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Health Savings Accounts May Help Tame the Health Insurance Monster
Health Insurance Savings Accounts Provide a New Option

By Phillip M. Perry
Date Posted: 9/1/2004

For most employers the cost of health insurance is a front burner issue that only seems to get hotter as the flames get higher. Premium increases have registered in the double digits for three years running, according to surveys conducted by the Kaiser Family Foundation, Menlo Park, Calif. And many businesses with fewer than 50 employees are seeing premiums jump from 18% to 35%, reports the Midwest Business Group on Health, a Chicago-based consortium of 80 employers.

            Such increases are not sustainable. No wonder the National Federation of Independent Businesses cites affordable health insurance as the number one small business concern.

            Is the only answer to drop health insurance altogether? Not necessarily. More employers are looking at a new vehicle called the Health Savings Account (HSA), which promises to reduce wasteful medical spending by appealing to employees' self interest. Under these plans, the individual who spends less money on medical care ends up with more cash in pocket. And employee control over medical spending means, in turn, a lower financial burden for the employer.

            "There is likely to be an explosion of employer interest in HSAs," said Mark D. Wincek, head of the benefits and compensation practice at the law firm Kilpatrick Stockton and a partner in its Washington office. "These programs allow consumers to actually function like consumers. That reflects a genuine paradigm shift."

            Indeed, business owners are lining up for more information. Three out of four employers say they will consider taking on HSAs, according to a new survey from Mercer Human Resource Consulting, New York. Nearly one in five employers are 'very likely' to offer a HSA by 2006, and over half say they're 'somewhat likely' to offer the new plans by that time.

            HSAs took effect Jan. 1, 2004. While many employers are launching the plans now, Mark expects the ball to roll faster in 2005 and the following year. "Most large companies work on a calendar year cycle and those who are planning to launch HSAs are doing the groundwork now for January 2005," he said. (Large companies, which drive innovation in health insurance, were not able to use the HSA predecessor plan, the Medical Savings Account.)


How They Work

            An HSA combines two financial vehicles. The first is a personal, employee-owned savings account dedicated to money earmarked for future medical needs. The second is a high deductible health insurance plan. This plan kicks in when medical expenses exceed the specified deductible. Trustees for HSA plans may be any of a number of financial institutions, such as banks, credit unions, and insurance companies.

            Both the employer and the employee can make contributions to the savings account. Employer contributions are excluded from employee income for tax purposes, and employee contributions are deductible from taxes. Annual contributions can be made up to the deductible, which must be at least $1,000 for individual coverage and at least $2,000 for family coverage. Annual out of pocket (including deductibles and co-pays) will not exceed $5,000 for individuals and $10,000 for families.

            Money withdrawn is not taxable if it is used to pay for qualified medical expenses including specialist visits, drugs and long-term care services as well as the purchase of continued health care coverage for the unemployed individual (via COBRA). The interest and investment earnings generated by the account are also not taxable while they remain in the HSA.

            Funds withdrawn for non-medical purposes will be included in the account holder's gross income, taxed accordingly and subject to a 10% penalty.

            At retirement, the money in the savings account can be withdrawn without penalty.

            Given the above description, it's apparent how health care expenses are reduced: Employees will spend money only on health care they really need. The less the employee spends, the bigger the accumulated nest egg.

            Smart consumers will ask questions such as these: Is that generic drug as powerful as the expensive name brand? And that procedure the physician wants to do -- is it really necessary? As for that emergency room visit that seemed so automatic in the past -- would a Monday morning office appointment be more appropriate for the symptom?

            "As an employee I know that I will save money if I take a little more active role in my health," said Marcus B. Newman, an employee benefits consultant at GCG Financial, an insurance services firm in Bannockburn, Illinois. "It encourages me to be more attentive."


Employers Win

            So, less money will be spent on health care as employees become careful medical shoppers. But will prudent spending translate into lower insurance costs for employers? The answer is most often "yes" for smaller organizations facing large premium hikes. Marcus gives an example: One of his clients has three employees in a traditional health insurance plan now facing a 39% premium hike that will bring monthly outlays to $3,700. By switching to an HSA with a monthly outlay of $3,072 the group will save nearly $8,000 in annual premiums.

            An attractive feature is that employers need not put any money into the savings accounts, although they may opt to do so. "Straight up employers can say, 'We will put less money on the table,' pointed out Mark. "Such employers may feel better about switching to HSAs because they have been thinking of getting out of the business of providing health care altogether." That the employer is put in the driver's seat is one of the biggest attractions of HSAs; business owners can feel more in control of premium levels.

            The HSA as a full replacement product at smaller employers, then, is looking pretty good. But how about larger businesses? They will be loathe to dissolve their current insurance offerings and will likely add HSAs as an additional option. In such cases employer contributions to the HSA will need to be equivalent to those of other plans.

            Whether these larger employers will enjoy savings is still an open question. "To some extent the larger employers will need to make a leap of faith," said Mark. "A lot of them are saying, 'I'll give the HSA a shot. I'm not sure it will be a world beater, but I am frustrated with how things have gone under my current set of alternatives, and I am going to try something new.'" As their employees spend less money on health care, these larger employers may find premiums rising more slowly than in the past.


What's the Catch?

            Nothing good comes without cost. And while HSAs seem like an imaginative solution to the health insurance puzzle, there is a hidden price: The programs require employees to shoulder more responsibility for their own insurance plans. That means a level of labor, and of attention to detail, to which individuals are unaccustomed.

            "HSAs have a layer of administration that is not part of a traditional health insurance plan," said Marcus. "It requires a personal relationship between the employee and the organization that administers the HSA."

            First, for each health care expenditure the employee must make sure the proper paperwork is filed with the sponsoring organization. If correct procedures are not followed, the expense may not be counted toward the annual deductible.

            Second, the employee must make sure each expenditure is allowed under the terms of the high deductible health insurance policy to avoid the risk of unanticipated additional expense.

            Here's an example of how such additional expense can arise. Suppose the employee spends $1,500 on a procedure such as lasik surgery, which is not listed in the insurance company's "Explanation of Benefits" or EOB.  Despite such exclusion, the individual is allowed to pay for the procedure using funds from the health savings account.

            The problem, though, may arise down the road. Suppose the individual incurs an expensive medical emergency later in the same year. The individual may expect the insurance company to pick up the tab after the $2,000 deductible is reached, and may figure that the $1,500 spent on lasik surgery counts toward the deductible. But the insurance company points out that the $1,500 spent was for a procedure that was not listed in its EOB. Bottom line: The individual will have to spend another $1,500 out of pocket before the deductible is reached and the insurance company starts to pay off.

            The burden of responsibility, then, is being shifted from the financial shoulders of the employer to the moral ones of the employee. "HSA funds need to be used wisely or there won't be enough money left over to pay for necessary medications and procedures," said Mark.

            The moral is clear: Employees will need to sit down and read the lengthy, fine print of the EOB to figure out what procedures are reimbursable. "In the past people have tossed their EOBs into the garbage," said Marcus. "With an HSA plan you absolutely have to read them."

            Of course, reading the fine print of insurance policies and managing financial paperwork are not the most popular activities for most of us. The problem is even worse for individuals without a firm command of the English language. "These plans will be problematic for organizations with non-English speaking work forces," warned Marcus. "Most of the instructional material is in English."


The Road Ahead

            Are HSAs right for you? As this article has illustrated, they come with significant advantages, especially for those smaller employers looking at unsustainable premium hikes. In such cases HSAs are circuit-breakers for health insurance programs that have grown too hot to handle.

            Succeeding with an HSA, though, takes communication. Make employees aware of the program's financial rewards. Convince them to take a closer interest in managing their own health care. Finesse the educational demands, and you may find an HSA a great way to lower the flames under the health insurance pressure cooker.


Where to Get More Information

            For the most comprehensive and authoritative information about Health Savings Accounts (HSAs), visit The U.S. Department of the Treasury Web site at www.treas.gov/offices/public-affairs/hsa/.

            The law firm of Kilpatrick Stockton has made available a continuing round of excellent reports on HSAs. Go to www.kilpatrickstockton.com, then click on "Publications" and then "Legal Alerts." Scroll down to the "Employee Benefits" section for several HSA communications.

            Want to find an insurance company and a trustee for your own HSA? Search for both at The HSA Insider Web site, at www.hsainsider.com. This site also has links to the latest news stories about HSAs and offers a series of commonly asked questions and answers.

            For basic information about HSAs, see A Consumer Guide to Health Savings Accounts. (Despite its name, this presentation is also useful for employers.) Go to the Web site for the National Association of Health Underwriters at www.nahu.org/consumer/HSAGuide.htm. There is also a search form for finding insurance brokers in your city.


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