May 2006 NCSL State Legislatures Magazine: Power to the Patient

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May 2006

May 2006 Contents

Power to the Patient

Can high-deductible plans and health savings accounts lower premium costs and replace the traditional goal of comprehensive insurance?

By Richard Cauchi

Employers Sign On
Not All Rosy
Still An Appealing Option
How Health Savings Accounts (HSA) Work

From the Xerox corporate boardroom and Main Street small business owners to President Bush's State of the Union address, the talk of health savings accounts has attracted headlines, high profile support and nagging concerns.

The idea behind this new way of buying health insurance is to give the patient control over how her health-care money is spent--is that MRI really necessary for a sore elbow? Because if she doesn't spend it, she gets to keep it. The money stashed pretax in the health savings accounts can build up over the years, tax-free. On top of that, there's a significant out-of-pocket savings on premiums. Depending on the deductible (ranging from $1,050 to $10,000 annually), policies can be 10 percent to 60 percent cheaper than traditional insurance.

Florida Representative Frank Farkas says the best way to control health-care costs and increase access is to put control of health-care choices back into the hands of patients, which is what HSAs do. Consumers are more frugal spending their own money than when they spend an insurer's, and they have an incentive to adopt a healthy lifestyle because it could save them money.

EMPLOYERS SIGN ON
Employers also like the plans. Wendy's, the fast-food chain, saw its health care spending drop when 9,000 of its 40,000 employees signed up for the tax-free savings accounts. The Whole Foods grocery chain uses health savings accounts to cover all its 30,000 workers, even part-time grocery baggers, at half the national corporate average for health care costs. Kansas, like a number of states and localities, gives state employees the option of choosing a health savings plan.

Where do the savings come from?

Let's say a Kansas state employee who earns $40,000 a year chooses a family health savings account along with a $3,000 deductible, 20 percent coinsurance policy. The state chips in $408 monthly, as it does for everyone. He pays $240 per month, while his colleagues with traditional insurance pay up to $520 per month. Right off the bat, the HSA employee is saving $3,360 annually and most of it can go into his personal health savings account. If his family is relatively healthy, he might have $1,000 or even $2,000 saved by the end of 2006. Every year the family does not spend all the money in the health savings account, it accumulates tax free. However, if a head injury lands his daughter in the hospital for four days or his wife has a complicated preterm pregnancy, two medical expenses that can quickly add up to $50,000, our Kansas employee could have $10,000 in annual out-of-pocket expenses (his 20 percent share, called coinsurance) on top of the $3,000 he has stashed his health savings account.

NOT ALL ROSY
The key, of course, is how healthy the family is and how disciplined the employee is in putting money into the savings account. And this is the rub. Do health savings accounts truly empower their owners or are they just another way to shift costs? Will the accounts attract healthier people, leaving the sicker patients in traditional comprehensive insurance with even faster rising costs?

"If you're unhealthy and low-income, this might not be the best plan for you," says Patrick Glavey, a vice-president of sales at Preferred Care in Rochester, N.Y.

Another worry is that people will opt for the high-deductible insurance, but have nothing to invest in the health savings account to help them pay that large deductible. Jerry Flanagan of the California advocacy group Foundation for Taxpayer and Consumer Rights says more than half of those already enrolled have not put any money in the savings account.

"It seems like an attractive idea," says Wisconsin Representative Pedro Col—n. "But it doesn't do anything for the cost of prescription drugs, and it may really trivialize primary care." He predicts that most HSA owners will avoid using their accounts in order to get the maximum investment income. "They'll use the HAS to pay for their fitness club at the YMCA, and then they won't go and get real care because they won't want to deplete the account. It's just going to become another investment vehicle for those who have enough money, and in the meantime, the long-term, serious problems [of the health-care economy] will become worse."

STILL AN APPEALING OPTION
With the latest federal reports predicting that one in every five dollars will be devoted to health care by 2015, and overall spending reaching more than $4 trillion, policymakers are bound to look at all the choices that keep costs in reach, for individuals and for states.

The supporters of ambitious universal health plans dismiss high deductible policies as a step backward. But for those who want to encourage market-based solutions, individual responsibility and less spending, the consumer driven health insurance is an appealing option.

How Health Savings Accounts (HSA) Work
HSAs are savings accounts with special tax-free status that must be opened along with a high-deductible health insurance policy. By federal law, the policy must have a minimum annual deductible of $1,050 for individuals and $2,100 for families. This means the enrollee cannot use insurance to cover the first expenses incurred each year. Money deposited into a health savings account is tax deductible--the earnings on the deposit are tax-free and withdrawals for medical expenses are tax-free. Unused money can be rolled over from year to year.

Other highlights in the federal law:

Both employers and individuals can contribute to HSAs.
The size of tax-sheltered HSAs is limited to the size of the deductible of the insurance plans to which they are linked, and cannot exceed $2,700 for individuals and $5,450 for families (with levels rising annually with inflation).
Withdrawals are allowed only for specified medical expenses. Other unauthorized withdrawals are taxed and penalized. Money in the account cannot be used for premiums.
The enrollee cannot be covered by any other health insurance plan, such as a spouse's plan.
The enrollee must be under age 65.

Richard Cauchi is NCSL's expert on health savings accounts. For more information, see the online report at www.ncsl.org/programs/health/hsa.htm

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