Thoughts on Health Savings Accounts

Here are some thoughts on health care and health savings accounts courtesy of Marotta Asset Management:

Employers and employees alike are feeling the squeeze of swelling health care costs. According to the Kaiser Family Foundation, health insurance premiums have risen at an average rate of 12 percent per year since 2000. Unable to keep up with rising premiums, employers are forced to pass on costs to employees, to trim benefits, or worse, yet, to dump the coverage all together.

Sick of facing the same dilemma each year, more Americans are turning to consumer-driven high-deductible health care plans like those which offer Health Savings Accounts. Since their 2004 debut, enrollment has increased exponentially and is expected to gain momentum. By 2010, the Department of the Treasury estimates as many as 45 million Americans may be covered by an HSA-eligible plan.

Thus far, the results of HSAs are surprising. In fact, they may be nothing less than a miracle cure for America’s health care crisis. So, you say, isn’t a health insurance plan with a high deductible the exact opposite of a great benefits package? Nope. And here’s why.

The cause of healthcare’s malignant growth has been diagnosed as a lack of "negative feedback." All systems must have a regulator in order to dampen runaway reactions. Healthcare coverage is no exception.

One way to provide just the right amount of negative feedback is to make sure that the person who pays for a service is also both the person who benefits from the service and the person empowered to decide if the service should be given in the first place.

Traditional health care plans, on the other hand, are built on cost sharing. And, chances are high that you consume far fewer health care dollars than you pay in. Most of a plan’s health care expenses are generated by a small number of participants with chronic problems. In fact, the top 10 percent of the most ill patients account for 69 percent of total health care payouts in America. Additional expenses are generated by a small number of participants who abuse the system and consume services simply because they are not paying for them.

Instead of handing over thousands of dollars each year to a big insurance agency, why not keep most of those dollars in a savings account and use them on the services you actually need? There is no person better suited to determining the value of a medical procedure than the patient paying for the benefit.

Insurance is best used to limit catastrophic risk, not to pool everyday expenses. Therefore affordable medical insurance should have a high deductible. Out of pocket expenses below the deductible provide sufficient negative feedback to prevent skyrocketing insurance costs.

To help Americans cover the out of pocket costs of high deductible plans, the federal government passed legislation providing tax incentives in the form of Health Savings Accounts.

HSAs are just that, savings accounts. As long as funds are saved and spent on qualified medical expenses all contributions, capital gains and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP).

You may think your insurance has a high deductible already. However, to qualify as a HDHP, insurance deductibles must be a minimum of $1,050 for individuals and $2,100 for families. Once the deductible is met, most HSA-eligible HDHP plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan. A study by the Galen Institute found that the majority of HSA-eligible plan participants pay premiums of less than $100 per month. Try comparing that to the premiums for most insurance plans which average $335 for individuals and $906 for families - per month.

As an HSA owner you’ll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg. And, unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don’t spend one year carries over to the next year. After all, it’s your money. While you’re on a roll, why not check out the invest options offered by your bank?

So, you ask, what counts as a qualified medical expense? The IRS has approved a long list of qualifying expenses. In addition to doctor’s visits, hospitalizations, lab tests and the like, the list also includes prescriptions and some over the counter drugs like aspirin.

Qualified expenses may also include items which may or may not count toward your deductible. For some, that may include vision and dental costs like contact solution and teeth cleanings. HSA funds may also be spent on medical expenses for a family member not covered under the HDHP. However, nonqualified withdrawals will be considered as income and slapped with an additional 10% penalty tax.

So, what happens to your HSA when you leave your employer? The money is yours. No matter how many times you change employers, your account is fully portable. Accounts owners are immediately fully vested. All contributions made by an employer belong to the account holder.

And, there’s even more good news. Consumer-driven health care plans are positively shaping the behavior of the insured while pushing health care costs down. The Galen study found that HSA owners were more likely to engage in healthy behaviors and to get annual check-ups. It also reported they were more likely to inquire about costs and less likely to consume health care they didn’t need. And don’t think that the health care industry isn’t taking note.

It should come as no surprise that average costs for consumer-driven health care plans increased at roughly one-third of the rate of traditional insurance plans, according to Deloitte Consulting LLP. Among them, HSA plan premiums actually decreased on average by 17 percent for individuals and by 6 percent for families, according to a 2005 report by the nation’s largest online insurance broker, eHealthInsurance. Now that’s something everyone should feel good about.
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A couple thoughts:

1. The issue of high health care costs is not going away. It will continue to grow and will become a larger and larger part of our budgets until the system gets "fixed." The issue will be especially important for retirees.

2. "In fact, the top 10 percent of the most ill patients account for 69 percent of total health care payouts in America." Wow. Seems like a handful of sick people are really racking up the bills and the rest of us are (likely) footing much of the bill. In this scenario, if you're healthy, it pays to get out of the traditional medical care plans and consider the alternatives discussed above.

Comments

[Pete]

I keep on reading these articles, yet I really do not know how HSA's will controll costs long term? The premise is that when people spend their own money that they will control costs. Yet when "the top 10 percent of the most ill patients account for 69 percent of total health care payouts in America", why would these 10% control costs when they are covered by catastrophic insurance? Would they opt for a cheaper surgeon when they are already over their high deductible limit (and have no cost to them)?

Yes, consumers can control the costs of their routine check-ups and small procedures, yet if you look around, this is not the high costs items. So, if it is reduced, it may not be by much. And, for real emergencies, are you really going to ask the cost of the ER before the doctor stops the bleeding?

It is good for those who are healthy (if they remain healthy) who want cheaper insurance. And, the cost of insurance for those who are sick will go up because the cost is not offset by healthy people with lower costs. Unfortunately, we do not always know when we will be sick or healthy. Insurance is suppose to spread risks, not isolate them. Thus, I have not been a big fan of HSA as a long-term solution to health care costs for all.

[Mike]

If the premium is $200/month less for a single person, that's $2400/year which would more than pay the added deductable.

If true, that'd be great, particularly if my employer offered the plan and would kick the premium difference into my account.

[Duane Gran]

HSAs are a great option for healthy people, but the Marotta essay veers into commentary on public health matters and lays too much blame at the foot of the traditional insurance industry. Insurance is all about risk pooling and one of the consequences of consumer driven health care is that it leaves more sick people in the traditional system. Given a short window of time it is easy to laud the benefits of the HSA program but in time some of today's healthy people will become sick and some of the benefits will be seen as an artificial balloon created by young and healthy plan members.

The indictment about 10% of the people taking up 69% of the costs is not surprising. I've also heard that half of all medical expenses occur in the last six months of life. Everyone thinks that is outrageous until they are hanging on by a thread.

I'm not sure how well HSAs will work to really bring down health care costs. For one, the funds they represent are a very small amount of health care.

For another, when you're spending on health care, you're often in an emotional state of mind, or perhaps you're truly ill. Can you imagine - your kid needs surgury, do you send her under the knife with CostCutters Health Care or with the well respected hospital down the street? You're having a heart attack, do you shop around for the best price on stints?

Of course, we can't let prices continue as they are now, but I don't see how the macro economics of HSAs will do much in this regard.

[sam]

I am currently in an HSA/HDHP and think it is great. I pay my expenses from pocket and let the HSA money accumulate like and IRA. I don't agree with some of the ideas expressed by commenters above about how consumer choice can't affect health care costs. The reason so many costs are so high to begin with is because of the current system where the insurance pays and so no one looks at the cost. Compare surgical procedures covered by insurance compared to those not covered by insurance for an illustration. Lasik and plastic surgery are procedures not covered by insruance, and I'd bet the cost for them is going up less quickly than for hip replacements or angioplasties. The difference is that people look at their pocketbooks before getting plastic surgery or lasik, so providers have to hold the line on what they charge.