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Seminar Research Paper Series Schmidt Labor Research Center
2005 Health Savings Accounts: Are HSA's Beneficial from the Employee's View? Are HSA's Beneficial from the Employer's View? Rayna L. Paola University of Rhode Island
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Recommended Citation Paola, Rayna L., "Health Savings Accounts: Are HSA's Beneficial from the Employee's View? Are HSA's Beneficial from the Employer's View?" (2005). Seminar Research Paper Series. Paper 11. http://digitalcommons.uri.edu/lrc_paper_series/11http://digitalcommons.uri.edu/lrc_paper_series/11
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HEALTH SAVINGS ACCOUNTS: ARE HSA’S BENEFICIAL FROM THE EMPLOYEE’S VIEW? ARE HSA’S BENEFICIAL FROM THE EMPLOYER’S VIEW? RAYNA L. PAOLA University of Rhode Island
The healthcare industry is changing; the war against escalating health-care costs is taking a toll on employers. HSAs offer an incentive for the average healthcare consumer to make smarter health decisions. Designed to help individuals save for current and future qualified medical and retiree health expenses on a tax free basis; the idea behind HSAs is to make individuals wiser about spending their money on healthcare and motivate them to shop for the best value.
"The president believes the best way to make INTRODUCTION health care more affordable is consumer choice," The constant war against escalating health- he added. (3). care costs is taking a toll on employers. Countless Essentially, an HSA is a savings product that employers are softening the blow by shifting a offers a different way for consumers to pay for greater portion of costs onto the employees. In their health care. An HSA allows you to pay for turn, consumer driven health plans are the wave of current health expenses and save for future the future and they are being offered by employers qualified medical and retiree health expenses on a at an increasing rate. Consumerism has not tax-free basis. You must be enrolled in a High always been the philosophy of the past. By putting Deductible Health Plan (HDHP) to be able to take the consumers into the driver’s seat, they are advantage of an HSA. An HDHP normally costs encouraged to take a bigger role in their treatments less than what traditional health care coverage in order to make a more effective and efficient costs, so the money that you save on insurance can system. People need to ask questions about their therefore be put into the Health Savings Account. health care the same way they would if they were In addition, an HDHP will cover most of your purchasing an automobile “Consumerism will medical expenses should your expenses exceed the change health care, as it has affected every aspect funds you have in your HSA. of society,” said Aetna Inc. President Ronald A HDHP is often referred to as a Williams (6). “catastrophic” health insurance plan. It is an Across the country, a new health care choice is inexpensive health insurance plan that commonly under examination. A Health Savings Account doesn’t pay for the first several thousand dollars of (HSA) is an alternative to traditional health health care expenses (i.e., your “deductible”) but insurance. These new innovative Health Savings will generally cover you after that. An HSA is Accounts are designed to change the way millions offered to help you pay for the expenses your plan can save to meet their health care needs. They does not cover. The savings accounts should be offer a financial incentive for average people to used to help pay smaller covered medical expenses keep themselves healthy and minimize their use of until the deductible is met; should the need arise, costly services. the high deductible insurance policy takes care of HSAs were formed by the "Medicare covered medical expenses exceeding the Prescription Drug, Improvement and deductible. Modernization Act of 2003," signed into law by “In order to qualify to open an HSA, your President Bush on December 8, 2003. They are HDHP minimum deductible must be at least created to aid individuals save for future qualified $1,000 (self-only coverage) or $2,000 (family medical and retiree health expenses on a tax-free coverage). The annual out-of-pocket (including basis. "The president believes people should own deductibles and co-pays) cannot exceed $5,100 their coverage," said Doug Badger, a senior (self-only coverage) or $10,200 (family coverage). advisor to President Bush, adding that the HDHPs can have first dollar coverage (no president signed himself up for an HSA in 2004. deductible) for preventive care and apply higher
© Rayna L. Paola, 2005 Paola-Health Savings Accounts 2
out-of-pocket limits (and co pays & coinsurance) Decisions on how to spend the money are for non-network services” (17). made by you without relying on a third party or a As an extra incentive, individuals between health insurer. You also make individual decisions ages 55 and 65 are eligible for catch-up as to what types of investments to make with the contributions. Once reaching age 65, individuals money in the account in order to make it grow. must stop contributing to an HSA. The catch-up You may sign up for HSAs at banks, credit unions, contribution limit for 2004 is $500. For instance, insurance companies and other approved if you have self-only coverage, you can contribute companies. Employers may also set up a plan for up to the amount of your annual health plan employees as well. deductible plus $500, but not more than $3,100. Any individual under age 65, who is covered The catch-up contribution limit increases to $600 by a high-deductible health plan, may establish an in 2005 (15). HSA. Funds contributed to an HSA belong to With the exception of preventive care, you individuals and are completely portable. Every must meet the annual deductible before the plan year the money not spent would stay in the pays benefits. Preventive care services are account and gain interest tax-free, just like an IRA. generally paid as first dollar coverage or after a Unused amounts remain available for later years, small deductible, or co-payment. As you receive unlike amounts in Flexible Spending other non-preventive medical care, you must meet Arrangements that are forfeited to the employer if the plan deductible before the health plan pays they are not used by the end of the year (14). benefits. You may pay your deductible with funds RESEARCH QUESTION from your HSA or you can choose to pay for your deductible out-of-pocket, allowing your savings to Health Savings Accounts: Are HSAs beneficial keep on growing. from the employee’s view and Are HSAs Under most high deductible health plans, beneficial from the employer’s view? doctor visits and prescription drug expenses are “covered,” they are just not reimbursable until It is important to look at both the employee’s such point as the deductible is satisfied for the view and employer’s view when you are exploring year. Only covered expenses build up toward the healthcare options. The cost of healthcare is deductible it’s important to know what expenses skyrocketing and employers are looking to shift are actually covered under your insurance the burden of cost to the employees. First, I will contract. look at some literature focusing on the healthcare Additional covered expenses normally include economics behind HSAs. With high deductibles the same covered expenses you would expect to be on the rise, HSAs at least offer an incentive for the covered under a high-quality comprehensive major employee. For employers, the attraction lies in medical policy, including but not limited to, higher deductibles and lower insurance expenses. physician’s services in and out of the hospital, Employees have the option to invest wisely build diagnostic testing in and out of the hospital, and up a tax-free nest egg they can use for routine hospital charges, surgical expenses, transplants, care, elective surgery or retirement (25). etc. Naturally, exclusions and limitations apply. Cost is not the sole factor, while examining For example, dental and vision expenses are HSAs; other factors also come into play. I will typically not covered under the insurance policy. examine the employer’s perspective, the potential However, they are allowable expenses for tax-free benefits, the potential problems and what has to withdrawals from an HSA (2). happen for these benefits to be realized along with The idea of an HSA is for you to own and looking at the likelihood that these benefits will be control your own money. Basically, if consumers realized. The National Underwriter suggests to had to pay more of their health care expenses out not to let the excitement surrounding HSAs cause of their own pockets, they would make better you to make rushed decisions. They suggest taking choices. The hope is that HSAs will put a lid on your overall business development strategy into increasing health-care costs while still shielding account when analyzing HSAs and other options users against catastrophic medical problems (10). (26). Schmidt Labor Research Center Seminar Research Series 3
Then, I will look at the employee’s Although HSAs are still relatively new, Doug perspective, the potential benefits and the potential Badger, a senior advisor to President Bush, said problems. HSAs offer a tax free incentive for the White House believes they will play an employees along with portability and rollover important role in the industry. "We think Health features. Although HSAs seem attractive on Savings Accounts are going to revolutionize the paper, I would like to see if they will be beneficial market," he said, adding there has been a "real to everyone. If they are not universally beneficial, shift in the market," since the accounts debuted I am interested to see what categories of people last year and that the administration expects to see they positively and negatively impact. significant growth for HSAs in the small group market and among large employers over the next LITERATURE REVIEW two to three years (3). Healthcare Economics In 2004, America spent about 45% of its Healthcare gurus feel that applying market government health care dollars on Medicare, principles to individual health care decision makes Medicaid and the Veterans Administration. The the system more efficient. In turn, a movement majority of health spending that remains in the from employer-based to individually owned private sector is an exaggeration from what a real insurance, combined with a national market for it, free market should look like. This is due to the fact could have a revolutionary effect. Numerous lives that most Americans acquire their health coverage would be improved if individuals no longer from their employers, a remnant of World War II needed to fear moving or switching jobs for fear of when companies got around wage and price losing their insurance. In addition, a massive pull controls by offering it as a tax-free benefit. That on the efficient allocation of resources in the tax exemption has created a system that is on overall economy would be removed. shaky grounds. Dr. William West, a practicing gynecologist in The basis of this problem is that most of us do Reading, Pa., and co-founder of First HSA, a not really have health "insurance" in the sense of national health savings account administration protection against high and unexpected expenses. company states that "There is such a disconnect Instead, our tax subsidized policies are often a between patients, doctors, and the cost of form of prepayment for such predictable and medicine. A patient has no idea if a drug costs $20 routine events as an annual physical. With five of or ten cents a tablet, and the way the system is set every six health care dollars paid by third parties, up today, doctors have no reason to explain the patients have little or no incentive to make cost- difference. An HSA ties everything together. I'm conscious decisions and neither do physicians, convinced they are going to replace traditional particularly since our unrestrained tort system medical insurance in the years to come." places them in jeopardy of getting sued if they fail He firmly believes that when individuals pay to prescribe every conceivable test. Doctors carry for office visits and prescription drugs from out an estimated $50 billion worth of "defensive" accounts they fund themselves, they are less likely medicine every year (16). to run to the doctor for every minor ailment and American manufacturers are losing their more likely to ask about cheaper generics. Dr. ability to compete in the global marketplace in West is confident that HSAs are the new way of large measure due to the overwhelming burden of health insurance. "When I was in medical school, health care costs, General Motors Corp. chairman we were taught 'history, physical, and then tests' and chief executive G. Richard Wagoner Jr. said in when it came to evaluating a patient," he says. February 2005 as he called on corporate and "Today, technology and the fear of getting sued government leaders to find "some serious have forced doctors to order tests before they even medicine" for the nation's ailing health system. see a patient. When you sit down with a person Wagoner said he intends to press his case and explain the options, the costs, and whether a personally in Washington and with the nation's test is really necessary, you're making the governors (7). decisions together. That's the best way to make an "GM and the United Auto Workers didn't informed decision about your health” (5) cause this double-digit inflation in health care," he Paola-Health Savings Accounts 4
said. And if GM pushed for sharp reductions in set of incentives. For example, if a consumer has a health benefits, the powerful union would likely $3,000 deductible and can keep what he doesn't strike and send the company into Chapter 11 spend, he will shop around for a less expensive bankruptcy protection, he predicted. "The cost of pharmacy, move more quickly to generic or lower health care in the U.S. is making American priced brand-name drugs, question whether lab businesses extremely uncompetitive versus our tests are necessary and avoid costly emergency global counterparts," he said. "In the U.S., health room visits for relatively minor ailments. In short, care costs have been rising at double- digit rates wherever possible, the consumer will demand to for many years. In 2003, they were about 15 know how much things cost, look for the best percent of GDP, at least 30 percent higher than the value, and avoid unnecessary expenses. next-most-expensive country." (7). Critics say this is a free-market fantasy. They Two existing inefficient features of the current say HSAs will benefit the healthy and the wealthy health-care system that HSAs will help cure are without reducing costs, and may even increase the high administrative costs and lack of consumer number of the uninsured. The early evidence incentives to use health care economically. Each doesn't support the critics. eHealthInsurance of these issues are a result of the tax code, which, reports that a third of HSA policies sold through before HSAs, taxed health care paid for by its Web site have been to the previously uninsured, consumers but not that paid for by employers. The so they seem to be reducing the number of the result has been a third-party payment system under uninsured (24). which the person receiving the care commonly Evidence suggests HSAs will indeed aid in pays only a small share of the bill. controlling health-care costs. Aetna recently The initial setback with the current healthcare developed a consumer-driven health plan named structure is the high administrative costs HealthFund which incorporated incentives similar associated with having insurance companies to HSAs. They found, that in 2003, costs in the scrutinize and reimburse routine expenses. Doctors consumer-driven plan went up 3.7% compared to a who want to avoid insurance industry red tape pay, 16.2% increase for a similar patient population in on average, 8% of revenue to outsource this traditional insurance plans. Consumers in Aetna's function to a billing company. Even if insurance HealthFund used the emergency room less, companies spend only a quarter of the amount switched relatively swiftly to generic drugs, and doctors do on their reimbursement bureaucracies, took greater ownership of their own health care by more than 10% of the cost of a visit to the doctor researching prices and medical information using is exhausted on paperwork. Most of these costs Aetna's Web-based resources (20). would disappear if patients paid for their doctor HSAs let consumers choose how to spend visits directly (with a debit card, for example), their own health-care dollars. Ever since most which would be the case for most consumers who first-dollar expenses have been paid for by a third choose high-deductible plans with a health savings party (insurance companies), medical expenses account. have soared. We believe that individual Essentially, HSAs will save money by making consumers are better able to decide how and where the patient a consumer. Health care is the only to spend their health-care dollars than are sector in the economy where there is almost no insurance companies. People who buy medical price transparency or consumer price competition. services using their personal HSA funds will shop A majority of patients give no thought as to how around for the best value for their dollars, and much medical procedures, tests, doctor visits or health care providers will feel pressure to charge even prescription drugs actually cost. In most competitive rates to attract patients. In other cases, workers who are covered by employer plans words, doctors will shift their focus from serving only pay their usually small co-pay, therefore the insurance companies back to serving their having little incentive to keep costs down. patients. Mr. Laperriere, a managing director of the ISI Our previous system has led to a population Group's policy research team in Washington, feels that has the highest rates of diabetes, heart disease, HSAs present patients with an entirely different and other degenerative diseases in the world. By Schmidt Labor Research Center Seminar Research Series 5 making many preventative expenses eligible for “clear” at the end of each year, as funds in an FSA coverage through HSA accounts, and by letting typically do. HSAs offer an incentive for the people keep any money they don't use, HSAs employee to do away with frivolous medical provide a powerful incentive for people to take a expenses. more proactive approach to their own healthcare. HSAs are financially beneficial to employers. Only by giving individuals the freedom to All employers need to do is provide are low cost make their own choices can we as a society learn high deductible heath plans. It is only voluntary of the best solutions. By allowing the use of HSA that employers contribute to the employee funds to pay for alternative, holistic, and deductible (22). preventative treatments, innovation and It can be difficult for small businesses to offer investment will be encouraged in areas where the insurance to employees. However, the current system has failed to find solutions. The combination of an HDHP and an HSA lowers the end result should be a healthier populace with insurance rates for an employer, allowing small access to a wide choice of treatment options (16). businesses to fit health insurance into their The negative effects that HSAs may have on budgets. the market are that some people who are in need of Generally, premium payments for high care may refuse treatment in order to keep the deductible health plans cost the employer less money saved up in their HSA. For example, a money. HSAs offer small business owners the woman suffering from severe chest pains may not opportunity to provide an attractive tax-savings seek the treatment or tests that she would have component to go along with their high deductible sought if she were under an employer controlled health plan. The savings the employer realizes plan with no deductibles. Unfortunately, she is from the reduced premiums may be contributed by taking a huge risk by not getting checked out and the employer to an employee's HSA, helping to she may or may not have the early signs of a heart offset the increased deductible. HSAs can be used attack. The positive effects on the market are that as a recruiting technique for the middle of the road HSA’s will help costs go down by controlling individuals that are looking to maximize their out unnecessary costs. For instance, a woman with a of pocket dollars (23). stuffy nose may be more likely to purchase a nasal decongestant from the drug store than make a sick Employer Realization visit at her local Urgent Care facility. As of 2004, few employers introduced HSAs. Employer Benefits Observers say that the slow uptake was tied to lack of awareness and the lack of government guidance Approximately 25 million Americans do not on the accounts. Guidance was not published until have health insurance. However, the recent mid-2004, when many large employers had addition of HSAs allows employers to support already locked in their benefit plans for the their employees by providing an accessible and following year. affordable means for medical care as well as to “Employers have been taking a wait-and-see lure desirable employees by offering competitive attitude, waiting for this guidance,” explains Mark benefits. Hamelburg, an attorney with the Washington As James Claffey, President of Benefits Resource Group of Mercer Human Resource Unlimited in Cranston, RI sees things, consumer Consulting. “The government’s intent was to try to driven health plans can potentially save a lot of get as many significant issues in one package as money by changing those people’s health care they could, and hopefully this provides sufficient spending habits, and also reward the light users guidance so employers can now go forward, if (9). they wish.” (14). Contributions into the account may be made Due to their newness, "they don't want to be by either the employer or the employee, or both. the first ones on the block," said Rob Corrigan, The funds cover medical expenses not reimbursed director, product management, at Downers Grove, by a high-deductible health plan (HDHP). Ill.-based First Health Group Corp., a managed Additionally, money in the account does not care company. "They want to see how this really Paola-Health Savings Accounts 6
works out and get some sense of the issues" and “Many employers are moving quickly to offer what the experience is going to be, he said (12). HSAs as an option to employees and there is no On July 23, 2004 the Treasury Department question that employer participation in HSAs will and the IRS issued comprehensive, and long- have a major impact on how rapidly the market awaited, guidance on health savings accounts. develops,” says Dennett. This guidance answered questions covering a "I would say that probably 75% of our clients broad range of rules for both the employee savings have spent a considerable amount of time getting accounts and their accompanying high-deductible smart on HSAs," said Ray Herschman, Cleveland- health insurance plans. This assistance is projected based national practice leader for consumer health to overcome uncertainty that has prevented some strategy at Mercer Human Resource Consulting. employers from offering an HSA option to their "Most are either going to them as a pilot, or are employees. trying to develop a longer-term strategy so they "We are particularly encouraged that Treasury are in a position to offer HSAs," he said (14). and IRS continue to act quickly to resolve key Industry watchers anticipate the majority of questions about how these plans can be structured businesses will use early 2005 to evaluate what the and managed," says Paul W. Dennett, vice market has to offer and, if they opt to offer HSAs, president of the American Benefits Council, a draft education programs so employees are national association of benefit plan sponsors and prepared for open enrollment for 2006 or 2007. administrators. He adds that the new guidance Big companies "will watch the dust settle in 2005, “provides needed answers to many of the priority then make their move," says Chris Delaney, vice issues employers have asked the agency to clarify president of marketing at Definity Health, a as they decide whether to offer HSAs to their consumer-driven plan provider. employees.” (13). Company executives do their research and Among the items clarified by the guidance are likely look for major insurers such as United the following: Healthcare, Aetna and Cigna and consumer health- • •Benefits under employee assistance plans, care specialists such as Definity Health and disease management plans and wellness Lumenos to continue building awareness for their programs generally do not disqualify an insurance and HSA products (25). otherwise eligible individual from contributing Once the employer gets more familiar with to an HSA. consumer-driven healthcare and HSAs, they must • •Mistaken distributions from an HSA can be communicate this idea to their employees. repaid to an HSA without penalty or tax. Educational workshops and lunch-ins are highly • Generally, the flexible spending account recommended for HSAs to be well received by the (FSA)-type salary reduction rules do not apply majority of the employee population. Many to HSA salary reduction contributions, which employees are frightened when they first hear of generally follow the more flexible 401(k) type rules that allow changes in elections the high deductible concept, but feel more throughout the year as long as any election is comfortable once they are educated on the effective prospectively). incentive possibilities of putting themselves in the • Payments by individuals due to traditional driver’s seat. benefit limits that are part of reasonable plan “Because using the HSA requires a designs do not count against the out-of-pocket considerable shift from traditional plans like maximums. HMOs and PPOs, educating employees is very • Employer matching contributions made important.” (18). through a cafeteria plan are not subject to the comparability requirements. Employer Problems • Account fees paid from HSAs are nontaxable There was some "kicking and screaming" distributions; account fees paid outside of the when Neenah, Wis.-based Plexus Corp. moved to HSA directly to trustees are not treated as consumer-driven health care programs two years contributions. ago, says corporate benefits manager Sarah Novak. It required a "real shift in mindset for Schmidt Labor Research Center Seminar Research Series 7 employees, and it's been a difficult one," says Ms. employer decides to fund an HSA for each Novak, whose firm introduced a high deductible employee, that money now belongs to the plan linked to a health savings account in January employee. If the employee doesn't use it in the first 2005. year, he can carry it over to the next. Most Now, employees at the contract manufacturing importantly, if the employee leaves the company, firm are coming to her with reports of where they the money goes with them. This means all of what can get lower-priced prescription drugs. They are the employer places towards their employee’s "starting to be engaged, starting to look at the cost HSA deductibles is lost. Since the funds are of health care, which I think is really key," said portable, employer contributories essentially run Ms. Novak. That change in mindset is something the risk of the employee taking their money to that many other employers hope to see in their their next place of employment (26). own employees as they also explore HSAs. In some cases, employers are finding that their Although relatively few firms have introduced contributions to employees' HSAs are wiping out HSAs so far, there is strong interest in them by any premium reductions gained by raising employers, and many observers predict they will deductibles. "Employers shouldn't introduce a grow dramatically next year. high-deductible plan with an HSA alongside a Currently, most employers are offering HSAs typical PPO and expect to save money," said as an option along with other plans. Otherwise, Helen Darling, president of the Washington-based employees will perceive it as a "take away," said National Business Group on Health. "If they did Dan Plante, Chicago-based senior manager for everything else the same, except they put in an PricewaterhouseCoopers L.L.P. Over time, HSA, they'd spend money," Ms. Darling said. though, depending in part on how well they "And if they had 20% enrollment in that HSA, perform, "there'll be a migration" into using HSAs they'd spend a lot of money." While there is no on an exclusive basis, he predicted. rule of thumb, some benefit experts say that It remains uncertain how accepted HSAs will employers should contribute no more than 50% of be with employees who have other options. At the deductible to the savings accounts (31). Aetna, 15% of its employees have enrolled in one Additionally, some critics also see a problem of two HSA models introduced in January, which in that employers cannot make sure their is "pretty good," said Robin Downey, head of contributions are being used solely for health care. product development in Middletown, Conn. A current ruling by the Internal Revenue Service Another 64% remain in one of two models of an says that only the account holder can decide how HRA plan, which Aetna first introduced in January to use HSA money. That may make some 2002, she said. The company also has an HMO companies reluctant to contribute to HSAs (8). (12). Under the President Bush’s guidance, A number of employers will hesitate to employers may not restrict employees from using implement an HSA plan because of the additional account funds for non-medical expenses, as long work and coordination costs associated with as the employee is prepared to pay the related switching from their current plan. These taxes. This is an area in which the new health employers may feel comfortable in their current accounts mirror employee 401(k) retirement plan and without seeing and clear and immediate accounts. A number of employers had advocated incentive, they may be reluctant to re-invent the in favor of allowing the imposition of withdrawal wheel. Rashke of the National Underwriter feels restrictions (5). that some employers will worry about the possible Employee Benefits elimination of co-pays and other changes to their benefit structures. The most obvious benefit that HSAs provide Additionally, other employers may come to a to employees is autonomy over their account and decision that setting up a HRA or a section 125 over their own health care costs. Employees with plan is a better way to give employees a stake in HSAs not only own their account, but they are holding down health care costs. An important given the right to choose how the account funds factor to note, Rashke mentions, is that when an are spent. In addition, debit cards may be Paola-Health Savings Accounts 8
provided, allowing users to pay for services such as eye glasses, dental work, and fertility directly, bypassing reimbursement delays. treatment qualify as a tax-free withdrawal from an Employees benefit from tax-free growth and HSA, but may not be covered by a typical health the right to take their HSA with them from job to insurance deductible. Additionally, the law job. A major benefit of HSAs comes into play stipulates that these expenses can be paid for the when you do not need all the money for one year’s benefit of the HSA owner, spouse, or dependents medical expenses. Then, your HSA becomes a (29). powerful planning tool for retirement and future Premium and Tax Savings medical expenses. "It's the triple-whammy of tax planning: tax-free contributions, tax-free earnings Health Savings Accounts can help you save and tax-free distributions. There are very few money on both your insurance premiums, and your opportunities like that," says Hewitt Associates tax income taxes. Due to the fact that HSAs must be attorney Andy Anderson (10). paired with a high-deductible health plan, your The self-employed benefit the most from health insurance premiums are normally much HSAs, notes JoAnn Laing, author of “The lower than a typical plan that has a $500 Consumer Guide to HSAs.” They get a double deductible. Currently, there are no other benefit because they get to write off as a business investments that offer a tax deduction today along cost both the cost of the health insurance premium with a tax-deductible withdrawal tomorrow. The and the amount they contribute to their HSA each savings from the lower premiums along with the year,” Laing says, adding that businesses also tax deductions could be $5,000 or more every benefit, as they can write off the cost of providing year. catastrophic health insurance for their employees, “This example is based on the average health which already costs less than regular health insurance premium of an individual with a family insurance (19). of four living in a metropolitan area, covered “They get a double benefit because they get to medical expenses totaling $1,500, and $550 in write off as a business cost both the cost of the expenses for dental care, contacts and eyeglasses. health insurance premium and the amount they Health insurance premiums vary substantially contribute to their HSA each year,” Laing says, based on age, geographic location and other adding that businesses also benefit, as they can variables. Federal tax savings calculations assume write off the cost of providing catastrophic health that contributions are deducted from federal taxes. insurance for their employees, which already costs Withdrawals for nonqualified expenses prior to the less than regular health insurance age of Medicare eligibility are subject to a 10% Plans that feature higher deductibles are penalty by the IRS” (16). offered at lower premiums. This enables you to Long-term savings have more control over comparing all aspects of your care, such as location, quality, convenience, An appealing feature of HSAs is that they and also cost in the same way you choose other encourage individuals to stay healthy. Any money products and services you buy. Most plans from your HSA account that is not used to pay include no referrals required for specialty care medical expenses is yours to keep. The money within network, access to out-of-network care grows in the account free from federal taxes and (higher coinsurance applies), a $1,000,000 lifetime remains free from federal tax when you take it out maximum and in-network preventive care covered if it is used for qualified medical expenses. There at 100% with no deductibles. is a 10% penalty if the funds are withdrawn before A significant point to keep in mind is that the age 65 for a non-medical expense, but after age 65 list of qualified medical expenses is, to a large they can be withdrawn penalty-free for any reason extent, more comprehensive than most health (you do pay income tax on the money withdrawn). plans. As a result, expenses incurred for items
Schmidt Labor Research Center Seminar Research Series 9
Savings Chart
Typical Non-HSA Plan Typical HSA Plan . Individual deductible: $500 Aggregate Family deductible: $5,250 Coinsurance: 80% - 20% Coinsurance: 100% Premium Paid - $7,630 - $2,636 Your share of medical expenses - $700 $500 for deductible, - $1,500 ($1,500 claim) $200 for coinsurance Non-covered medical expenses - $550 - $550 (dental and eye wear expenses) Expenses Subtotal = - $8,880 = - $4,686 Tax Savings* on HSA Deposits (Assumes a 28%** tax bracket on deposit + $0 + $1,470 of $5,250, the maximum contribution allowed with a $5,250 deductible) Net Expenses - $8,880 - $3,216 (out-of-pocket minus savings) Total Net Savings with HSA Plan . = +$5,664
Because your unexhausted grow tax-deferred, For most Americans, out-of-pocket medical the investment opportunity is tremendous. expenses are a relatively small expense each year. Potential return depends upon the interest rate at This chart featured on the HSA America website which your investment grows, and on how much shows annual medical expenses for the United of your deposit is used to pay medical bills. States population by percentage: Investments can be placed in savings accounts paying 1 - 4%, or in stocks, bonds, or mutual funds with higher potential returns.
Long Term Savings Chart
Individual's Savings HSA Growth Over 30 Years. Family's Savings HSA Growth Over 30 Years. Based on a maximum yearly contribution of $2,650 Based on a maximum yearly contribution of $5,250
Medical Expenses 4% Annual 10% Annual Medical Expenses 4% Annual 10% Annual Per Year Return Return Per Year Return Return
$0 $149,914 $488,265 $500 $268,944 $875,939 $500 $121,458 $395,585 $1,000 $240,002 $781,676
These savings are based on 4% and 10% to place your investment into a variety of mutual interest rates. Your interest rate will fluctuate funds (16). depending on your investment and the market Unlike the funds you put in a flexible conditions. There are many companies that can spending account, an annual use-it-or-lose-it deal, administer your Health Savings Account. Some the money that goes into an USA compounds tax- offer a fixed interest rate, while others allow you free over time and is yours to keep. The less you Paola-Health Savings Accounts 10
spend, the more you get to keep. There are no Stipulations such a high-deductible health taxes to pay when you withdraw the money to use plan's pre-certification requirements; limits on it for health care. After you turn 65, you may do lifetime benefits; limits on specific benefits, such what you want with it (21). as the maximum number of days or visits covered; and limits to "usual, customary and reasonable Employee Realization amounts" can make HSAs seem daunting (13). For the self-employed and uninsured, an HSA Further, your health is unpredictable. You may be a no-brainer since it offers affordable may enroll in an HSA with a HDHP as a access to catastrophic medical coverage with a moderately healthy individual. Months down the tax-planning incentive. As long as you buy high- line, you may discover that you have a serious deductible insurance, you can even set up an HSA illness. The problem is, when you enroll in an on your own. The HSA Insider website HSA, you are using your current health as a (hsainsider.com) lists qualified HSA judgment for its attractiveness to you. Your health administrators. status at the time you enroll may not be the same If you are fortunate enough to receive six months down the line. If you are not able to employer-sponsored health benefits, deciding plan ahead, you may not have the money put aside whether to go with an HSA may be complicated. to pay the high deductible before you can receive In general, if you normally spend little on health treatment. Some critics of HSAs say that they will care or can afford to pay for what you do out of attract only the healthiest and wealthiest pocket, HSAs can be a great way to save tax-free employees, eventually making health insurance for future health costs or retirement. This may be more expensive for others (8). extremely appealing if you have maxed out your At first glance, HSAs look appealing to both 401(k) and IRAs. employees and employers. However, the plan is Naturally, when you are evaluating health designed in a way that only benefits those insurance, you want to be certain the doctors and individuals that do not spend all of the money services you use are part of the plan. There are elected into their HSA each year. wide variations among providers and plans, and it HSAs are intended to make consumers more is always essential to be sure you choose a plan aware of their choices; some see HSAs as a good will cover what you need (10). way for employers to push the rising cost of health care onto those needy individuals. Employee Problems HSAs are beneficial to those employees that HSA opponents worry that some people, are able to afford the deductible and are normally particularly low and moderate wage earners, will in decent health. Employees also have to be very forgo necessary medical treatment. This may lead selective in the healthcare that they seek in order to more severe conditions and expensive to save money to be rolled over. Although the emergency room visits down the line. Basically, high deductible health plan kicks in after the if a person can barely pay their rent and suddenly deductible is exhausted, the benefit of an is responsible for a deductible that is a thousand employee having an HSA is null if no money is dollars; they may not be able to afford the care that ever rolled over to save for retirement. they need. Additionally, if an employer does not contribute to Unfortunately, forcing individuals to make the deductible, then the HSAs are only appealing payment choices about their health coverage may toward high income individuals. Many lower mean many poorer individuals put off a trip to the income individuals find it difficult to meet the doctor, or skimp on important surgeries or check- $1,000 minimum. On a harsher note, low income ups to avoid depleting the funds in their accounts families must meet the $2,000 deductible before (19). their health plan takes effect. It is very difficult for For the very sick, the plans are less appealing large low income families to simply provide food though once the deductible has been met they will and shelter to their families. The though of get the same coverage as with traditional plans (9). reaching a large deductible for insurance to Schmidt Labor Research Center Seminar Research Series 11 become effective is nothing less than frightening frightening. High-deductible health plan's pre- for these poor people (22). certification requirements, limits on lifetime One survey shows that HSAs are not benefits, limits on specific benefits and spending appealing to many consumers. A report released in amounts are examples of the stipulations. January 2005 by benefits consultants Watson Critics argue that HSAs shift the cost and Wyatt Worldwide, based in Washington, shows burden of health coverage from the employer, that of nearly 1,000 individuals with health where they have traditionally been, to the insurance, 29% said they had heard of HSAs. consumer. In addition, they contend that HSAs More than half of those surveyed found the idea of deprive employers, unions and other large groups a high deductible "extremely undesirable," and of the influence that would otherwise gain them about two-thirds said the same about paying full deep discounts for medical coverage. Further, price for prescription drugs before meeting the critics say HSAs are most attractive to moderately deductible (28). healthy people who are less likely to spend all the While high deductibles and co-pays make money in their accounts, providing a tax-free way insurance more affordable for businesses, it just to save money. Basically, it’s those individuals shifts the cost and burden to the employees. With that have the luxury of making health choices that a health savings account, you get a tax break, but will benefit most from these accounts. it’s still your dollars. Many people feel that HSAs Others argue satisfaction around consumer- are just a nice way of pushing all the burden of driven health plans is at an all-time high. Many monitoring health care costs onto the consumer. health plans are reporting satisfaction levels of This is the primary reason why employee anywhere from 70% to more than 90%. In education is so important so employees know addition, rate increases have dropped significantly. where they stand when it comes to HSAs. Lumenos' rate increases dropped to 7% last year, compared with the 12% to 13% national average, CONCLUSION said Kronenberg. "Once employees use the plans, The healthcare industry is inevitably moving they often don't want to go back to managed care, towards consumer driven healthcare. Created by where they didn't have control of the money," said the Medicare bill that President Bush signed Dec. Kronenberg. Slightly more than half of the 8, 2003, HSAs characterize a key element of company's members reported having more consumer-directed health care. HSAs are designed knowledge in managing their health care after to help individuals save for current and future being enrolled in the plans, he said. qualified medical and retiree health expenses Some critics feel that the biggest beneficiary without incurring federal income tax and earning of consumer-driven health care will be the patient. federal income tax-exempt interest on the money Not only will consumers benefit from lower saved. Unlike the flexible spending account, with health-care costs, but HSAs will inevitably shift its "use it or lose it" rule that forces workers to decision- making away from employers and forfeit funds not spent within a year, any of the insurance companies to patients, who will have unused HSA money stays in the account until more control over one of the most important spent. The idea behind HSAs is to encourage aspects of their live; their own health care (20). individuals to be wiser about spending their Additionally, healthcare critics claim that the money on health care and motivate them to shop tax benefits are attracting many individuals to the for the best value. A primary goal is to reduce plans. Kim Bellard, vice president of e-marketing unnecessary use of health care services. and customer relationship management for Some employees like how HSAs work, a Highmark, stated that the company initially majority of individuals liked certain features, such thought healthier individuals would be drawn to as lower premiums and having control of the funds HSAs, but surprisingly believes that more "older, even after leaving a current employer, although high-worth" individuals may be opting for the they disliked the risk of higher prescription drug plans more because of their tax advantages than payments and deductibles. For the employee, the health-care benefits (6). certain stipulations can make HSAs seem Paola-Health Savings Accounts 12
There is no doubt that there is strong interest increased to 1.03 million from 438,000 in in them by employers, and many observers predict September 2004, according to results of a survey they will grow dramatically next year. Next year, sponsored by America’s health Insurance Plans, there will be an increasing percentage of Washington (4). employers who are interested in some variation of The bottom line is that businesses must gain consumer-directed health plans and a number of control of skyrocketing health insurance premiums those will ultimately have HSAs linked to them. if they are to continue to offer health insurance as According to a 3,000-employer survey an employee benefit. Qualified HDHPs, coupled released in the fall by the Kaiser Family with HSA accounts, are one possible solution well Foundation and Health Research and Educational worth considering (1). Trust, about 27% of employers say they are In conclusion, when the question is asked if "somewhat" or "very" likely to offer HSA-eligible HSAs are beneficial from an employers view, the health benefits in the next two years (28). answer is: It depends. The same is true from the Most employers that offer HSAs, particularly employee’s view. Each individual employer and large firms, offer the accounts as an option within employee has unique circumstances that illustrate their health care program, but smaller firms are the effectiveness of health savings accounts from more likely to offer them as a total replacement their view. Many factors play into the employer’s health plan. Employer funding of the HSA can role such as the size and flexibility of the company vary from zero to full funding, with most falling and the cost savings generated from the plan. somewhere in between, say observers. Generally, average, middle of the road employees Proponents anticipate that having to pay at benefit from HSA. The individuals that have the least initial medical expenses out of their own option of making choices when it comes to their HSAs, regardless of who initially funds them, will healthcare will benefit from HSAs and make an encourage employees to become more careful impact on the total market. Hopefully, through health care consumers. But relatively few education and incentives, HSAs can positively employers have introduced HSAs. Observers say affect the market. Unfortunately, low income or that the slow uptake is likely because the bulk of unhealthy individuals will not be attracted to needed government guidance on the accounts was HSAs due to high deductibles and lack of not published until mid-2004, when many large opportunity to enjoy the rollover and portability of employers had already locked in their benefit the tax free savings. Additionally, the individuals plans for the following year (12). who never visit the doctor will not impact the Some experts say that not all employers are market. finding huge bargains. Further, those that are Consumer-driven plans target people in the reaping some savings are sharing much of them middle-the ones who could choose to take generic with employees to encourage enrollment. drugs instead of brand name ones, or avoid the However, there are ways that employers can emergency room for all but true emergencies, or structure these plans to make them winning not get an MRU when an X-ray will do (9). propositions, if not the first year they are offered, Consumer driven health plans are the future of then in subsequent years by driving down future healthcare and they are being offered by claim costs (11) employers at an increasing rate. Ideally, by According to a 2004 survey of health plan putting the consumers into the driver’s seat, they costs by Mercer Human Resource Consulting, will take a bigger role in their treatments in order consumer driven health plans cost an average of to make a more effective and efficient system, $5,233 per employee per year, while preferred essentially keeping health care costs under control. provider organizations-the most prevalent plan in REFERENCES today's market-cost an average of $6,095 per employee per year (14). Current data, featured 1. Adams, Louis R. “Control Rising Health Insurance May 4, 2005 in the National Underwriter, shows Premiums”. Agency Sales. Feb 2005. Vol. 35, Iss. 2. that enrollment in HSAs has doubled in the past six months. The number of HSAs purchased has Schmidt Labor Research Center Seminar Research Series 13
2. American Health Value. “Five Reasons to have a 15. Hockenberry, Cindy. “Health Savings Accounts Health Saving Account”. 30 January 2005 Usually a Smart Choice”. www.health--savings--
29. Russo, Tami N. “Weighing Health Savings Accounts”. Pennsylvania CPA Journal. Philadelphia: Winter 2005.Vol. 75, Iss. 4. < http://0-proquest.umi.com.helin.uri.edu> 30. Walsh, Tom, “Controlling Health Care Costs” Health Care Costs. Jun 2004. Volume 3, 1-33. 31. Wojcik, Joanne. “Savings not necessarily quick with consumer-driven offerings”. Business Insurance. Chicago. 7 Feb 2005. Vol. 39, Iss. 6.