AN OVERVIEW OF HEALTH SAVINGS ACCOUNTS
January 2005 - Health Savings Accounts were launched 12 months ago under federal legislation that took effect on January 1, 2004. Thousands of Americans have already switched to health savings accounts to save taxes and lower health insurance costs. Rosy forecasts predict that eventually millions of us will change our health plans to adopt this design as the concept gains popular approval. But large-scale changes to health plans may be slower than these predictions indicate. The current Health Savings Accounts program requires us to drop our previous health insurance in favor of specific high deductible insurance plans and then open a separate tax-free savings account with a custodian bank that works much like an Individual Retirement Account except that the deposits are used to cover health expenses. The Health Savings Account concept is widely praised by consumers, medical practitioners, and politicians alike but the actual procedure is plagued with a number of practical problems. Serious constraints that inhibit the growth of Health Savings Accounts are listed below.
Finding Affordable Health Insurance
Health savings accounts require us to have a specific type of high deductible health insurance. This high deductible insurance is less expensive than full coverage but in many cases the required insurance is still unaffordable. In New Jersey, for example, the least expensive health plan that qualified for a health savings account for people who purchase their own insurance was $708.42 for single coverage and $1,476.51 per month for family coverage. The national average price of HSA-qualified health insurance is over $200 per month for individuals (for insurance with a $2500+ deductible plus required co-payments) and over $400 per month for families (for insurance with a $5000+ deductible plus required co-payments). Some providers like www.MedSave.com , www.FreedomBenefits.net and www.CelticEnrollment.com specialize in low cost health insurance plans, including HSA-qualified insurance. Most individuals simply do not want to allocate this much of their income toward health insurance and so in New Jersey, like many other places, individuals do not purchase health insurance unless they are offered it as part of an employer-provided benefit plan, for example. Those without qualifying health insurance are locked out of the health savings account program under current law.
Federal legislation known as "HIPAA" phased into force over the past several years now makes health insurance available to every American, regardless of their health history or state of residence. These are usually called "state mandate plans" referring to the law that forced their creation. It would seem that we deserve a congratulatory "high five" for this action, but this is hardly the case. At this point, most people who need this coverage either cannot find it, cannot afford it, or just plain do not want it. To our knowledge, open enrollment HSA-qualified health insurance plans are available in less than 5 states. That means, for example, that if you have diabetes then participation in an individual health savings account is out of the question almost anywhere in the country. For the moment, health savings accounts are limited to health individuals or those offered qualifying employer-provided health insurance.
The complications between state and federal health insurance regulations mean that almost none of us can distinguish between a "qualified" and "non-qualified" health insurance plans. Some insurance companies issue clear written statements (usually right on the title page of the policy) to policyholders that their plans are "qualified" or "not qualified". Other insurance companies, unfortunately, skirt around the issue, playing dumb or letting policyholders draw their own conclusions. The problem with this is that is creates the risk that the HSA deduction will be disallowed by IRS. The solution is really quite simple: rely only on the written statement on the policy title page of the policy that says a plan is HSA-qualified. If that statement is missing, the plan is not-HSA qualified. There are no qualifying health insurance plans, to our knowledge, that do not have this identifying wording plainly printed on the policy title page.
When employers provide health coverage to employees, health savings accounts are not the most efficient means to provide benefits. Few employers are willing to drop their current health plans in favor of a more expensive insurance just to adopt HSA accounts that mimic health benefits the employees already have through other cafeteria health benefit plans. A far more popular and more efficient method of providing cash for uninsured health expenses is through a Health Reimbursement Arrangement. This more liberal cousin to the health savings account does not require any specific type of insurance and allows more latitude in the design and operation of health plans. More flexibility generally results in a higher level of benefits received by employees and a higher level of employee satisfaction with their health benefit plans. It would be silly for an employer to lock themselves into the constraints of the Health Savings Account program under current law. Freedom Benefits Association at http://www.FreedomBenefits.org provides more information on more attractive alternative low cost health insurance plans for small businesses.
There is no legal requirement to deposit money into a Health Savings Account. In fact, the balance in most health savings accounts is much less than the amount of the owner's insurance policy deductible. Many account owners say that after paying for the ever-increasing insurance policy premium they have little left over for savings. Some Health Savings Account owners admit that the lower cost of high deductible health insurance, rather than the savings account feature, was the primary draw toward this new program. The observation that so few Americans have the financial resources to fully fund a health Savings Account has prompted some politicians to blast the program "another tax shelter for the rich". Whatever the reason, under-funded health savings accounts mean that participants have a significant gap in their health coverage. Basic health care items like annual exams, prescription drugs and diagnostic laboratory testing is likely to be skipped because these are items that fall into the "uncovered" financial zone above the savings account balance but less than the insurance policy deductible.
Evidence gathered by employee benefits consultants under the earlier experimental medical savings account program indicated that few people actually deposited as much money into their savings accounts as they originally anticipated. Such is the nature of voluntary savings plans. Many benefits advisers believe that unless the deposits are funded through automatic deduction systems (from paychecks or otherwise) the Health Savings Accounts will never be properly funded.
The IRS has been silent on the issue of how it will determine who is eligible for a health savings account. Most tax-favored benefits programs (like IRAs, for example) are subject to both automated audit programs as well as manual tax audits. Certainly IRS agents will not spend time browsing through the pages of health insurance policies to make the determination. Yet the Health Savings Account program lacks the requirement for insurance companies to publish statements of eligibility or make the list of eligible members available to the IRS. These were the procedures used under the prior experimental Medical Savings Account program but it is not known whether these procedures will be used with Health Savings Accounts. Current law does not require that banks verify the eligibility of account owners before opening a Health Savings Account. Some banks estimate that a large portion of Health Savings Accounts are not really eligible for the plan. One benefits consulting firm estimated that 90% of the Health Savings Accounts opened online before July 2004 would have been considered ineligible by IRS. Even large financial firms like Merrill Lynch have erroneously opened health savings account that would not qualify under IRS rules. The widespread confusion is directly caused by the lack of clarifying communications from the Treasury.
New providers of health savings account qualified insurance and account administration are available with each passing month. Unfortunately, most of these new providers do not have a track record of service in either health savings accounts or medical savings accounts and are relying primarily on their overall reputation in other areas of financial service to attract customers. The largest national providers of both services are listed at http://HealthSavingsAccount-HSA.com. This listing will be updated from time to time as these new providers gain experience and market reputation with consumers.
The required link between Health Savings Accounts and health insurance is causing serious problems for this new benefit program. Freedom Benefits Association believes that the a federal legislative amendment to drop the required connection between health savings accounts and health insurance would be the best solution to these problems. This would facilitate a widespread consumer-directed focus on savings for health expenses. By eliminating the legislative requirement, we will unleash natural economic forces that will eventually have the same effect in curbing health care inflation. This topic is likely to be discussed in an upcoming bill making technical corrections to the Medicare Modernization Act of 2003 but this is just as likely to present an opportunity for legislators to restrict HSAs as to expand them, according to a report recently published by The Heartland Institute.
For now, consumers will find better values in other types of health insurance and will continue to use insurance that costs less than HSA-qualified plans like short term medical insurance and basic health insurance. Businesses will continue to find better values available in a consumer-driven Health Reimbursement Arrangement (HRA).
MedSave.com (www.MedSave.com) lists low cost health insurance plans nationwide. Freedom Benefits Association promotes low cost benefit plans for small businesses including Health Savings Accounts, Health Reimbursement Arrangements and Cafeteria Benefit Plans at www.FreedomBenefits.org.