Although Health Savings Accounts (HSAs) are new kids on the health insurance block, some industry experts contend the accounts could become the dominant form of health care financing in the next five to 10 years. Analysts project more than 40 million HSAs will be established over the next decade.
HSAs became available as of January 1, 2004, with passage of the Medicare reform measure signed by President George W. Bush last December. Designed to help individuals save for future medical expenses on a tax-free basis, HSAs can help build tax-sheltered nest eggs to cover out-of-pocket medical costs.
Workers below age 65 can accumulate tax-free savings for lifetime health care needs if they have qualified health insurance plans. A qualified plan has a minimum deductible of $1,000 for individuals and $2,000 for families. Individuals with self-only policies can set aside as much as $2,600 in their HSA, while families can set aside as much as $5,150 a year.
HSAs in Practice
Health insurance specialists acknowledge the merits of HSAs but maintain several important issues remain to be ironed out.
“What we’re finding mostly is although these plans impose a lot of risk on the insured, the premiums just do not warrant the risk,” said Deborah Mijal, an employee benefits consultant with Granite Group Benefits in Manchester, New Hampshire. “They could probably get an HMO and still have a competitive rate.”
Nevertheless, Mijal sees HSAs playing a big part in that state’s health insurance picture, because employers are currently bearing too much of the cost for employee health care. “For employers this is their second highest expense,” Mijal said, adding, “HSAs are great but they need to be priced accordingly.”
Assurant, formerly Fortis Health of Milwaukee, sold the first individual medical HSA policy on New Year’s Day.
“We’re seeing a very strong interest and response from insurance agents and consumers,” said Rob Guilbert, Assurant’s vice president of corporate communications.
Assurant says the premium savings on a high-deductible HSA plan is 50 percent or more versus a typical low-deductible plan. Assurant, like other providers, touts the tax advantages: Contributions to the HSA are not taxed, interest earned on money in the HSA is not taxed, and expenditures from the account for qualified health expenses are tax-free.
Guilbert believes HSAs will set the standard and eventually dominate the market, once the financial benefits, such as reducing monthly premiums, and the system-wide benefits of putting consumers in control of their own health care spending are better recognized.
“This type of consumer choice model will definitely be the primary model for health insurance,” Guilbert said.
To illustrate his point, Guilbert described the HSA’s impact on a hypothetical family in Ohio, with two 37-year-old adults and two children. With traditional insurance and a $500 co-pay, Guilbert said, the family would expect to pay a monthly premium of $600–a total of $7,200 a year in insurance premiums alone.
If instead the family was insured under the HSA model with a $5,000 annual contribution to the account, the monthly premium would fall to $250–just $3,000 a year. HSA tax savings (assuming the household is in the 25 percent tax bracket) add up to $1,200. Total savings for the family are $5,400, according to Assurant.
CareFirst Blue Cross and Blue Shield
CareFirst Blue Cross and Blue Shield, the top carrier in the Mid-Atlantic region, has announced plans to add HSAs to its consumer-directed health care plan portfolio. The company expects to sell the HSA product to large and small employer groups.
“We feel HSAs will sell well in our individual markets and we plan to pursue it,” said Cindy Otley, a product director with CareFirst in Owings Mills, Maryland.
To date, the larger employers in CareFirst’s coverage area have shown the most interest in HSAs. Such employers recognize they compete for employees with other firms, and HSAs are viewed as a substantial benefit that can be used to attract and retain qualified employees.
Otley says new consumer-directed health care products, similar to the HSAs, are on the horizon. Providers will be trying to get innovative and more competitive about how to deal with increased costs.
“More and more costs are being shifted to the consumer,” she said. “We think the market is steadily going to move in this direction using these types of accounts.”
One disadvantage with HSAs, according to Granite State’s Mijal, is educating consumers on how to use them. “We’re leaving a lot of decisions back on the consumer where they should be, but it’s a whole new way of assessing health care and being educated,” she said. “At our level we educate the employer and employees when working with them to put together comprehensive benefits plans in where risk is, where to take risk as well as what they can do to save money.”
HSAs aren’t for everyone. Small business owners and individuals should check first with their tax professionals to see if these high-deductible health insurance policies are a good fit.
Stephen Parezo is writer and editor for Fiducial, an international provider of small business services. This article is reprinted with permission. For more information, tips, and resources, log on to http://www.fiducial.com.
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