This month's tip is a little longer than usual, but I think it's worth it. I've asked Lin Osborn, a health care specialist, to share with you some important information on healthcare savings accounts.
The newly created Health Savings Accounts (HSAs) have hit the health insurance market after being signed into law on December 8, 2003. An HSA is a tax-sheltered savings account similar to an IRA, but earmarked specifically for medical expenses. Deposits are 100% tax-deductible for the self-employed and can easily be withdrawn to pay for routine medical bills with tax-free dollars. Larger medical expenses are covered by purchasing a low-cost, high deductible health insurance policy. Any funds not used in a particular year are rolled over into the following year, so unused funds are never lost.
Features and Benefits:
First, you and/or your employer fund an HSA with pre-tax dollars placed in a special account. You can do this on a monthly basis, or in a lump sum. The current maximum is $2,600 for an individual, or $5,150 for a family. There is a modest set-up fee and nominal annual administrative costs. Also, because these are such new products, there are currently some restrictions on the types of investments eligible to be used within the accounts.
Simultaneously, you and/or your employer purchase a High Deductible Health Plan (HDHP). To qualify, the HDHP must have an annual out-of-pocket maximum of either $5,000 for an individual, or $10,000 for a family. Not all high deductible plans are considered HDHP, so you must make sure that whatever you purchase meets the federal requirements. Predictions are that, on average, premiums for these should be about 40% less than current managed care products.
You will be issued a special debit card and a checkbook to pay for any qualified medical expenses until your deductible is met. These distributions are tax-free. Any funds left in your account will roll over into future years and continue to grow tax-free.
Qualified medical expenses include (but are not limited to) the following: vision services, dental care, OTC medication, chiropractic care, birth control pills, addiction services, some home improvements, long-term care and Medicare premiums. IRS Publication 502 lists all the qualified expenses.
The HSA is considered the property of the insured and is both portable and private. The owner, not the employer, therefore bears the responsibility for keeping track of costs and receipts, and filing paperwork so that the HDHP can determine when the deductible is met. When you qualify for Medicare, you can continue to spend the money in your account on medical expenses, including Part B premiums, again tax-free.
HDHPs are not managed care, but they still may have some cost controls. You may have in-network and out-of network payment structures, both before and after your deductible has been met. There are no co-payments below the deductible, but there may be afterwards. Prescription benefits may be tiered. Also, depending on the plan, you may pay a percentage of all costs up to another specified limit.
HSAs have the potential to save both the employer and the employee money in the form of premiums, while also providing a triple tax-free investment vehicle. Because the HSA's owner files all paperwork, administrative costs to the health plan and the employer should be reduced. Proponents say that eventually, if enough people sign on, doctors' offices will see a reduction in paperwork too.
What are the downsides?
First of all, these accounts offer an unprecedented triple tax-free status: they aren't taxed when they are funded, while they grow, or when they're distributed. Therefore, it is estimated that HSAs will remove $6.4 billion in income tax revenues from the Federal budget over the next decade. That money will either have to be cut from some programs, or replaced some other way.
Funding HSAs may prove difficult for the working uninsured. There is concern that too many simply won't be able to afford to fund the HSA to begin with. Although early response has been encouraging, it is far too early to tell if these products can continue to attract this segment of the market. Since this population would be primarily buying individual (not group) plans, they will also pay higher premiums than an employer sponsored group rate.
People who consistently spend more than their deductible will wind up paying more for health care, not less. This may encourage older or sicker people to stay with more traditional health insurance. Critics charge that these arrangements undermine the basic concept of insurance: spreading the risk. Further fragmenting the risk pool will drive the costs of traditional plans higher. If that happens, the most vulnerable may see their premiums skyrocket, while the young and healthy instead quietly build a nest egg for their retirement years.
Advocates are also worried that when people have to pay out of pocket, they may forgo needed care, even care recommended by their physician, in order to save costs. A recent study showed that when co-payments were lowered on prescription medications for diabetic patients, more people took them. So when their chronic conditions were controlled, total health care costs actually went down. Although the health plan spent more on medicines, they actually lowered their overall costs.
HSAs, one of the first "consumer directed" health insurance vehicles, are also promoted as encouraging greater individual choice. The theory is that people will become more sensitive to the costs of care once they begin to pay out of their own pocket, which will help drive costs down. While this may be true, there are few tools consumers can access in order to compare the outcomes of one treatment over another, or the skill levels of various doctors. In order to create informed consumers, the marketplace has to become far more transparent in regards to outcomes and price. This type of competition among practitioners and hospitals will further "commoditize" the practice of medicine.
In the early 1990's, Managed Care promised better outcomes, less waste, coordinated care and lower costs. The holiday lasted only five years before costs again began spiraling out of control. HSAs, and other types of "consumer driven" health plans, have no mechanism, save the invisible hand of the market place, to actually control costs. Health Savings Accounts are not any more tested than was Managed Care when policy experts promised it was going to fix the health care system in 1989. Nevertheless, we are rushing forward into a great national experiment that may transform medical delivery in this country.
Lin Osborn is the Director of Health Plan Navigator, an organization that specializes in resolving medical bill problems and errors for individuals who are overwhelmed by medical paperwork and red tape. Health Plan Navigator can be reached at (914) 478-5055, (800) 249-8116, or on the web at www.healthplannavigator.com. You can also reach Lin at firstname.lastname@example.org.