Health Savings Accounts:

Are Wealth and Health Portfolio Choices Joint and Rational?Stephen T Parente, Ph.D.Associate Professor, Department of Finance, University of MinnesotaRoger Feldman, Ph.D.Blue Cross Professor of Health Insurance, University of Minnesota

Presentation at the International Health Economic Association Meeting, July, 2007

Sponsored by the Robert Wood Johnson Foundation’s Health Care Financing & Organization Initiative (HCFO) and the U.S. Department of Health and Human Services

Presentation Overview

Background Research Question Conceptual Model Empirical Approach Caveats Results Discussion

The Health Savings Account (HSA)

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HSAs legislated in Medicare Modernization Act of 2003.• Consumer owns the HSA• Unused $$ roll-over at year end• HSA must be purchased with

complementary high deductible health plan (HDHP)

• Can be purchased by consumers in the state-regulated individual or small group markets.

• Employers are also providing HSAs as part of their benefits package.

• Money deposited in HSAs is tax-advantaged.

• Unused $$ at 59 years of age can be used for medical care and retirement.

• Early withdrawal penalty for any use other than healthcare.

Previous Literature

Little literature on actual HSA plan choice. Lots of simulations and some survey work.

Dyan, Skinner and Zeldes (2004) use three sources of data to model whether the rich invest more. Specifically, they find a positive relationship between savings and income (though they examined lifetime income).

Goldman and Maestas (2005) find increases in risks of higher medical expenses lead to a reduction of exposure to other risks using Medicare beneficiaries choosing between different supplemental insurance elections.

Research Questions Is HSA choice related to retirement

investment decisions? Bonus question: What personal attributes

are associated with the choice of an HSA? If HSA choice is related to retirement

investment decisions, do consumers make ‘rational’ retirement portfolio decisions? Rational will depend on investor objectives

priors. Big Caveat, we are just developing what the

idea of what rational should be.

Conceptual Model of HSA Investment for ‘Max Saver’

Tax-free Saving

Taxable Income

Y(1-t)

Slope = 1/(1-t)

Slope = 1

We assume there is a subset of ‘maximum savers’ who wish to take advantage of all tax deferred savings opportunities. The person illustrated has “maxed out” her 403(b) contribution.

She chooses an HSA while maintaining her 403(b). The x-intercept for the budget constraint is after-tax income where Y = income and t = tax rate.

The budget constraint has a kink at the “Max 403(b).” Addition of the HSA option allows the person to move away from the kink, increasing her tax-free savings without reducing her 403(b) contribution.

Data to Test Hypotheses Large University employer with 16,000 employees. Quasi-experimental pre (2005)/post (2006) design with

introduction of HSA in 2006. Examined 2 cohorts of workers continuously employed

from 2005-2006: Chose HSA in 2006 Chose PPO/EPO/POS/HMO in 2006

Supplemental retirement data Participation and amounts contributed in 2005 & 2006 Pool 403(b) and 457 $$ together

Employee characteristics: age, gender, salary, plan premium (after-tax), chronic illness (from prior year claims), job class.

Plan CharacteristicsPLAN CHARACTERISTIC

HSA POS and PPO

Employer HSA contribution

$500 single $1,000 family

Not applicable

Deductible $2,500 single $5,000 family

None

Coinsurance/Co-pay 10% 10% Inpatient & specialty services $15 office visit co-pay $100 inpatient co-pay

Rx coverage Same as other covered services

$10 generic $20 formulary brand $30 non-formulary brand

Preventive Care 100% covered 100% covered Stop-loss limit $4000 single

$7,000 family $1,500 person (POS) $3,000 family (POS) $1,000 person (PPO) $2,000 family (PPO)

Standard Retirement Characteristics

Faculty Retirement Defined contribution Vested in 1st year Compulsory 2.5% employee contribution

matched by 13% employer contribution

Civil Service Retirement Defined benefit based on salary and years of

service Vested in 1st year Compulsory 4% employee contribution matched

by 4% employer contribution

Supplemental Retirement Characteristics

403(b) Program: Optional tax-deferred savings plan $14,000 limit in 2005 $15,000 limit in 2006

457 Program: Optional tax-deferred savings plan $18,000 limit in 2005 $20,000 limit in 2006

Can combine contributions (e.g., $35,000 contribution maximum in 2006)

Econometric ApproachBivariate probit of HSA choice and 403(b)/457

opt-in for simultaneous 2006 choices. Can test whether the two decisions are related

(rho). Can compute the probability of HSA investment

conditional on supplemental retirement investment.Difference-in-differences estimate of

supplemental retirement dollars for the HSA adopters and non-HSA adopters, given that employee opted-in in 2005. Two models estimated:

Control for ‘max-saver’ through interaction with annual trend and HSA choice

Leave ‘max-saver’ out of the model

Caveats

HSA take-up was very small in this employer. (0.4%) or 63 people/~16,000 Not expected to be this small given prior

enrollment in the consumer driven health plan (CDHP) of ~1,300 in 2005.

Results from just one employer.Two other employers for whom we have HSA

data but not retirement data have take-up rates of 1%.

Early results.

Employer Health Plan Choices in 2006

2006 Choices Employees Employee Total Employee Total Employee Total Employee TotalEPO 4,627 481$ 4,807$ 1,557$ 10,377$ 1,251$ 8,330$ 2,041$ 13,614$ Tiered Network 1,017 481$ 5,060$ 1,557$ 10,917$ 1,251$ 8,765$ 2,041$ 14,329$ Point of Service HMO 7,096 572$ 4,898$ 1,752$ 10,572$ 1,409$ 8,489$ 2,301$ 13,874$ Regional PPO 1,273 627$ 4,953$ 1,872$ 10,691$ 1,505$ 8,585$ 2,447$ 14,019$ National PPO 1,623 733$ 5,060$ 2,098$ 10,917$ 1,685$ 8,765$ 2,743$ 14,316$ HRA 170 783$ 5,109$ 2,135$ 10,954$ 1,911$ 8,991$ 2,470$ 14,043$ HSA 63 530$ 4,857$ 1,594$ 10,413$ 1,477$ 8,557$ 2,057$ 13,629$

Notes:EPO - Exclusive Provider OrganzationPPO - Preferred Provider OrganizationHMO - Health Maintenance OrganizationHRA - Health Reimbursement Account/High DeductibleHSA - Health Savings Account/High Dedutible

Single Employee + Spouse Employee + Kid Family

Descriptive Statistics 2005-2006 EmployeesRetirement $$ of HSA versus non-HSA Cohorts

2006 HSA 2006 Non-HSA

Sample Sample T-testVariable Mean Mean

Optional Retirement Savings in 2005 and 2006

2005 opt in to supplemental retirement (403B or 457)=1, else=0 0.547 0.318 ***2006 opt in to supplemental retirement (403B or 457)=1, else=0 0.509 0.333 ***2005 Amount invested in supplemental retirement program ($) 6,413.41$ 2,416.86$ ***2006 Amount invested in supplemental retirement program ($) 6,753.67$ 2,752.10$ ***Investing at 90th percentile of 2005 supp. program=1, else 0 0.132 0.034 ***Investing at 90th percentile of 2006 supplemental program=1, else 0 0.132 0.036 ***

N=13,164N=52

Descriptive Statistics 2005-2006 EmployeesCharacteristics of HSA versus non-HSA Cohorts

2006 HSA 2006 Non-HSA

Sample Sample T-testVariable Mean Mean

Employee Chararacteristics

Employee's tax-adjusted medical insurance annual premium 682.91$ 865.90$ ***

Employee or immediate family member has chronic condition=1, else=0 0.113 0.187 *

Employee elected a single contract=1, family=0 0.547 0.455

Number of dependents 0.811 1.133 *

Employee's salary minus tax liabilities 75,802.58$ 53,243.57$ ***

Employee is female=1, male=0 0.472 0.533

Employee age in 2006 47.04 45.92

Years at Employer in 2006 10.68 11.82

Professional job class=1, else =0 0.849 0.635 ***

Statistical Significance

*** p<=.001, ** p<=.01, *P<=.05

Bivariate Probit - HSA Choice

RobustVariable Description Coefficient Standard Error P>|Z|

Dependent Variable: Chose HSA Plan in 2006=1, Chose Other Health Plan= 0

Employee Chararacteristics

CONSTANT Intercept -2.758 0.249 0.000

ADJPREM Employee's tax-adjusted premium -0.431 0.167 0.010

CHRONIC Employee/dependent with chronic illness -0.190 0.158 0.232

KIDS Number of dependents 0.058 0.064 0.364

ADJPAY Employee's salary minus tax liabilities 0.000 0.000 0.012

FEMALE Employee is female=1, male=0 -0.101 0.091 0.269

AGEIN2006 Employee age in 2006 0.005 0.005 0.285

JOBYEARS Years at employer in 2006 -0.008 0.006 0.197

PROFJOB Professional job class=1, else =0 0.277 0.112 0.013

Bivariate Probit - Supplemental Retirement

RobustVariable Description Coefficient Standard Error P>|Z|

Dependent Variable: Opted in for supplemental retirement (403B or 457)=1, else 0

Employee Chararacteristics

CONSTANT Intercept -2.038 0.065 0.000

CHRONIC Person/dependent has chronic illness 0.067 0.031 0.030

SINGLE Employee/dependent with chronic illness -0.063 0.036 0.077

KIDS Number of dependents 0.000 0.013 0.999

ADJPAY Employee's salary minus tax liabilities 0.000 0.000 0.000

FEMALE Employee is female=1, male=0 0.085 0.023 0.000

AGEIN2006 Employee age in 2006 0.018 0.001 0.000

JOBYEARS Years at employer in 2006 0.025 0.001 0.000

PROFJOB Professional job class=1, else =0 0.282 0.026 0.000

rho 0.131 0.056

Difference-in-Differences Results

Standard Standard Variable Description Coefficient Deviation T-Stat Coefficient Deviation T-Stat

Intercept -7616.126 504.4787 -15.10 -2595.607 342.5622 -7.58

Year is 2006=1, Year is 2005=0 981.318 159.8085 6.14 959.064 113.2261 8.47

HSA 2006 Enrollment cohort=1, else 0 3144.154 1441.7124 2.18 941.192 1123.1388 0.84

HSA Cohort * Year 2006 Interaction 115.918 2036.2178 0.06 -278.754 1587.4520 -0.18

90th percentile contrib. cohort (Max Saver)=1, else 0 18620.108 254.307 73.22

HSA * 90th percentile interaction 381.276 2213.957 0.17

90th percentile * Year 2006 Interaction 560.133 352.035 1.59

HSA * 90th percentile * Year 2006 interaction 976.957 3130.242 0.31

Employee age in 2006 226.142 10.656 21.22 116.440 7.232 16.10

Employee is female=1, male=0 -1108.004 168.081 -6.59 -591.371 112.950 -5.24

Number of dependents 35.632 64.971 0.55 37.613 43.619 0.86

Employee's salary minus tax liabilities (in '000s) 24.796 1.992 12.45 12.595 1.343 9.38

Employee/family has chronic condition=1, else=0 294.903 193.123 1.53 -44.476 129.691 -0.34

Professional job class=1, else =0 4133.395 186.858 22.12 2485.810 126.460 19.66

Years at employer in 2006 -23.079 10.297 -2.24 -8.769 6.914 -1.27

Adjusted R-square 0.1916 0.6359

Observations 8824 8824

Individuals 4412 4412

Model 1 w/o Max Saver Variables Model 2 w/Max Saver Variables

Summary of Empirical FindingsEven with very small take-up, we find evidence

that HSA enrollment and supplemental retirement investment decisions are related. Pr (HSA|403(b)/457) = 41% (predicted from BVP) Pr (No HSA|403(b)/457) = 26% (predicted from BVP)

Those who invested in HSAs had greater contributions to their supplemental retirement. However, if we control for ‘max-savers’ in 2005, the HSA effect is negative and not statistically significant.

With the recent change in HSA law, the tax-savings investment potential for HSAs will only increase.

Is it Rational for HSA Takers to Use this Insurance for Long Term Investment?

Depends on Risk Profile If healthy, you will get greater rate of return If under 45 and healthy, you could self-fund

for several years, invest the HSA assets in growth funds and try to beat medical care inflation.

Depends on availability of other long term investment accounts and tax-deferred advantage.

Next StepsWork with another large employer

(N=~200,000 covered lives) to get 2006 HSA decisions and 401K decisions.

Also get portfolio data to fully examine conceptual model developed in our draft paper.

Identify whether the HSAs were ever debited. Explore correlations with prior health history given from claims data. This would help identify the tolerance for self-funding by consumers.

Identify the portfolio choice (risk vs. return) of HSA assets

Extend empirical tests to investor behavior from finance literature.

Thank You!

For more information on our research, please visit:

www.ehealthplan.org

Stephen T. Parente, Ph.D., M.P.H., M.S.Associate Professor, Department of FinanceDirector, Medical Industry Leadership InstituteCarlson School of ManagementUniversity of Minnesota321 19th Ave. South, Room 3-122Minneapolis, MN 55455612-624-1391 (v)paren010@umn.edu http://www.tc.um.edu/~paren010