HSAs need more flexibility to serve those with chronic illnesses

The performance of health savings accounts (HSAs) has muted most criticism of them.  Initial research suggests these tax-favored savings accounts don’t favor only the young and wealthy.  More importantly, people are not forgoing medical care, especially preventive care, just to keep their HSAs well funded.

Yet the criticism that HSAs benefit only the healthy persists, and it vexes me.  Lately it’s taken on a personal dimension.

Back in 1998, while in my healthy mid-20s, I funded an Archer Medical Savings Account, the precursor to HSAs.  It was great.  Though I was in it for only a year, I built up what, at the time, seemed a nice medical-expense nest egg.  In reality, it was only $800, but it took years for me to spend it all.

Today — still young, still fit, and actually a bit more trim — I rip through, on average, almost $800 in medical expenses each month due to a recent bout of cancer.  Though not technically chronically ill, I do have chronic expenses.  The regular CT scans, chest X-rays, blood tests, and specialist visits that keep telling me I’m cancer free will occupy my medical ledger for years.

If I funded an HSA with $2,850 per year — the maximum allowed — I’d spend it all in four months and therefore have no opportunity to save.  With no chance to save, I have no incentive to economize, which destroys the HSA’s key advantage.

So could an HSA ever work for someone with an expensive chronic illness?

Yes and no.  HSAs could work, but not without a change in federal law.  The real problem is not the HSA; rather, the problem is that federal law restricts the type of insurance policy that can be coupled with an HSA.

Federal law allows people to fund HSAs only when coupled with a very specific kind of high-deductible insurance policy.  More specifically, the insurance policy must hold the policyholder responsible for virtually all medical expenses up to the deductible limit.  This means that, in my case, I must be responsible for the cost of my CT scans up to the deductible limit if I wish to fund an HSA.

With HSA-compliant deductibles starting at $1,100 and averaging $1,900, one of my quarterly $1,500 CT scans could meet my deductible in January, an arrangement that makes little sense to me or the health plan.  If I promptly meet the deductible, I’ve lost a huge incentive to think twice throughout the rest of the year about more mundane expenses like brand-name drugs and throat cultures, defeating the purpose of the deductible.  Unfortunately, that’s the inescapable result for chronically and expensively ill people with HSAs.

A different type of health plan, if allowed by federal law, could be coupled with an HSA and could meet the needs of the chronically ill.  Consider, for example, a health plan that would separate avoidable expenses (like emergency room use and weekly chiropractor visits) from unavoidable expenses (like heart stents and diabetes drugs) and then exempt the unavoidable expenses from the deductible.  If my unavoidable CT scans were exempt from the deductible, I’d suddenly become responsive to the deductible and be able to save, because my remaining medical expenses would fall below the deductible.

But there’s no need to theorize.  These plans already exist.  Though unable to be coupled with an HSA, they can be coupled with a health reimbursement arrangement (HRA).  HRAs are similar to HSAs — the employee controls the money and unspent money rolls into the next year — but the employer owns the account.

Destiny Health (a Chicago-based consumer-directed health plan) sells an HRA plan that exempts from the deductible drugs prescribed for over 100 chronic illnesses as well as certain hospitalizations and surgeries.  The plan also helps people manage their chronic illness through an elaborate wellness program that rewards healthy behavior and healthy outcomes.  Research by Aon, an independent consulting firm, confirms that this “plan design … can improve both the health outcomes and costs relating to [chronically ill] members.”

These innovative products are only now developing because the tax-exempt status of HRAs had been in doubt until the IRS issued rules sanctioning them in 2002.

Regrettably, HSAs are pointlessly chained to one type of insurance plan and not free to evolve like the HRA.  Despite being constrained, in just a few short years HSAs have proliferated and proven they can restrain health care costs without compromising health.

Congress should finish the job and allow HSAs to be coupled with any insurance policy, which would eliminate any bias against unhealthy people.

— Peter Nelson is a Policy Fellow with Center of the American Experiment in Minneapolis.