Morningstar Magazine - October/November 2017 - 37

Lower Use, Worse Healthcare Outcomes
Republicans talk up the appeal of consumer-directed
healthcare spending. This is often a health savings
account, or HSA, usually combined with a highdeductible insurance policy. Consumers can save and
invest, tax-free, in their HSA and then use that
money to pay out-of-pocket costs. This approach
assumes that consumers overuse health-care services
and that, when faced with spending their own
money from the HSA, they will be smart about spending
on high-value services from the lowest-cost provider.
While there is evidence of both overuse of some
services and underuse of others, policy research on
these types of cost-sharing arrangements strongly
suggests that consumers are not good at distinguishing
high-value services from low-value. When more
of the cost-sharing is shifted onto consumers, they tend
to reduce healthcare spending indiscriminately. On one
hand, high cost-sharing leads to a slowdown or
decline in healthcare spending (consumption). On the
other, patients might forgo necessary and high-value
services that lead to healthier outcomes. For example:
gThe Rand Health Insurance Experiment from the
early 1970s is the landmark study that demonstrated
how higher cost-sharing can reduce healthcare
spending. However, it also showed that costsharing reduced effective medical care, including
preventive services, especially among low-income
children and adults.

gMultiple studies have demonstrated the same dynamic.
For example, one study found that cost-sharing
lowered inappropriate hospital admissions by 27% but
also decreased appropriate hospital admissions
by 22%.1
gStudies of consumer-directed plans among patients
with employer-sponsored insurance suggest
considerable confusion about plan features and
self-selection. In other words, employees choosing
consumer-directed plans skew more educated,
high income, and healthier. These are also the folks
who, according to the Kaiser Family Foundation
in 2016, gain greater benefit from the favorable tax
treatment of HSAs.
gFinally, putting consumers in charge of shopping for
lower-cost providers has resulted in a reduction in
healthcare spending. We have not seen a shift toward
lower-cost providers among employees who had
extended access to price-shopping tools for physician
services and lab tests.
High-quality data on what constitutes high-value
versus low-value healthcare services might help
consumers discriminate where healthcare dollars are
most likely to lead to better health. However, we're not
optimistic that even the best data will overcome
the significant information asymmetry between doctors
and patients. Most patients still rely on their doctors

for advice and guidance on what healthcare services
are necessary, needed urgently, and valuable.
We are heartened to see that practitioners and
providers are beginning to advocate for lowering
financial barriers to high-value care. A recent editorial
in the Journal of the American Medical Association
pushed back on payer enthusiasm for shifting
more cost-sharing onto the shoulders of patients. The
Affordable Care Act attempted to address this
by making preventive care free of out-of-pocket costs.
However, none of the Republican replacement
ideas attempted to hone consumer-directed health into
a more targeted lever.
Aside from decreasing use, HSAs also primarily benefit
high-income households while leaving lower-income
families on the financial ropes. In one wide-ranging
policy study of HSA participants in employer-sponsored
plans from 2004-12, the authors found that the
high-income employees ($100,000-plus per year) were
four times more likely to max out their contributions
than employees from the lowest-income quintile.2
Our conclusion: We think consumer-directed tools will
likely encourage lower healthcare use across the board
and could lead to less-desirable health outcomes.
Debbie S. Wang is a senior analyst with Morningstar
Research Services.

1 Siu A., Sonnenberg F., Manning W., Goldberg G., Bloomfield E., Newhouse J., Brook R. 1986. "Inappropriate Use of Hospitals in a Randomized Trial of Health Insurance Plans." New England Journal
of Medicine, Nov. 13, 315(20), pp. 1259-66.
2 Helmchen, L., et al. 2015. "Health Savings Accounts: Growth Concentrated Among High-Income Households and Large Employers." Health Affairs, Vol. 34, No. 9.

naming a spouse as a beneficiary can make a lot of
sense, the last surviving spouse might consider
expediting expenditures from the HSA (at least to
match healthcare spending) and naming a
charity as the HSA beneficiary. In contrast to an
HSA inherited by a human beneficiary who's
not a spouse, the charity wouldn't owe taxes on
the inherited amount.
Much Potential

True, HSAs aren't specifically designed
as retirement-savings vehicles. Rather, their

ostensible function is to cover the higher
out-of-pocket costs that accompany being covered
by a high-deductible health-care plan rather
than a traditional health-care plan. But for people
with limited ongoing medical expenses,
an HSA can be a great piggy bank for additional
retirement savings. And the tax benefits
of HSAs are so generous that even people with
more significant health-care costs might consider
paying those expenses out of pocket, provided
they can afford to do so, so that their money can
continue to compound in the HSA.

The benefits of investing in HSAs are clear. It's
now up to the industry to offer investors
inexpensive, high-quality investment options. K
Christine Benz is director of personal finance
with Morningstar.

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