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The health insurance industry has long been cloaked in an impenetrable veneer of terminology and it is now time to add two new acronyms to our lexicon – HSA (Health Savings Account) and HDHP (High Deductible Health Plan). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, added Section 223 to the Internal Revenue Code to permit eligible individuals to establish HSAs for taxable years beginning after December 31, 2003. You may think of an HSA as a 401(k) plan for healthcare – save money through pre-tax payroll deductions, earnings on the money are not includable in gross income, and distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income. Note, however, that unlike most 401(k) plans there is no vesting schedule to protect employer contributions. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan (HDHP). The price of admission to the world of HSAs is that the underlying health plan must be a “high-deductible health plan (HDHP).” An HDHP has an individual annual deductible of at least $1,000 and individual annual out-of-pocket expenses not exceeding $5,000. The HDHP has a family annual deductible of at least $2,000 and family annual out-of-pocket expenses not exceeding $10,000. Gone are the days of physician office visit copayments and first dollar coverage for prescription drugs. The only type of care that can be covered before the deductible has been met is that of preventive treatment. For calendar year 2004, the maximum monthly contribution for eligible individuals with self-only coverage under an HDHP is one twelfth of the lesser of 100% of the annual deductible, but not more than $2,600. For eligible individuals with family coverage, the maximum monthly contribution is one twelfth of the lesser of 100% of the annual deductible, but not more than $5,150. Certain “catch-up” provisions exist for individuals age 55 or older. Two Types of Purchasers You may have heard the saying that there is nothing wrong with crossing the line once in awhile - it’s jumping over it buck naked that will get you in trouble. I feel the same way regarding the unbridled hype about HSAs. Don’t get me wrong. These plans are viable programs that will benefit many Americans. But, there have been numerous articles written touting the advantages of HSAs and very few that really get into the important, practical details. Thus, there will be two types of purchasers of HSAs – (i) those who have thoughtfully researched the product and are comfortable with the increased patient liability of the HDHP in relation to the lower premium cost, and (ii) those individuals who have read so many articles that say HSAs are the answer to America’s skyrocketing healthcare costs and then go blindly purchase the product. Product Comparison Below you will find a comparison I did for an Atlanta client who was trying to decide whether to renew with his traditional healthcare plan or to purchase a HDHP and fund the accompanying HSA.
Bottom Line As you can see above, we have increased the individual patient’s liability from $2,500 in out-of-pocket costs to $5,000 and taken away the $15 physician office visit copayment feature and the prescription drug card. But, the employer saves $935.26 a year in premiums and the employee saves $119.05. If the employer and the employee contribute their entire premium savings to the HSA, an individual covered under this HDHP would have to be insured claim-free for 2.39 years before it would be more advantageous to be covered by the HSA ($2,500 in increased out-of-pocket costs divided by $1,044.31 in annual premium savings). Answer to Skyrocketing Healthcare Costs or Just Cost Shifting? The tax advantages of HSAs are real and tangible benefits to this type of program. An argument can be made, however, that the overall premium savings is due to the shifting of costs from the insurance company or employer to the patient. Let’s explore the HSA sales pitch:
Issues that are credited with causing high health care costs – the aging of our population, advances in medical technology, increased government mandates, and higher prescription drug utilization – are not addressed by HSAs. Costs are simply shifted from the insurer or employer to the patient. Who would want to purchase an HSA? As you can see from the product comparison we did above, healthy people benefit the most from an HSA because they don’t have to dip into their savings to pay for care. It is much harder for moderate or high consumers of healthcare services to get ahead under such programs. Thus, healthy person would consider it to be a relatively low risk to sign up for an HSA and a chronically ill individual would find it a high risk to select such a plan. Employers will find it difficult to gauge the risk to their employees and dependents. You can bet that in a 30 employee group you will have 2 moderate users of health care and one individual that is a high user. So now you are left with the decision to potentially harm these three individuals for the benefit of the rest of the group. One possible solution for this dilemma is if the insurer will allow for two plans to be offered. Conclusion The reader would be incorrect to conclude that I am against HSAs. I consider them to be just one of a number of tools available to satisfy an individual or group’s health insurance needs. They are a viable product and have a useful niche to fill. As you consider the purchase of an HSA, seek competent assistance from an insurance professional and take the time to educate yourself to a level above the superficial hype included in most news articles.
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Hype about Health Savings Accounts
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Editor: Debra F. Goldman (DGoldman@GMLJ.com) (This publication is the property of the Atlanta Association of Legal Administrators. Reproduction or reprint without prior permission is strictly prohibited. Click here to request reprint permission.) Designed/Distributed By 
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