 2004-2011 contribution limits that indicate a general upward trend for all the years as seen in Table 3. The consumer survey data also indicates that individuals with a health care plan that is compatible with HSA have similar characteristics as those with traditional health care plans like PPQs and HMOs. These include age, income and health. Consumer survey revealed that 59.8% were aged 45 years and above, the annual household income for 42.1% of the consumers ranged between $50,000 and $100,000 and 95.8% considered themselves to be of better or average health (Feldstein, 2006). In terms of annual growth, HSA has been experiencing a general positive growth. As of January 2007, 4.5 Americans were covered by health plans that are HSA-qualified. This was indicated by data from survey conducted by America’s Health Insurance Plans (AHIP) on health insurers. This represented a 1.3 million increase since January 2006. Among the 4.5 million people 3.4 were covered through plans that were sponsored by their employers while the remaining 1.1 were covered by HSA-qualified plans they had individually purchased. A follow-up survey conducted by AHIP indicated a 6.1 million increase in the number of Americas covered by HSA-qualified schemes as of January 2008. This figure rose to 8 million as of January 2009. These surveys also indicate that there is a god response by employers and individuals to HSA. Given the various choices of health care plans, there is a need to make a good economic analysis of HSA to determine its suitability over the other health care plans. Economic analysis determines the optimum use of limited resources in situations involving two or more alternatives in an attempt to achieve some specific objectives under the given constrains and assumptions. Economic analysis also tries to measure, in monetary terms, the social and private costs and benefits of the project to the economy or community while taking into account the opportunity costs of available resources employed. In this paper the economic theme that will be used to provide an analysis of this medical issue is opportunity. Analysis of HSA Worldwide, the human population is generally aging and at the same time, the utilization of health care per capita is also increasing. As a result of this, expenditures and costs of health care have risen greatly over the recent years and this trend is expected to persist and even accelerate in the future. This generates a perpetual concern for policy makers of ensuring the sustainability of the existing health care systems. However, the current financing systems concerned with health care are not feasible any more. The opportunity presented for the development of HSA in the above situation is the need for an alternative health care system that will lower the growth in health care expenditures. This system should also take into consideration the utilization patterns of every individual in terms of health care (Keeler et al, 1996). CDHC health care insurance plans allow individuals to use HRAs, HSAs and other medical payment products of similar nature to make direct payment for routine medical expenses. Under such situations, patients suffer from huge deductions made from their savings accounts. In comparison to CDHC policies, HDHI policies protect the consumers of such health care plans from catastrophic medical expenses. Therefore, those people enrolled to HDHI and are being covered by HSAs enjoy the benefits of HDHI policies which are less costly. One important feature of HSA under such an insurance plan is that the users use a pre-funded spending account in paying for routine medical claims. HSA is normally funded by its users on regular basis for example through premiums that are deducted from their salary/wages. They use a special debit card given to them by the insurance plan or a bank. Another situation that presented an opportunity for the development of HSA is the demographic trends that have exerted pressure on the existing social security system. This means there was a need to centre the role of curbing increasing cost of health care on the consumer. This is achieved through their rational choices of health care services. According to Grossman, (1972), HSA is not vulnerable to the effects of demographic trends since it is a fully funded system. Each generation, and more specifically each individual, pays for their own medical expenses. The enhancements made to HSA that went into effect in 2007 have allowed it to cater for the health care needs of the lower income people. These included a combination of HSA and premiums as well as tax subsidy to pay for their insurance premium that are catastrophic in nature. HSA therefore saves the less wealthy and less educated from the crisis of avoiding the appropriate and much needed health care. This is because it reduces the cost burden of health care at such instances. This is supported by the fact that more than a fourth of those who joined HSA in 2007 were previously uninsured. HSA also allows for its users to make informed decisions regarding their health care. At the end of the year, users keep any balance in order to boost future balances or as an investment for future expenses. This means that people can choose to and are able to accumulate large amounts of money that can be used to cater for desired medical care when need arises. This is opposed to making direct payments which is subject to restrictions of prevailing personal financial conditions. HSA can therefore be said to allow its consumers to play the key role of decision-making in regard to the type and quality of health care they receive (U.S. Department of Health and Human Services, 2007). Research indicates that patients under HSA were more likely to ask questions the cost of health care and choose less expensive treatment options too. Such patients were also more likely to follow treatment regimes more carefully. At the end of a person’s working life, HSA deficits are waived and the person’s with positive balances have the option of keeping the money or spend it in other ways of their choice. This means that HSA savings can become a good way of saving money that can cater for any type of emergency after retirement. At such a time, there are no penalties for the withdrawal of the savings made for non-health care uses (Palumbo, 1999)... Eichner et al (1996) made an analysis of health insurance that is longitudinal in nature. This was conducted over a three-year period (1989-1991) on 300,000 employees of a large firm. From the data obtained, it was realized that about 80% of the employees are left at least 50% of the overall HAS contributions. Only 5% of the employees had remained with less than 20% of their total HSA contributions. Economic forces impacting on HSA The force of supply has had a positive impact because the conditions for receiving enrolling for HSA are not complicated. Employers also sponsor their employees on such programs leading to high consumption rates. Improved standards of living have also impacted positively on HSA because it has enabled people to seek for better health care as opposed to relying on government funded medical care. People are able to spare some money on monthly basis as contribution to HSA. This has led to a general positive growth in HSA contribution over the recent years as indicate in Table 3. One of the economic forces that impact negatively on HSA is poor or destabilized economic growth. This reduces the rate of employment and triggers retrenchment. This means that the affected individuals are forced to quit the system and its benefits even before they can make substantial savings. In such a case, the system makes its users to be in constant state of uncertainty. Poor economic growth leads to a slow growth or stagnation in the general consumption of HSA for example the figures for HSA contributions for the years 2010 and 2011 are the same. This means the system experienced a zero growth rate at this time. The system has not received the large coverage it requires. This is highly needed because the system is fully funded hence low coverage makes its implementation difficult. This is worsened by the fact that HSA has an ambiguous the cost savings function. Frequent destabilization of the global and national economy negatively affects HSA system. This is because it affects the employment rates yet the system caters for the employed individuals. Evaluation of HSA HSA can be said to operate as a consumer-driven supply and demand project. Ozanna, (1996) states that insurance companies do not pay the routine health care expenses rather, it is done by the patients themselves. This means that people are in a position to relate their bank accounts and the cost of health care. This will therefore determine the rate at which they contribute to the HSA and demand for health care services. The overall economic effect of HSA program in healthcare is ambiguous because it has an ambiguous cost savings function. For example, its contributions for the years 2010 and 2011 are the same compared to the other years whose figures vary. At the same time, no one can predict what will happen in the next years to come. After the deductible that involves no coinsurance, the HDHP can cover health care expenses upto 100%. This means HSAs greatly lowers the levels of out-of-pocket liability in catastrophic situations as compared to the situation in traditional health plan. HSAs are able to stimulate preventive care and levels of health activities that are socially efficient. This is because it raises the expected wealth of its users without lowering the profits of the insurer. This means it is more cost-effective to the heath insurers (Eichner et al, 1996). Assumptions, limitations and recommendations from which the contractor could act The major assumption under which the contractor should operate under is that the society for which the project is designed for has policies that support HSA. The contractor should also assume that the contributions for the HSA are going to be steady or experiencing an upward trend and ignore the uncertainties involved. The contractor should also assume that there is substantial demand for HSA so as to ensure its immediate reception. The contractor has to work under the limitations of ambiguity in HSA contributions. This is because the scheme is consumer-led and it is them who determine the level of supply and demand. For example, the annual level of contributions. One of the major recommendations under which the contractor will work under is the extension of the HSA to cater for the low income people. Conclusions HSA has made health care more accessible and more affordable in the US. It has also made people to be responsible for health care services of their own choice trough enrollment to the High-Deductible Health Plan. Compared to other health care programs, HSA is more effective in catering for future medical expanses. However, the effect of uncertainty lowers the attractiveness of the scheme because persons of lower economic ability are disadvantaged in case their medical expenses exceed their HSA funds. Recommendations Though HSA was meant to extend medical coverage to lower income people, it still does not cater for then fully. This is because if they are disadvantaged if they undersave or do not simply have enough funds to cover for their health care expenses at a particular time. In such a case, they have to use their standard savings to cover the remaining health care expenses. The system should therefore be improved to include some loan that can be granted to cover the remaining expenses. This loan should have the lowest interest rates and will then be deducted from the monthly contributions of the HSA users. Provision of such loans will also encourage those with poor health to join the program. HSA offers no advantage for retirees for example, people over 65 years old are not allowed to make tax-advantaged/tax-exempted contributions to HAS. At this time they are considered as net non-contributors. The age limit for making tax-exempt contributions to HSA should therefore be eliminated. This will allow for retirees to use whatever is available for them to sustain their membership in the health care plans and continue to make medical savings for themselves. HSA policies should also be revised in order to allow it extend its services to non-salaried people for example students or farmers. References Eichner, M. McClellan M and. Wise, D. (1996). “Insurance or Self-Insurance?: Variation, Persistence, and Individual Health Accounts.” NBER Working Paper 5640. Feldstein, M. (2006). “Balancing the Goals of Health Care Provision.” NBER Working Paper 12279. Grossman, M. (1972). “On the Concept of Health Capital and the Demand for Health.” Journal of Political Economy (80) pp 223—255. Heffley, D. and Miceli, T. (1997). “The Economics of Incentive-Based Health Care Plans.” Working Paper 1997-05, University of Connecticut. IRS (2010) Revenue Procedure (Rev Proc) 2009-29. Online: http://www.irs.gov/pub/irs-drop/rp-09-29.pdf. Viewed on 20th May, 2011. IRS (2011) Revenue Procedure (Rev Proc) 2010-22. Online http://www.irs.gov/pub/irs-drop/rp-09-29.pdf. Viewed on 20th May, 2011. Keeler, E. Malkin, J. Goldman, D. and Buchanan, J. (1996). “Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?” Journal of the American Medical Association. (21) pp 1666—1671. Ozanna, L.(1996). “How will medical savings accounts affect medical spending?” Inquiry (33) pp 225—236. Palumbo, M. (1999). “Uncertain Medical Expenses and Precautionary Saving Near the End of the Lifecycle.” Review of Economic Studies (2) pp 395-421. U.S. Department of Health and Human Services (2007). Medicare and You. Centers for Medicare & Medicaid Services. Appendices Table 1: 2010 HSA Contribution Limits   Self-only Coverage Family Coverage Contribution Limit Minimum annual deductible $1,200 $2,400 $3,050 Maximum annual deductible and other out-of-pocket expenses $5,950 $11,900 $6,150     Table 2: 2011 HSA Contribution Limits   Self-only Coverage Family Coverage Contribution Limit Minimum annual deductible $1,200 $2,400 $3,050 Maximum annual deductible and other out-of-pocket expenses $5,950 $6,150 $11,900 Table: 2004-2011 HSA Contribution Limits Year (Single) Contribution Limit Contribution Limit (Family) Catch-Up Contribution (55 or older) (Single and Family) 2004 $2,600 $5,150 $500 2005 $2,650 $5,250 $600 2006 $2,700 $5,450 $700 2007 $2,850 $5,650 $800 2008 $2,900 $5,800 $900 2009 $3,000 $5,950 $1,000 2010 $3,050 $6,150 $1,000 2011 $3,050 $6,150 $1,000 Read More