Contents

Health Savings Accounts
My Opinion
Useful Links

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Health Savings Accounts

The following article, excerpted largely from the 17 March issue of Forbes magazine, does an excellent job of explaining the various aspects of health savings accounts.

Consumer-driven healthcare plans are employer-sponsored health benefit programs that educate employees as to the true cost of medical services and hold employees more responsible for their medical purchase decisions. These new models require a more educated healthcare consumer and, as these consumers become financially responsible for more of the real cost of healthcare services, both demand and long-term healthcare costs will decrease. These new models come in a variety of designs: Health Reimbursement Accounts, Tiered Network Plans, Plan Choice Models, and Personalized Provider Network Plans.

Health Savings Accounts (HSA) are a new addition to this list. Their objective is to couple a high-deductible health plan with tax-free accumulation of funds to get employees to treat costs like their own money and be wise consumers. HSA funds roll over indefinitely and may be used tax-free to pay qualified medical expenses including COBRA premiums, retiree health insurance, or long-term care insurance.

Yet according to a recent Forbes Business article, there's a distinct possibility that these new accounts could fizzle out, as did their predecessors, Archer Medical Savings Accounts. Moreover, the Internal Revenue Service is expected to issue rules in the coming weeks that could play a big role in determining HSAs' appeal.

Under the new law, employees and self-employed people with high-deductible insurance policies—a minimum of a $1,000 deductible for an individual or $2,000 for a family—are eligible to open HSAs beginning this year. A worker and/or his employer can contribute, pretax, enough to cover the deductible up to a maximum of $2,250 for individual coverage and $4,500 for family plans, adjusted annually for inflation. The money in the HSA grows tax-deferred and can be withdrawn totally tax-free so long as it's used for medical expenses. HSA participants between 55 and 65 years of age can put away an extra $500 a year pretax. (That catch-up contribution rises $100 a year until it reaches $1,000 in 2009.)

A recent survey by Watson Wyatt and the National Business Group on Health found that 32% of large companies expect to offer employees some sort of high-deductible, consumer-directed option next year, up from 21% this year.

IRS Rulings on the Horizon

For now, Congress has left much about HSAs to be sorted out by the IRS. If big companies are to be able to offer such plans for 2005, the IRS must issue rules soon, in time for companies to incorporate HSAs into their open enrollment season this fall. There are three key decisions the IRS must make:

• Prescription drugs. Congress specifically said dental and vision plans could be offered separately alongside eligible high-deductible plans. But it was silent on whether prescription drug coverage can be carved out and offered separately, without a high deductible, to HSA participants. Workers have become accustomed to special drug plans, which aim to control costs with mail-order prescriptions and higher co-pays for certain drugs. HSAs are likely to be far less attractive if employees must forfeit their familiar drug coverage.
• Preventive care. Congress said high-deductible plans could allow some preventive care to be offered without a deductible. But what care? In preliminary guidance issued in December, the IRS suggested a narrow definition. The National Business Group, whose 201 big employer members include Microsoft, AT&T, Ford Motor, General Electric and Merck, argues that the IRS should allow plan sponsors to come up with their own broad definitions of what qualifies. Wellness services make plans more attractive, the group says. The group argues, "Group health plan sponsors and health insurers have no incentive to include services that are not effective as preventive care, [since] they would only add to their costs."
• Coordination with HRAs and FSAs. The IRS must decide how HSAs fit in with two other types of tax-advantaged accounts: flexible spending accounts and health reimbursement accounts. Employees can divert pretax dollars from their salaries into FSAs to pay for health care costs. Although FSAs have a huge drawback in that employees must use all the money they set aside each year by Dec. 31 or forfeit the cash, use of them has surged recently. The newer HRAs were actually created not by Congress but by an IRS ruling and can only be funded by contributions from employers, not employees. The money in an HRA can (employer permitting) be rolled over from year to year, but it can't be carried by an employee to a new job, as an HSA can.

The National Business Group wants the IRS to allow employees with HSAs to continue to use FSA and HRA funds to pay deductibles, co-pays and other uncovered costs so they can save the growing balances in their HSAs to fund healthcare costs when they retire. Such a provision would make HSAs akin to 401(k)s for health costs, an idea that Fidelity, for one, has been actively promoting. Fidelity calculates that even with the new Medicare prescription drug benefit, a couple retiring in 2004 at age 65, without any employer-paid retiree health benefits, needs $175,000 in savings to fund out-of-pocket medical expenses for the rest of their lives.

The IRS, however, tends to instinctively protect tax revenue and is unlikely to allow such flexibility. More likely, it will rule that HSA participants can only use FSA and HRA accounts for supplementary services not covered by their high-deductible health plans, such as dental and eye care and over-the-counter drugs.

The IRS will likely address the many unaddressed issues in guidance planning by early summer. They may be more useful for highly compensated employees who have higher discretionary income or to the younger, healthier population who are least likely to use or need healthcare. HSA plans are relatively complicated and will require commitment for education and decision support tools from employers.

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My Opinion

by Stephen Lafferty, E to E Editorial Board Member

To better understand Health Savings Accounts (HSAs), let's briefly review the history of medical insurance. In 1929, a group of Dallas school teachers each paid Baylor University Hospital 50 cents a month for 21 days per year of hospitalization. In the 1930s, hospitals across the country followed suit because they were cash strapped. These contracts were bought by Blue Cross. In the 1940s, these "Indemnity Plans" were developed to include physician and surgeon costs. These plans were promoted by Blue Shield which eventually incorporated itself into the Blue Cross/Blue Shield that we know today.

The 1960s created a new model because of other costs—primarily diagnostic testing, x-rays, labs and prescription drugs. This was the advent of the first true "Major Medical Comprehensive Plan," which included calendar deductibles and co-insurance.

The 1980s and 1990s brought us managed care in preferred provider networks like PPOs and HMOs. These contractual discount arrangements were designed to better control costs. However, these controls and managed-care safeguards are no longer managing costs.

Today we see insurance costs and premiums escalating like never before. This is due in part to price increases, but it is also due to heavy, lifestyle-related utilization. Because this country's insurance model has essentially remained unchanged for 50 years, employers, and therefore employees, are required to absorb more and more of these costs.

The HSA model simply pushes the costs over to the employee. Ideally, the HSA concept should make consumers more aware of costs, so they can become better consumers. The higher deductibles (as much as $2,600/individual—$5,150/family) should provide a premium savings, allowing the insured to put tax deductible contributions into health savings accounts.

HSAs don't offer meaningful premium savings because the out-of-pocket maximum for both HSAs and traditional plans are about the same. HSAs cannot offer coverages for office co-pays or drug card co-pays. And even if a person is a smart medical consumer, high maintenance drugs, hereditary health issues or a "routine" outpatient surgery can wipe out the HSA savings account and compromise a person's financial stability.

We're all starving for a solution to higher medical insurance costs. HSAs sound like a good idea—but when you look deeper, I feel that it's just placing a band-aid on the problem. HSAs are just passing on the high costs of insurance to the employees.

The "My Opinion" column states the opinion of one of the members of the E to E Editorial Board and does not necessarily reflect the opinion of the other members of the board or of the Northern Illinois Health Plan.

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Useful Links for Employers

National Association of Health Underwriters