Medicaid to offer HSA pilot program

Health savings accounts aren't just for the private market anymore.

President Bush has signed legislation that will allow up to 10 states to offer Medicaid recipients "Health Opportunity Accounts" that are similar to health savings accounts available in the private market.

The legislation originally was introduced by Sen. Mike Crapo (R, Idaho) and Rep. Mike Rogers (R, Mich.) in October 2005. It was later rolled into the budget reconciliation bill that President Bush signed into law last month.

The provision allows participating states to test whether HOAs encourage Medicaid recipients to be more cost-conscious about their health care decisions by giving them a stake in their health care spending.

Proponents note that HSAs in the private sector have shown that giving patients more control of their health care dollars motivates them to look for better value.

"That's especially needed in Medicaid, because people on Medicaid have had very little exposure to the actual cost of their health care consumption," said Grace-Marie Turner, president of the Galen Institute, a health policy research organization in Alexandria, Va., that advocates for consumer-driven health care.

But critics warn that putting these patients in the driver's seat could have a big downside.

"There isn't a lot of evidence that people in Medicaid are over-utilizing services," said Rachel Klein, deputy director of health policy at Families USA, a health care consumer group in Washington, D.C. "You don't want to be discouraging them from going to the doctor when they need to."

A strong supporter of HSAs, the American Medical Association has not taken a position on the HOA legislation but advocates that state governments be given the freedom to develop and test different models for improving coverage for low-income patients.

How the accounts work

States that participate in the demonstration program will be allowed to offer HOAs as early as Jan. 1, 2007, to Medicaid recipients who are not elderly or disabled. Recipients can use the accounts to purchase services that Medicaid normally covers, and their enrollment is voluntary.

States can put as much in the HOAs as they want, but they will receive federal matching funds for account contributions up to only $2,500 for an adult and $1,000 for a child each year.

Proponents say one of the goals of the demonstration program is to expand Medicaid recipients' access to physicians.

Beneficiaries can use their HOA to visit any doctor, including physicians who do not otherwise participate in Medicaid. These patients can pay any non-participating doctor up to 125% of the Medicaid fee schedule, although participating physicians are still limited to charging the standard Medicaid payment rate.

In addition, HOAs enable physicians to collect payment more quickly, said Kelly Childress, a legislative assistant to Rogers. Account holders will use electronic debit cards to pay physicians directly, she said. "The idea is that this will be much better for physicians, because they'll get paid immediately."

Like HSAs in the private market, the HOAs will be coupled with high-deductible health care coverage.

The legislation requires states to set the deductible between 100% and 110% of the amount they contribute to an HOA. That stipulation is designed to limit recipients' exposure to out-of-pocket costs. Once the deductible is met, traditional Medicaid benefits kick in, and recipients are required to pay the standard charges.

The pros and cons

But critics say the gap between the HOA and the deductible could pose a significant hardship to some Medicaid recipients, particularly those in poor health who exhaust their accounts but have not met the deductible.

Those beneficiaries "could face a substantial increase in their cost-sharing obligations, which would discourage their use of medically necessary services," according to an analysis published in November 2005 by Edwin Park and Judith Solomon of the Center on Budget and Policy Priorities, a liberal think tank in Washington, D.C.

In addition, they note that HOAs are predicted to increase federal Medicaid costs, mainly because beneficiaries can keep 75% of their account balance once they leave Medicaid.

Like HSAs in the private market, unspent funds in an HOA roll over at year's end. In some cases, Medicaid beneficiaries will build up a substantial sum, and they will still have access to those funds when they become ineligible.

HOA enrollees who leave Medicaid can use their remaining account funds to pay for health care services or coverage, or even job training and tuition expenses.

That makes sense, said the Galen Institute's Turner.

"If you don't need the money for health care, allow people to use the money for something they value -- that's part of the savings incentive," she said.

But Park and Solomon point out that this provision allows people who are no longer eligible for Medicaid to use federal matching payments for services not covered by Medicaid. The Congressional Budget Office estimates that HOAs will increase federal Medicaid spending by $60 million over the first five years.

Interested states

At least a half-dozen states have expressed interest in offering HOAs or similar health savings accounts in Medicaid, Childress said. They include Florida, Georgia, Kentucky, South Carolina, Texas and West Virginia.

Three states -- Florida, South Carolina and West Virginia -- already are moving forward with broad Medicaid reform plans that include some type of health spending account.

South Carolina has proposed accounts very similar to HOAs in the Medicaid waiver application it submitted to the Centers for Medicare & Medicaid Services in 2005, said Jeff Stensland, a spokesman for the South Carolina Dept. of Health and Human Services. The state is still waiting to hear whether its waiver will be approved, Stensland said. "We have expressed verbally as well that we are interested in the pilot program."

The federal program is limited to 10 states in the first five years, but the secretary of Health and Human Services is allowed to extend the program nationwide after the five-year period ends. If that occurs, the program's costs will triple over the second five years to a total increase in federal Medicaid spending of $265 million over 10 years, the CBO estimates.