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Eligible Plan Enrollees Did Not Open HSAs while Individuals Who Did Had 
Higher Incomes' which was released on May 14, 2008.

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Testimony: 

Before the Subcommittee on Health, Committee on Ways and Means, House 
of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:30 a.m. EDT:
Wednesday, May 14, 2008: 

Health Savings Accounts: 

Participation Grew, and Many HSA-Eligible Plan Enrollees Did Not Open 
HSAs while Individuals Who Did Had Higher Incomes: 

Statement of John E. Dicken:
Director, Health Care: 

GAO-08-802T: 

GAO Highlights: 

Highlights of GAO-08-802T, a testimony before the Subcommittee on 
Health, Committee on Ways and Means, House of Representatives. 

Why GAO Did This Study: 

With health care spending increasing, Congress enacted legislation 
effective in 2004 establishing Health Savings Accounts (HSA) to be 
coupled with eligible high-deductible health plans. The novel structure 
of eligible health plans coupled with HSAs has raised questions about 
who selects them and how they are used. Proponents contend that the 
lower premiums of the health plans and the tax-free savings potential 
of HSAs appeal to consumers, while the health plans’ high deductibles 
encourage enrollees to be more astute health care consumers. However, 
critics are concerned that HSA-eligible plans may attract enrollees who 
seek lower premiums but lack the resources to contribute to an HSA, and 
wealthy enrollees who may use the HSA primarily to accumulate tax-
advantaged savings. 

This statement focuses on (1) participation in HSA-eligible high-
deductible health plans and HSAs, (2) the income characteristics of HSA 
account holders, and (3) the funding and use of HSAs. This statement is 
based primarily on findings from GAO’s April 2008 report entitled 
Health Savings Accounts: Participation Increased and Was More Common 
among Individuals with Higher Incomes (GAO-08-474R). For that report 
GAO reviewed industry data on the participation in HSA-eligible plans 
and HSAs, and analyzed Internal Revenue Service (IRS) data on tax 
filers who claimed deductions for HSAs. The statement also draws on 
findings from related GAO reports issued in 2006. 

What GAO Found: 

GAO found that the number of individuals participating in HSA-eligible 
high-deductible health plans and HSAs increased significantly since 
2004. A series of health insurance carrier surveys reported that the 
number of lives covered by HSA-eligible plans increased significantly 
from about 438,000 in September 2004 to an estimated 6.1 million in 
January 2008. GAO’s analysis of IRS data showed that the number of tax 
filers ages 19 to 64 reporting HSA activity nearly tripled from about 
120,000 in 2004 to about 355,000 in 2005. Industry estimates indicated 
continued growth in HSA participation in 2006 and 2007. However, many 
HSA-eligible plan enrollees did not open an HSA. From 2005 through 
2007, 42 percent to 49 percent of HSA-eligible plan enrollees reported 
that they had not opened an HSA, and 20 percent to 24 percent did not 
plan to open an HSA, citing their inability to afford an HSA or a 
belief they did not need an account. 

Tax filers who reported HSA activity and enrollees in certain HSA-
eligible plans had higher incomes on average than other tax filers. For 
example, among tax filers between the ages of 19 and 64, the average 
adjusted gross income (AGI) for those reporting HSA activity in 2005 
was about $139,000, compared with about $57,000 for other filers. About 
59 percent of HSA filers had AGIs of $60,000 or more, compared with 26 
percent of other tax filers. Moreover, income differences between HSA 
and other filers existed across all age groups and within different tax 
filing statuses, such as single or joint tax filers. 

Among all filers reporting HSA activity in 2005, average 
contributions—reflecting both individual and employer contributions— 
were about $2,100, compared to average withdrawals of about $1,000. 
Among filers who reported HSA contributions in 2005, about 41 percent 
did not withdraw any HSA funds that year, while about 22 percent 
withdrew as much or more than their reported contributions. About 93 
percent of reported withdrawals were claimed for qualified medical 
expenses. Some HSA-eligible plan enrollees GAO interviewed for a 2006 
report were unsure what medical expenses qualified for payment using 
their HSAs, and few researched the cost of services before obtaining 
care. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-802T]. For more 
information, contact John E. Dicken at (202) 512-7114 or 
dickenj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you examine issues related to tax 
advantaged health savings accounts (HSA) and HSA-eligible high- 
deductible health plans. With health care spending increasing in the 
United States, Congress enacted legislation effective in 2004 
establishing HSAs to be coupled with HSA-eligible high-deductible 
health plans.[Footnote 1] The novel structure of HSA-eligible plans 
coupled with HSAs--a type of consumer directed health plan[Footnote 2]-
-has raised questions about who selects them and how they use the 
accounts. Proponents of consumer-directed health plans contend that the 
lower premiums of HSA-eligible plans and the tax-free savings potential 
of HSAs appeal to many consumers, while the high deductibles encourage 
them to be more astute health care consumers.[Footnote 3] However, some 
critics are concerned that HSA-eligible plans may attract enrollees who 
seek lower premiums but lack the resources to contribute to an HSA, and 
wealthy enrollees who may seek to use the HSA primarily to accumulate 
tax-advantaged savings rather than pay for medical expenses. 

My comments today are based primarily on findings from our April 2008 
report entitled Health Savings Accounts: Participation Increased and 
Was More Common among Individuals with Higher Incomes.[Footnote 4] My 
remarks focus on (1) participation in HSA-eligible high-deductible 
health plans and HSAs, (2) the income characteristics of HSA account 
holders, and (3) the funding and use of HSAs. 

In conducting our work for the April 2008 report, we analyzed industry 
data, Internal Revenue Service (IRS) data, and nationally 
representative survey data. To examine participation in HSA-eligible 
health plans we obtained estimates of the number of lives covered by 
HSA-eligible health plans from 2004 to 2007 from America's Health 
Insurance Plans (AHIP).[Footnote 5] For this statement we updated this 
information to 2008 based on AHIP's more recent estimates. To examine 
participation in HSAs, we analyzed 2004 and 2005 tax filer data from 
the IRS Statistics of Income (SOI) sample to estimate the number of tax 
filers reporting HSA activity in those years,[Footnote 6] reviewed 
various estimates of the number of HSAs in 2006 and 2007 that were 
reported in health care and financial industry publications,[Footnote 
7] and examined data from nationally representative surveys of HSA- 
eligible plan enrollees conducted from 2005 to 2007.[Footnote 8] To 
examine income characteristics of HSA account holders, we analyzed IRS 
tax data from the 2005 SOI sample. To examine funding and use of HSAs, 
we analyzed IRS tax data from the 2005 SOI sample and data from 
nationally representative employer surveys conducted from 2005 through 
2007.[Footnote 9] We performed this work from September 2007 through 
February 2008, and a detailed explanation of our scope and methodology 
is included in the report. I will also draw on findings from our 
related reports issued in 2006.[Footnote 10] We conducted all our work 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

In summary, we found that the number of individuals participating in 
HSA-eligible health plans and HSAs increased significantly since 2004; 
however, HSA-eligible health plans still represented a small share 
(about 2 percent in 2006) of individuals with private health coverage. 
While participation in both the eligible health plans and the HSAs 
grew, survey estimates indicate that more than 40 percent of the health 
plan enrollees did not open an HSA, citing among other reasons their 
inability to afford an HSA or a belief that the accounts were not 
needed. Tax filers who reported HSA activity in 2005 had higher incomes 
on average than other tax filers--about $139,000 compared with about 
$57,000. Among all filers reporting HSA activity in 2005, average 
contributions--reflecting both individual and employer contributions-- 
were about $2,100, compared to average withdrawals of about $1,000. 
Among filers who reported HSA contributions in 2005, about 41 percent 
did not withdraw any HSA funds that year, while about 22 percent 
withdrew as much or more than their reported contributions. About 93 
percent of reported withdrawals were claimed for qualified medical 
expenses. We reported in 2006 that some HSA-eligible plan enrollees we 
interviewed were unsure what medical expenses qualified for payment 
using their HSAs, and that few researched the cost of services before 
obtaining care. 

Background: 

Most Americans--about 202 million in 2006--receive health coverage 
through private health plans. Over the past several years, insurers 
have expanded their portfolio to include insurance plans with high 
deductibles, lower premiums, and, generally, an associated savings 
account to pay for services up to the deductible. These consumer- 
directed health plans are designed to reduce health care spending and 
encourage more consumer control. To help achieve these goals, insurers 
typically offer online tools to enrollees designed to help them 
evaluate the cost and quality of health care services. Experts suggest 
that reliable information about the cost of particular health care 
services and the quality of specific health care providers would help 
enrollees become more actively engaged in making health care purchasing 
decisions. 

Beginning in 2004, insurers began to market HSA-eligible consumer- 
directed health plans. HSA-eligible health plans are required to meet 
certain statutory criteria, including minimum deductible amounts, which 
are higher than health plan deductibles on average, and maximum limits 
on enrollee out-of-pocket spending.[Footnote 11],[Footnote 12] HSA- 
eligible plans are sold either to an individual or through group plans, 
such as those offered by employers. 

HSAs are tax-advantaged savings accounts established to pay for 
qualified medical expenses.[Footnote 13] Individuals are eligible to 
open an HSA and contribute funds if they are enrolled in an HSA- 
eligible plan and have no other health coverage, with limited 
exceptions.[Footnote 14] Both employers and individuals may--but are 
not required to--contribute to HSAs, up to an annual limit.[Footnote 
15] Individuals may claim a deduction on their federal income taxes for 
their HSA contributions not exceeding the limit. HSA withdrawals for 
qualified medical expenses are not federally taxed; withdrawals for 
nonqualified expenses are subject to tax and, when withdrawn before age 
65, an additional tax penalty. HSA account holders may access their 
account funds by check, by debit card, or by allowing providers to 
directly debit their account funds. Account administrators, such as 
financial institutions, report to IRS the contributions and withdrawals 
made to and from the accounts they manage, and individual account 
holders report to IRS the amount of withdrawals they used for qualified 
medical expenses or other expenses. Unused HSA balances may accumulate 
from year to year without limit and earn interest. HSAs are owned by 
the account holder and individuals may keep their accounts if they 
switch jobs or are no longer enrolled in an HSA-eligible health plan. 

Participation in HSA-Eligible Plans and HSAs Increased Significantly, 
and Many HSA-Eligible Enrollees Did Not Open an HSA: 

Industry estimates indicate significant increases in the number of 
individuals covered by HSA-eligible health plans. For example, a series 
of insurance carrier surveys conducted by AHIP found that the number of 
lives covered by HSA-eligible plans increased significantly from about 
438,000 in September 2004 to an estimated 6.1 million in January 2008. 
[Footnote 16] Despite the growth, HSA-eligible plan coverage 
represented only about 2 percent of individuals with private health 
coverage in 2006.[Footnote 17] 

Participation in HSAs also increased significantly. IRS data show that 
the number of tax filers between the ages of 19 and 64 reporting HSA 
activity nearly tripled from about 120,000 in 2004 to about 355,000 in 
2005. In addition, although industry estimates varied, all indicated 
continued growth in HSA participation in 2006 and 2007. For example, 
one industry publication estimated that the number of HSAs managed by 
major financial institutions more than doubled between 2006 and 2007. 
[Footnote 18] 

Despite the growth in HSA participation, many HSA-eligible plan 
enrollees did not open an HSA. Nationally representative surveys of HSA-
eligible plan enrollees conducted in 2005 through 2007 found that 42 
percent to 49 percent reported that they had not opened an HSA, and 20 
percent to 24 percent did not plan to open one.[Footnote 19] Reasons 
survey respondents cited for not planning to open an HSA included that 
they could not afford them or they did not believe they needed them. On 
the basis of an analysis of publicly available survey data and data 
obtained from IRS, we also reported that roughly 45 percent of HSA- 
eligible plan enrollees in 2004 did not report contributions to an 
HSA.[Footnote 20] Similarly, industry representatives we spoke with 
told us that many HSA-eligible plan enrollees did not have an HSA. The 
representatives also said that they expect that there would always be 
some share of eligible consumers who would choose not to open an HSA. 

HSA Account Holders Reported Higher Incomes than Other Tax Filers: 

Tax filers who reported HSA activity and enrollees in certain HSA- 
eligible plans had higher incomes on average than other tax filers. 
Among tax filers between the ages of 19 and 64, the average adjusted 
gross income (AGI) for those reporting HSA activity in 2005 was about 
$139,000, compared with about $57,000 for other filers.[Footnote 21] 
About 59 percent of HSA filers had AGIs of $60,000 or more, compared 
with 26 percent of other tax filers.[Footnote 22] Moreover, income 
differences between HSA and other filers existed across all age groups. 
(See fig. 1.) Income differences between HSA and other filers also 
existed within different tax filing statuses, such as single or joint 
tax filers. In 2006 we reported similar findings based on different 
data sources covering different time periods. For example, we reported 
that about 51 percent of HSA filers in 2004 had AGIs of $75,000 or 
more, compared with 18 percent of all tax filers under age 65.[Footnote 
23] In addition, we reported that among active federal employees 
enrolled in the Federal Employees Health Benefits Program in 2005, 43 
percent of HSA-eligible plan enrollees earned federal incomes of 
$75,000 or more, compared with 23 percent for all enrollees.[Footnote 
24] 

Figure 1: Comparison of HSA and Other Tax Filers' Average Adjusted 
Gross Income by Age, 2005: 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Age Category: 19 to 34; 
HSA filers: $67,064; 
Other Filers: $29,454. 

Age Category: 35 to 44; 
HSA filers: $143,681; 
Other Filers: $63,943. 

Age Category: 45 to 54; 
HSA filers: $153,404; 
Other Filers: $77,646. 

Age Category: 55 to 64; 
HSA filers: $189,345; 
Other Filers: $81,495. 

Source: GAO analysis of IRS data. 

Notes: Analysis was limited to tax filers between the ages of 19 and 
64. HSA filers included those reporting any contributions to or 
withdrawals from an HSA. Contributions include those made by individual 
tax filers or by employers or other individuals on their behalf, but do 
not include any funds that were transferred to an HSA from a medical 
savings account. Withdrawals did not include those made to avoid a tax 
penalty by removing contributions that were in excess of the allowable 
limits, or those made to transfer funds from one HSA to another. For 
returns of married couples filing jointly, returns were categorized 
based on the age of the primary tax filer, and the AGI included the 
combined AGIs of both filers. 

[End of figure] 

HSA Contributions Exceeded Withdrawals and Most Withdrawals Were 
Claimed for Qualified Medical Expenses: 

The total value of account holder and employer HSA contributions in 
2005 was about twice that of account holder withdrawals--about $754 
million compared to $366 million. Among all filers reporting HSA 
activity, the average HSA contribution was about $2,100, the average 
HSA withdrawal was about $1,000, and average contributions and 
withdrawals generally increased with both income and age. Employer 
survey data provided varying estimates of the extent to which employers 
contributed to their employees' HSAs. For example, a series of surveys 
reported that more than a third of large employers offering HSA- 
eligible plans did not contribute to their employees' HSAs in 2005, 
2006, or 2007.[Footnote 25] Another survey reported that 47 percent of 
small and large employers offering HSA-eligible plan coverage for 
families did not contribute to their employees' HSAs in 2007.[Footnote 
26] 

The extent to which account holders withdrew HSA funds varied, but of 
the funds withdrawn, most were claimed for qualified medical expenses. 
Among filers who reported HSA contributions in 2005, about 41 percent 
did not withdraw any HSA funds that year, while about 22 percent 
withdrew as much or more than their reported contributions.[Footnote 
27] This is consistent with statements from industry experts that 
characterized HSA account holders as either savers or spenders, where 
savers primarily used HSAs as a tax-advantaged savings 
vehicle.[Footnote 28] Of the HSA funds that were withdrawn in 2005, 
about 93 percent were claimed for qualified medical expenses. The 
remaining 7 percent of withdrawals were for nonqualified expenses, 
which are subject to tax and, if withdrawn before age 65, an additional 
tax penalty. 

We reported in August 2006 that some HSA-eligible plan enrollees we 
interviewed were unsure what medical expenses qualified for payment 
using their HSAs, and few researched the cost of services before 
obtaining care, although many researched the cost of prescription 
drugs.[Footnote 29] In addition, we reported in April 2006 that 
consumer-directed health plan experts and employers told us the tools 
provided by insurance carriers to assist consumers in assessing the 
price and quality of health care providers and services did not provide 
sufficient information to allow enrollees to fully assess the cost and 
quality trade-offs of health care purchasing decisions.[Footnote 30] 
They cited several reasons for this, including potential legal barriers 
to greater price transparency and a lack of consensus on what would 
make ideal quality measures. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 
answer any questions that you or other Members of the Subcommittee may 
have. 

For future contacts regarding this statement, please contact John E. 
Dicken at (202) 512-7114 or at dickenj@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this statement. Randy DiRosa, Assistant Director; 
Gerardine Brennan; Stephen Ulrich; and Timothy Walker made key 
contributions to this statement. 

[End of section] 

Related GAO Products: 

Health Savings Accounts: Participation Increased and Was More Common 
among Individuals with Higher Incomes. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-474R]. Washington, D.C.: April 
1, 2008. 

Health Savings Accounts: Early Enrollee Experiences with Accounts and 
Eligible Health Plans. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-1133T]. Washington, D.C.: September 26, 2006. 

Consumer-Directed Health Plans: Early Enrollee Experiences with Health 
Savings Accounts and Eligible Health Plans. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-798]. Washington, D.C.: August 
9, 2006. 

Consumer-Directed Health Plans: Small but Growing Enrollment Fueled by 
Rising Cost of Health Care Coverage. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-514]. Washington, D.C.: April 28, 2006. 

Federal Employees Health Benefits Program: First-Year Experience with 
High-Deductible Health Plans and Health Savings Accounts. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-271]. Washington, D.C.: 
January 31, 2006. 

Footnotes: 

[1] HSA-related tax advantages were authorized by the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 for 
individuals covered by HSA-eligible health plans--plans that meet 
minimum deductibles and maximum out-of-pocket spending limits. Pub. L. 
No. 108-173, §1201, 117 Stat. 2066, 2469. Both employers and 
individuals may--but are not required to--contribute to HSAs, up to an 
annual limit. 

[2] Consumer-directed health plans generally include three basic 
components--a health plan with a high deductible; an associated tax- 
advantaged account to pay for medical expenses under the deductible; 
and decision-support tools to help enrollees evaluate health care 
treatment options and costs. 

[3] HSA contributions up to annual limits are exempt from income tax, 
and withdrawals for qualified medical expenses are not federally taxed. 
Contributions exceeding the limit are subject to federal tax. 
Withdrawals for nonqualified expenses are also subject to federal tax, 
and--if withdrawn before age 65--an additional tax penalty. 

[4] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-474R] 
(Washington, D.C.: Apr. 1, 2008). 

[5] AHIP is a trade association representing health insurers. 

[6] We defined HSA activity for a given year as any reported 
contributions to or withdrawals from an HSA in that year. 

[7] We also interviewed officials from the organizations that prepared 
the estimates--Atlantic Information Services, Financial Research 
Corporation, and Information Strategies Incorporated--however, we did 
not verify the reliability of the estimates. 

[8] Blue Cross Blue Shield Association, CDHP Member Experience Surveys, 
2005, 2006, and 2007. 

[9] Kaiser Family Foundation and Health Research and Educational Trust, 
Employer Health Benefits: Annual Survey (Menlo Park, Calif., and 
Chicago, Ill.: 2005, 2006, and 2007) and Mercer, National Survey of 
Employer-Sponsored Health Plans (New York, N.Y: 2005, 2006, and 2007). 

[10] A list of these related GAO products is included at the end of 
this statement. 

[11] An out-of-pocket spending limit is the most an enrollee is 
required to pay toward the cost of covered services. The out-of-pocket 
spending limit includes deductibles and other payments, but not 
premiums. 

[12] These amounts are annually adjusted for cost-of-living increases. 
In 2008, the minimum deductible amount is $1,100 for single coverage 
and $2,200 for family coverage, and the maximum limit on enrollee out- 
of-pocket spending is $5,600 for single coverage and $11,200 for family 
coverage. 

[13] Qualified medical expenses are generally identified under the 
Internal Revenue Code (26 U.S.C. § 213(d)). 

[14] Limited coverage (including specific injury or accident, 
disability, dental care, or vision care) in addition to the HSA- 
eligible plan is permissible. 

[15] The annual contribution limit is adjusted annually for inflation. 
In 2008, contributions are allowed up to $2,900 for single coverage or 
$5,800 dollars for family coverage, regardless of the amount of the 
deductible. In 2007, contributions were allowed up to $2,850 for single 
coverage or $5,650 for family coverage. Prior to 2007, contributions 
were limited to the lesser of the deductible amount for the HSA- 
eligible plan or the limits specified for each year. 

[16] America's Health Insurance Plans, January 2008 Census Shows 6.1 
Million People Covered by HSA/High-Deductible Health Plans (Washington, 
D.C.: April 2008). The estimates included plans from the individual and 
group markets. 

[17] GAO analysis of America's Health Insurance Plans' 2006 and 2007 
estimates of lives covered by HSA-eligible health plans, and the U.S. 
Census Bureau's 2006 Current Population Survey estimate of lives 
covered by private health insurance. 

[18] Atlantic Information Services, Inc., "Number of HSAs Doubles Over 
Past Year; Firms Now Hold Nearly $2 Billion, ICDC Finds," Inside 
Consumer-Directed Health Care (Mar. 9, 2007). 

[19] Blue Cross Blue Shield Association, CDHP Member Experience 
Surveys, 2005 through 2007. 

[20] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-798]. 

[21] The median income of HSA filers in 2005 was about $72,000 compared 
with about $32,000 for other filers. 

[22] Other tax filers include both insured and uninsured individuals. 
The uninsured tend to have lower incomes than those with health 
insurance coverage. For returns of married couples filing jointly, the 
AGI included the combined AGIs of both filers. 

[23] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-798]. 

[24] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-271]. 

[25] Mercer, National Survey of Employer-Sponsored Health Plans, 2005, 
2006, and 2007. 

[26] Kaiser Family Foundation and Health Research and Educational 
Trust, Employer Health Benefits: 2007 Annual Survey. 

[27] HSA withdrawals may exceed contributions in a given year if 
balances are carried over from prior years. 

[28] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-514]. 

[29] See GAO-06-798. Information on HSA-eligible plan enrollee 
experiences was gathered from focus groups we conducted of employees 
from three large employers that offered HSA-eligible health plans. 
These focus groups also revealed that participants generally reported 
positive experiences, but most would not recommend the plans to 
consumers who use maintenance medications, have a chronic condition, 
have children, or may not have the funds to meet the high deductible. 

[30] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-514]. 

[End of section] 

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