Continuation of Research on Consumer Directed Health Plans: HSA Simulation Model Refinement . Executive Summary


High-deductible health plans (HDHPs) are attracting attention from consumers, employers, and policy-makers.  These plans couple a large out-of-pocket deductible with a tax-advantaged health savings account (HSA) that can be used to pay for eligible medical expenses.  If an enrollee spends all of the dollars in the HSA in a given year, she then spends her own money until the deductible requirement in the health insurance plan is met.  This benefit design can be tailored to cover all or part of the expenditures that exceed the deductible.  To facilitate informed decision-making, the enrollee may be provided with information about health care providers, including physician education and experience, prices and quality ratings.

This plan type has been the subject of a public policy discussion as a health insurance mechanism to reduce the number of uninsured by providing financial incentives to consumers to "take-up" consumer driven health plans.  Our current results show that these initiatives may hold some promise in reducing the number of uninsured by several million.

In a previous report for the Office of the Assistant Secretary (OASPE) of the Department of Health and Human Services (DHHS), we simulated the effect of the Medicare Modernization Act of 2003 (MMA) on take-up of high-deductible health plans in the individual health insurance market. (Feldman, Parente, Abraham et al, 2005; Parente et al, Final Technical Report for DHHS  Contract HHSP233200400573P, 2005) We also simulated the impact of additional subsidies for HDHP enrollment, including one based on our interpretation of the Administration's 2004 proposal that featured low-income tax credits for the purchase of HDHPs.  We predicted that proposal would have increased HDHP take-up and reduced the uninsured by 2.9 million people at a tax cost of $8.1 billion per year, or an average tax cost of $2,761 per person.

We contracted with OASPE to extend and refine the simulations that were performed under our prior contract.  In particular, we refined the health plan choice model by incorporating the effect of prior health status on health plan choice - a necessary step if one wants to predict enrollment more accurately.  Using the results of our choice model, we predicted health care costs for the people who enrolled in each plan.  We turned costs into premiums by adding a loading fee and then predicted choices again with the new premiums.  We continued to "iterate" the choice model until premiums and choices converged.

In addition to these refinements in the model, we also refined our method for estimating the tax cost of various subsidy proposals to include an offsetting reduction in tax subsidies for people who drop subsidized employer-sponsored health insurance (ESI).  Finally, we brought the simulations "up-to-date" by simulating the proposals outlined in the President's 2006 State of the Union (SOTU) speech and explained in detail in the 2006 Treasury Blue Book.1    As we understand that proposal, it has three related parts:

  • Tax treatment of HDHP premiums:  Individuals covered by an eligible HDHP2 would be allowed an “above-the-line" deduction in determining their adjusted gross income.   In order to further level the playing field between individual health insurance and ESI, individuals covered by an eligible HDHP would receive a refundable tax credit equal to the lesser of: (1) 15.3 % of the HDHP premium or (2) 15.3% of their wages subject to employment taxes.
  • Tax treatment of HSA contributions: The amount that could be contributed before taxes to the HSA would be increased to the out-of-pocket limit for the individual's HDHP (currently, $5,250 for single coverage and $10,500 for family coverage).  This provision would allow covered individuals to pay all out-of-pocket expenses under the HDHP with pre-tax dollars.  In addition, individuals making after-tax contributions to the HSA would be allowed an employment tax credit similar to the premium credit described in #1 above.
  • Low-income tax credit: A refundable tax credit would be offered to low-income individuals and families to purchase an eligible HDHP.  The credit would provide a subsidy of up to 90 % of the health insurance premium, up to a maximum dollar amount, and it would be phased down to zero at higher incomes.  Full details of the credit are provided in the 2006 Treasury Blue Book.

The results of our revised simulation of the three policy changes combined, as well as individual impacts, are presented in Exhibit 1.  The numbers reflect only the individual market since the group market is offered insurance.  Likewise, the uninsured total reflects results from only the individual market.  Subsidy costs are tallied for the individual market to give a national presentation of the cost per newly-insured person resulting from the SOTU policies.  The least expensive option, per capita, is a tax-deductible HDHP premium. The most expensive is increasing the tax-deductible threshold for the HSA.  Interestingly, the per capita cost of the tax credit proposal and entire SOTU are nearly identical.

  HSA Enrollees Uninsured New Insured AnnualSubsidy Cost (millions) Subsidy Cost per New Insured
Exhibit 1: Summary Effects of the 2006 State of the Union Impact from Simulation Model           
2003 Medicare Modernization 3,272,521 27,305,770 0 $0 $0.00
State of the Union 2006 16,194,845 17,802,877 9,502,893 $21,829 $2,297.12
    Tax deductible HSA premium 7,474,963 24,420,419 2,885,351 $5,136 $1,780.09
    More deductible HSA contribution 3,433,760 27,214,791 90,979 $393 $4,316.63
    Low income subsidy of HSA premium 11,929,312 20,848,203 6,457,568 $14,792 $2,290.66

It is important to note that these three components are not additive because of the way in which the simulation is calculated.  Each component is the result of a separate simulation.  Also, our model use 2006 premium estimates.  At this time, we do not premium estimates to identify a pre-MMA population (with 2003 premium estimates).

In summary, tax credits for high deductible health insurance premiums would reduce the number of uninsured.  That result, combined with the additional proposed policy change of making the HDHP premium tax-deductible, would lead to an even sreater reduction in the uninsured. Increasing the limit of tax-deductible contributions to the HSA has little public policy impact and is the most expensive policy of the three outlined in the SOTU.  Combined, the new policy options can have significantly more impact than the previous 2004 proposal with a reduction in the estimated per capita subsidy cost.  Of the three proposals, the most impact is produced by the tax credit proposal.  The least costly per capita proposal is the tax-deductibility of the HDHP premium.  The tax credit and premium deduction policies appear to have largely independent effects.  If the HSA contribution proposal is eliminated as an option, the tax credit and premium deduction components could be enacted in stages and not crowd out much of the other's effect. If the goal is to maximize the reduction in the number of uninsured, pursuing the 2006 proposal could reduce the uninsured by nearly 10 million persons, affecting over one third of the individual market.

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