The new Medicare law has focused public attention on government help to consumers in paying for prescription drugs. But the law also includes the less-heralded Health Savings Accounts (HSAs), which could have a major impact on the health insurance market.
An HSA combines a savings account with a high-deductible insurance plan. The deductible must be at least $1,000 a year for an individual and $2,000 for a family.
HSA supporters say the accounts will offer new chances to expand coverage to the self-employed, owners of small businesses and people whose employers do not offer health insurance. But critics say the accounts will segment the market, enabling the wealthy and healthy to enjoy tax breaks, while low-income and less healthy people remain in the traditional insurance pool.
The annual contribution to an HSA will vary depending on the size of the deductible. It can range up to $2,600 for an individual and up to $5,150 for a couple. Those 55 years and older can add another $500 to the individual account. Funds left in an HSA at the end of the plan year can be rolled over into the next year, without reducing the maximum amount that can be deposited in the new year.
An HSA is similar to an Individual Retirement Account because contributions are tax-deductible. However, it reaps even more benefits than a traditional IRA, which is taxed when money is withdrawn. By contrast, money in an HSA is not taxed when it is deposited nor when it is withdrawn. Money in the account can be spent for any medical bills — a doctor’s visit, a stay in the hospital, a prescription for medication. Over-the-counter drugs also are covered.
When an individual reaches age 65 and qualifies for Medicare, he or she is not permitted to make further contributions to HSAs. The money in the account can be withdrawn and used to pay for Medicare Part B monthly premiums or the costs of enrolling in a Medicare HMO. The money also could be used for the individual’s share of retiree medical insurance from a former employer. These costs can be significant, since many firms are placing a cap on the amount of dollars they will spend for retiree coverage.
In addition, workers who lose their jobs can use HSAs to pay premiums to continue employer-sponsored coverage through the Consolidated Omnibus Reconciliation Act, or COBRA. Under COBRA, former workers must pay 102% of the premium, plus a 2% administrative fee.
The insurance polices linked to HSAs must include catastrophic medical coverage for consumers. By law, the health insurance policies limit annual personal spending to $5,000 for an individual and $10,000 for a family.
The HSA market will make a splash in California this year. Blue Shield of California already has announced that it will sell the high-deductible polices that go hand-in hand with HSAs. All market segments will be offered the new plans: individuals and families, small groups and mid-sized as well as larger employers, according to Gina Stassi, a Blue Shield vice president. Deductibles for the Blue Shield plans will range from $2,250 to $2,400 for individuals and from $4,500 to $4,800 for families.
Stassi said the appeal of HSAs as savings vehicles could persuade some previously uninsured Californians to buy policies. “There are a number of people that choose to be uninsured not because they can’t afford it but because they don’t see the value of insurance,” she said. But an HSA can “fund your care in a way that gives value to consumers because the account provides dollars to use for future medical expenses.”
The new accounts also could be attractive to affluent professionals in California who might work as independent contractors and consultants or who might have short-term careers at several firms.
Such well-paid and mobile workers “can afford to put the money into these accounts,” noted Barry Miller, a senior consultant in the Los Angeles office of Segal & Co., a benefits consulting firm. These workers will welcome a tax deduction, confident that they can afford a high deductible and aware that the money belongs to them and can move with them to the next job.
But Miller cautions that “lower-paid people might not look at [HSAs] as favorably because of the higher deductible. It is harder for them to put money into the account.”
If individuals with HSAs are fortunate enough to stay healthy and avoid making withdrawals, the account should grow just as the money placed in an IRA would grow. Banks, credit unions and insurance companies, along with brokerage firms, would be the trustees for the money, holding the accounts and managing the money they contain. Eventually, there is likely to be a broad range of investments for the untapped balances in the accounts, including savings certificates and mutual funds.
A survey of 991 employers by Mercer Human Resources, a benefits consulting firm, predicted that 73% of the companies would offer HSAs as an insurance option to their workers by 2006.
The theory behind the HSA approach to health care assumes the existence of well-informed and prudent consumers who can afford high deductibles, know when to seek medical attention and when medical attention is unnecessary. HSA supporters are confident that millions of U.S. residents fit this description.
However, critics of HSA worry that the accounts pose potential dangers for a large number of consumers. Healthy people who skip a doctor visit to avoid withdrawing funds from their HSA won’t suffer any serious consequences. But those with chronic ailments who try to save a few dollars can be risking a fatal outcome.
Dr. Robert A. Berenson, a senior fellow at the Urban Institute’s Health Policy Center, offered this word of caution to Congress’ Joint Economic Committee: “We often hear of the patient with a straightforward clinical problem, such as an upper respiratory infection, who can avoid insurance, long waits and paper work by paying, say, $50 directly to a doctor in a clinic. We do not hear about the patient with an upper respiratory infection who also is a diabetic on insulin and has renal failure and hypertension.”
The HSA is something new in the U.S. heath care system, and it is unclear whether consumers will want to combine health services with a way to accumulate savings.