Communities: HSA/HRA/FSA Admin & Finance

The History of Health Savings Accounts: Commemorating the 10th Anniversary and Looking to the Future

December 8, 2013 will mark the 10th anniversary of health savings accounts (HSAs). In telling the story of health savings accounts, decades-long arguments on solutions to our broken health care system inevitably arise. With debates currently swirling around the chaotic implementation of the Affordable Care Act, the history of HSAs (and their precursor, medical savings accounts) sits at the heart of the free-market solution to health care reform.

To commemorate the 10th anniversary of HSAs, I've connected with many influential figures in the history of health savings accounts and asked them to tell their part of the story. Special thanks to Roy Ramthun, Ron Bachman, Bill Sweetnam, Beverly Gossage, Mike Parkinson, Kirk Hoewisch and John Young for their assistance in telling this history of health savings accounts.

The Fathers of Health Savings Accounts

Speak with enough experts in consumer-directed health care and a general consensus forms regarding the fathers of medical savings accounts: John Goodman and Pat Rooney. Although the idea of medical savings accounts seems to have arisen independently from many brilliant economic and health policy minds dating back to the 1970s, it is inarguable that these two figures loom large over the history of health savings accounts.

Throughout the 1980s and early 1990s, John Goodman, National Center for Policy Analysis, and Pat Rooney, Golden Rule Insurance Company, became nationally known for their advocacy of a law that would allow for tax-free contributions into a medical savings account. Their combined efforts included articles in prominent journals and meetings with key government officials.

Roy Ramthun, Founder, HSA Consulting Services, LLC; Former Senior Health Policy Advisor to President George W. Bush; "Mr. HSA": I served on the GOP staff of the Senate Finance Committee from 1990 to 1995. During 1992, “health reform” became part of the presidential election debate with then-governor Bill Clinton and sitting President George H.W. Bush offering plans to reform health care. Our committee held a series of hearings on the subject to begin to educate Members of the Committee on the topic. One of our hearings included Pat Rooney, CEO of Golden Rule Insurance Company, as a witness. I remember him being dressed in a blue seer-sucker suit and bow tie with a fashionable hat, which drew snickers from some of the Members on the dais. He struck me as a stereotypical Southern gentleman, so I was a little surprised to find he hailed from Indianapolis.

He was the last witness, and he talked about a completely different concept than the previous witnesses – none of whom I remember, only Mr. Rooney. He described an “experiment” that he had tried with his own employees: the concept of raising their insurance benefit deductibles and giving them cash (which came from premium savings) to offset at least some of the higher deductible. He put the cash he gave to employees in a “medical savings account” that each employee could access. He said the change in employee behavior was truly amazing. However, the cash was taxable, while the insurance premiums were not. So he described the distortion in tax policy that he felt was sending the wrong message to employers and employees. I remember being struck by such a simple concept – equalizing treatment of health care tax policy for health care expenses paid out-of-pocket with health care expenses paid through health insurance. I later learned that Mr. Rooney convinced six Senators – four Democrats and two Republicans – to introduce a bill to change the tax policy.

The Health Security Act – or Clintoncare – and Failed Attempts at Federal Health Reform

In January 1993, only a few months after being elected into office, President Clinton addressed the American people from the White House with his plans for health care. Influenced, the President said, by Americans with critical conditions who could not afford care, President Clinton cited the need for national health care reform, and to do so, he created the Task Force on National Health Care Reform. The task force was to be led by First Lady Hillary Rodham Clinton, as well as Clinton advisors Carol Rasco, Ira Magaziner and Judy Feder.

Roy Ramthun: The elections of 1992 brought the Clintons to the White House and the ensuing development of and debate over Clintoncare (also known as the Health Security Act). Medical savings accounts were never considered for a place in the bill but did appear prominently in GOP alternatives. As history records it, Clintoncare led to a stalemate (even with Democrat control of both House and Senate). And there wasn’t much more debate or discussion over MSAs. By 1996, I had left Capitol Hill and was now working as a lobbyist for an insurance company in the private sector. It was not an issue I was following at the time. But I eventually learned that a demonstration project that would allow self-employed individuals and small businesses to purchase MSA plans was included in the HIPAA law of 1996. I later heard that Sen. Ted Kennedy did not want MSAs included in the HIPAA law but eventually agreed to include them as a “demonstration project.”

Although medical savings accounts arose as a free-market alternative to the health care plan proposed by the Clintons, they failed to become law during the early 1990s. Despite this, several states like Missouri began passing their own laws allowing the creation of medical savings accounts.

The Seven Year's Test: Medical Savings Accounts

After the passage of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became law – but in a severely stunted version from what many had wanted. Following debate on whether MSAs should be included in the HIPAA law, the final version limited MSAs to a test program for only small businesses and the self-employed. Despite these restrictions, medical savings accounts did begin to make some ground in the health insurance industry.

Kirk Hoewisch, Senior Vice President, Sales, HSA Bank (formerly MSA Bank); early proponent of MSAs: “[In the 1990s], there was great difficulty in getting others to see the advantages of the HDHP/MSA concept. However, there were definitely other “believers” like myself, who were very excited about MSAs. For example, in those early years, I attended the National Association of Alternative Benefit Consultants (NAABC) in Chicago and met with the pioneers of CDHC: Rooney, [Harv] Randecker, [Greg] Scandlen and others. In those early years, there were only a handful of players besides ourselves (called State Bank of Howards Grove at the time). There was Norwest, Merrill Lynch and American Health Value. We all shared the vision and passion for the CDHC revolution.

Beverly Gossage, current GOP candidate for Kansas Insurance Commissioner; leading HSA/HRA consultant: My family owns Kastl Plumbing in Lawrence, Kansas that they started 43 years ago. About 11 years ago, my sister asked if I could help her with finding solutions for the company’s health insurance, which was experiencing another annual increase of 27 percent. I began doing research for them and discovered medical savings accounts. We agreed that raising the deductible, lowering premiums and putting savings aside for the employees made since. After my call to the Department of Insurance to ask which carriers offered these plans resulted in a list of carriers who merely offered group plans in Kansas, I began to call all of the carriers. I found two willing to consider an MSA for a group, but they were no help in locating an agent who was a specialist in these plans. I left my position as District Manager of Sylvan Learning Centers, got my agent's license and embarked on this new mission to assist businesses and individuals with finding consumer-driven health plans. I later discovered that Kastl Plumbing – to my knowledge – was the first, full-replacement MSA group plan in the country.

Health Reimbursement Arrangements and the Rise of the Start-ups

Around the dawn of the new millennium, the path toward great consumerism in health care was advanced with the evolution of health reimbursement accounts (HRAs). HRAs, revived by the Treasury Department's ruling that funds could be rolled over from year to year, were a huge boon to the emerging consumer-directed health care market. However, there is a key distinction; health reimbursement arrangements were not savings accounts for health care expenses. Through Treasury regulations, they were designated as health insurance policies.

Ultimately, an emerging group of start-ups, namely Lumenos and Definity Health, companies that would forever change the landscape of health insurance, began to catch the industry's attention. Initially, these groups were based around the HRA model.

Ron Bachman, Editorial Chairman, The Institute for HealthCare Consumerism; President & CEO, Healthcare Visions, Inc.; former Partner, PricewaterhouseCoopers: The recession beginning in 2000 encouraged some companies to move ahead without the Treasury approval to establish health reimbursement arrangements. At the time, they were simply referred to as Personal Care Accounts (PCAs). Medtronics, a durable medical equipment company, was in financial trouble and made the bold decision to lower their health care costs with a PCA plan design and force the Treasury into a decision.

In early September 2001, Speaker Newt Gingrich set up a meeting with Mark McClellan M.D., Ph.D., President Bush’s Chief Health Policy Advisor, and myself, then at PricewaterhouseCoopers. Also at the meeting were Joe Walsh, J.D., Principle, PwC, and Jon Comola, Chairman, The Wye River Group on Health.

PwC had been working with Medtronics and Definity Health, a new company founded by Tony Miller that was offering the PCA plan design. The concept of HRAs was presented as not needing any legislation but just getting the Treasury Department to make a declaration that Sections 105 and 106 of the IRS code could be interpreted to allow for accumulating health accounts. Dr. McClellan immediately saw the value of the approach as it would be a more consumer-centric approach than the use-it-or-lose-it requirements of the then popular but limiting flexible spending arrangements.
Mark saw the potential for a sea change in the insurance market. He stated that the Treasury could do this before the end of 2001.

Unfortunately, the tragedy of September 11 happened the next week and the administration’s efforts were sidetracked. But, after resolving some technical regulatory issues, in just nine months the Treasury on June 22, 2002 declared approval of HRAs. Many kudos go to William Sweetnam, the Treasury official in charge of getting the HRA regulations completed. In Washington, getting something this significant in nine months is the equivalent of moving at the speed of light. The success and growth of HRAs set the stage for HSAs to be passed in December 2003.

Mike Parkinson, Principal, P3 Health LLC; Past President, The American College of Preventive Medicine; formerly Executive Vice President, Chief Health and Medical Officer, Lumenos: I had known of “Archer” Medical Savings Accounts – sponsored by Congressman Bill Archer – through my work with the American Medical Association. MSAs were in the market, but constrained in number by federal legislation. MSAs promoted the ability of consumers to use tax-advantaged monies (recall that employers had a tax-advantage for providing coverage already) directly from providers. Definity and Lumenos initially used health reimbursement arrangements to provide account-based plans. Our Lumenos team worked closely with key IRS officials to assist them in crafting the health savings account regulations, which were released in 2004. I was privileged to be with Secretary Snow on the IRS’s release to discuss how health savings accounts, particularly if properly designed and supported with information, could be “good medicine.”

Health Savings Accounts Become Law

With the signing of the Medicare Modernization Act (MMA) on December 8, 2003 – and after a decades-long struggle – health savings accounts were finally law. President George W. Bush signed the bill into law following passage by a slim margin in Congress. The MMA was largest overhaul to Medicare in the program's history; at the last minute, health savings accounts were included due to the urging of Newt Gingrich and other Republican leaders.

Roy Ramthun: When I was asked to take a position at the U.S. Treasury Department in the fall of 2003, HSAs were not yet being considered as a provision of the 2003 Medicare Modernization Act which created the Part D prescription drug program. But I later learned that including HSAs, which no longer had most of the MSA “demonstration project” restrictions, was a key provision that helped persuade some more conservative Republican members of the House to vote in favor of the legislation. When I heard they were included, I realized immediately what HSAs were and how they might be able to change the debate on health care generally and for the upcoming presidential election cycle in 2004.

When I was told by Treasury Secretary John Snow’s chief of staff that HSAs were to be my new number one priority, I immediately recognized the opportunity to apply my health care experience to the development and implementation of the rules for HSAs, as well as the need for communicating those rules to insurance companies, banks, employers, and others who might have an interest.  We decided to create some initial guidance about the basic details of HSAs which was published in less than a month after enactment. We also decided to host a meeting of interested stakeholders at the Treasury Department to answer questions about the guidance and to request input on which areas needed the most urgent attention to help stakeholders understand the rules and take advantage of the opportunity to create HSA products.

Bill Sweetnam, Principal, Groom Law Group; former Benefits Tax Counsel, Office of the Tax Policy, U.S. Department of the Treasury; key legal figure in the formative years of both HRAs and HSAs: There was a short period of time from the enactment of the MMA in December of 2003 and the effective date for HSA provision in January 1, 2004. So, our biggest problem was determining what questions needed to be answered by guidance and when the guidance was required in order for there to be a successful roll-out of HSAs. We talked with the interested groups about those issues shortly after the MMA was passed and continued to have a dialogue with all interested parties about what guidance was needed to offer HSAs and high-deductible health plans. With the help of my staff at the Office of Tax Policy (most notably, Kevin Knopf) and the IRS attorneys at the IRS Chief Counsel’s Office, we were able to issue eight pieces of guidance by July 2004 that addressed many of the important issues surrounding HSAs and high-deductible health plans. Those government attorneys determined whether there were problems in administering the new law, and they proposed smart, effective solutions to those problems. Without the excellent lawyers at the Office of Tax Policy at Treasury and at the IRS Chief Counsel’s office, we would not have been able to provide the needed guidance that helped get HSAs off the ground.

Beverly Gossage: Before long the local and state Chambers of Commerce, the NFIB and other business groups asked me to do seminars for their members. I tried to research for articles and any information that I could find on these plans. I read Regina Herzlinger’s book, Michael Cannon’s articles, John Goodman’s blogs and visited Lumenos. I was so excited about the HSA legislation and couldn’t wait for all my clients and potential clients to have the benefits of an HSA since MSAs were restricted to small groups and the self employed. On January 1, 2004, I submitted multiple applications for clients and converted Kastl Plumbing and current clients to an HSA.

In March 2004, I received a fax from Assurant Health asking me to seize writing HSAs because they were not approved in Kansas. When I called the Department of Insurance to ask why this federal law was not approved in Kansas, they said legislators had to write a law that would allow HSAs to be tax deductible since the current law at the time said MSAs were tax deductible, and they asked me if I would be willing to testify in favor of this change and to explain these plans. That was the first of many testimonies on behalf of consumer-driven solutions. The law was passed, and they agreed to make it retroactive on behalf of my clients and others who may have set up these accounts prior to the law being written.

Consumer-directed Health Care Takes Off

In the mid-2000s, for the first time, health savings accounts and consumer-directed health care were given an opportunity to compete in the health insurance market without significant restrictions. With the strong growth of health savings accounts and other CDHC products, traditional health insurers began making offers to many of the innovative start-ups that spearheaded the CDHC revolution. Eventually, Lumenos was acquired by WellPoint, and Definity was acquired by UnitedHealthcare. Many other groups like HSA Bank were also approached with offers.

Mike Parkinson: But rather than accelerate CDHPs in some ways, in some more significant ways, the CDHP movement was blunted under the national carriers. First what was a transformational strategy for health insurance with a drive for healthy behaviors, patient care engagement, cost transparency and paradigm shift – it was the consumer’s/patient's money, not the plan's – became a plan option. Some major revenue streams for the nationals – for example, pharmacy “rebates” – were threatened. If consultants were challenging – brokers were even more so in the small to mid-sized employer market distribution channel. It became clear that the broker was the customer – not the employer. And the compensation models didn’t promote brokers selling CDHPs. The departure of the great majority of senior leaders from the acquirers at the end of their specified contracts was testament I believe to the fact that CDHPs weren’t embraced fully.

PPACA and the Future of Health Savings Accounts

When President Barack Obama signed the Patient Protection and Affordable Care Act into law on March 23, 2010, the U.S. health care system was forever changed. Although initially many experts believed the ACA could signal the death knell of health savings accounts, due to the dedication of industry leaders and miscalculations by the Obama administration on plan costs, health savings accounts have arguably become an integral part of the ACA as the de facto bronze plan in many states.

In a regulatory environment that is far from ideal – and one that many once feared – the future of health savings accounts remains bright. Ultimately, private sector innovations like private health insurance exchanges bode well for the future adoption of HSAs by U.S. employers.

Roy Ramthun: Over the next five years, I anticipate additional strong adoption of HSAs by employers and the private market generally. HSAs have demonstrated their staying power as a game changer that truly helps bend the “cost curve” in health care. Obamacare (especially the Cadillac plan tax provision) will only accelerate this adoption – even though that was not its intent. As the market grows, HSA administrators and insurance carriers will need to respond to the demand for more transparency, user-friendly tools, and programs that help support consumers as they take more responsibility for maintaining their health. I think it is too early to know what the response to HSAs will be within the state-based insurance exchanges. For many, it might be the only plan they can afford. I remain hopeful in this part of the market as well.

Mike Parkinson: Employers who choose to continue to offer health insurance will only be offering health savings accounts “done right” viz. with funding to the account and additional incentives for improving health and medical care. Using consumer-driven health plans to power and integrated health and productivity strategy – involving EAP services, disability and leave management, worker’s compensation and on-site services – makes the most economic sense. And its frankly what we’re doing now with an incentivized health management program at UPMC and integrated approach. Leveraging the use of new technologies with transparent pricing, comprehensive shared decision-making support and even incentives for their use will further drive savings and better care. And it goes without saying, individuals purchasing health savings accounts – if we support the most vulnerable with economic support to make care affordable – can work as well.

John Young, Leading CDHC Consultant; formerly Senior Vice President, Consumerism, Cigna; Founder, Consumer Driven Marketing (the mid-market distribution system for Definity Health): The future of health savings accounts and consumerism strategies has never been brighter. Today, we see mass adoption of HSAs and other account-based strategies in every employer segment, notably the middle market, which has been the slowest to adopt. Adding to this increased employer sponsored adoption, the experience of defined contribution health strategies is setting a very interesting new expectation; the majority of employees when faced with a defined financial contribution and expanded benefit choices are far and away self-selecting lower value benefits.

More than half of these employees are selecting HSA-qualified medical plans. Normal participation when offered as an option is 10 percent. Defined contribution strategies are seeing 50 percent HSA enrollment. This gives us insight to the exchange environment around the corner. Taking defined contribution as a preview, health reform and the Affordable Care Act will create many more participants in HSAs. The many different influences here are paving the way for HSAs: the elimination of Limited Coverage Plans and the looming Cadillac plan tax, to name a couple. But behavioral economics are powerfully in play – health savings accounts will succeed when you give people choice, make them spend their own money and offer them lower value options. 

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