Health Savings Accounts (HSAs) were recently made available for federal government workers and are becoming increasingly available in the private sector. While Kansas legislators considered allowing state and local government workers access to this session, their access to this coverage option currently remains unavailable. Encouraging the use of consumer-driven approaches would benefit state and local workers while also allowing legislators to witness directly the impact HSAs will have on behavior and health care outcomes. HSAs may also lead to another important benefit: cost savings.
Currently, state and local government workers enjoy generous health plans when compared to private industry workers. According to the Bureau of Labor Statistics, the proportion of compensation spent on health benefits was 50 percent greater among state and local government workers compared to those in the private sector. In fact, the average cost of health benefits per hour is more than double that of workers in the private industry.
For example:
- The average cost of health benefits per hour of compensation for all state and local government workers was $3.38 in 2004.
- This accounts for 9.9 percent of their total compensation.
- By comparison, the average hourly cost of health benefits for private industry workers was only $1.54.
- This is only 6.6 percent of total compensation.
Experts claim the high cost of health benefits strains the budgets of many state and local governments. In reality, it is the workers who suffer in the long run. This occurs because workers themselves are paying the high cost of their health benefits both directly and indirectly through reduced wages.
Excessive health benefits are inefficient in other ways. Some workers may prefer fewer health benefits in return for increased cash wages. For these employees, excess funds spent on health benefits are not an efficient form of compensation since they would prefer more cash instead of more health insurance.
The solution is to let these workers express their preference while giving them an incentive to be wise consumers of health care. This will allow them more control over how they spend their own money.
Workers with greater health needs or those merely wanting more health services could use funds set aside in their HSA. Those wishing to do so could add to the HSA funds tax free for use during the year or later in life. Employees wishing to cash out some of their benefits and take funds as compensation could do so after paying a penalty equal to the taxes they would pay on cash wages. Most employees would roll over a portion of the funds each year for future use.
The potential cost savings could be significant. A recent survey by Aetna of almost 13,500 members in their consumer-driven plan (called HealthFund) found that they performed very well compared to a match set of non-HRA enrollees.
Employers offering HealthFund as an option experienced very modest increases of 3.7 percent in medical costs, compared to almost 16 percent in populations with similar demographics and more than 14 percent for Aetna's PPO plans. One HealthFund plan sponsor with "full replacement" actually saw costs fall 11 percent. Half of the members had funds left over at the end of the year to roll over into the next calendar year – averaging 31 percent of their funds.
From a savings, satisfaction and health outcomes perspective, giving employees more choice and control over their health care makes good sense. Kansas policymakers should not keep state and local workers waiting for these benefits any longer.