Critical Condition - November 18, 2005

What you need to know about Health Savings Accounts.

By Kate Steadman, UC-Santa Cruz

My employer offers Health Savings Accounts. Um, what exactly is it and should I get one?

Health Savings Accounts, known in the health policy world as HSAs, are a new way of paying for your health expenses. HSAs are a type of bank account offering tax benefits that you use only to pay for medical bills. HSAs were authorized by the Medicare Prescription Drug, Improvement, and Modernization Act in 2003 (of the confusing new drug benefit fame), and they’re becoming quite popular. Insurance companies like Blue Cross and Blue Shield, Aetna, and United Health Group sell them, and employers like Wal-Mart offer them to their employees. Over 2.4 million people have signed up for HSAs, and analysts estimate that by 2010 there will be $10 to $26 billion dollars in such accounts

I had no idea they were so popular! But I’m wary of trends – I don’t want to get swept up in some parachute pants revival.

As far as HSAs go, you have reason to be. Whether or not you should get one depends on your age, your health status, and your budget, along with the other plans your employer is offering.

Why is there so much hype over HSAs? Are they going to cover the uninsured?

I’m glad you asked. So far there aren’t any concerted efforts to make HSAs the main cure for the uninsured. This is, in part, because many employers of the uninsured don’t offer health insurance, period, let alone HSAs.The hype is about health care spending in general, which has been steadily rising, and premium costs in particular, which have increased 73% over the last five years.

HSAs are part of a new brand of health care initiatives known as Consumer Directed Health Care (CDHC). These initiatives, chiefly supported by free-market advocates, seek to control health care spending by shifting more of the cost onto patients. The idea is that if people see the bill for their health care, they’re more likely to seek out the lowest price for care and cut out unnecessary spending. The landmark RAND Health Insurance experiment, which used high deductible health plans, demonstrated that patients will reduce their consumption of care in these insurance arrangements. The problem is that they sought less care in all areas – necessary and unnecessary both.

HSAs are also a piece of what the Bush Administration terms “ The Ownership Society”. Along with legislation like Social Security Privatization, these initiatives seek to give people more direct ownership over their money in programs like social security and health insurance. But when you put money in an HSA, rather than a regular account, you are shifting your money away from the risk pool operated by traditional insurance companies (see my first column about risk pooling). Many health policy experts worry that HSAs and the accompanying health plans will fracture the insurance system, with only healthy people in HSAs and high deductible plans, and sick people in traditional and managed care plans.

But I’m young and healthy. How do I get an HSA?

The first thing you should know is that you can’t just decide you want an HSA and head over to the bank to open one up. You must be enrolled in a high deductible health plan (HDHP) that qualifies to be coupled with an HSA. An HDHP is a type of health insurance that has a higher deductible than traditional or managed care health plans – $1,901 for single coverage and $4,070 for family coverage on average, according to recent research by Kaiser. If you’re an unmarried recent graduate, that means you will have to pay around $1,901 of your own money, on top of your monthly premium, before your insurance pays a cent.

I budgeted a lot for clothing and bar tabs – I’m not sure if I can fit $1,901 of health insurance in too.

Understandable. But the plus side of HDHPs is that your annual premium is usually lower—$2,700 for single coverage and $7,909 for families on average, compared to $4,024 for single and $10,880 for traditional and managed care plans. A lower premium means you pay less per month, but a high deductible means unpredictable costs if you get sick. You could go most months paying only your premium, but others where you incur $500 in cost, especially if you need x-rays, lab tests, or prescriptions (prescriptions are not exempt from your deductible). In traditional or managed care plans, you pay your premium along with co-pays every month, but it would be unusual to incur a $500 bill unless you went out of network or received treatment that isn’t covered under your plan. If you’re generally healthy you might end up paying less with an HDHP, especially if you’re male and get to skip expensive yearly visits to the OB/GYN. But if you’re on a tight budget, like millions of middle class families and new professionals, unexpected medical costs related to illness or injury can blow a huge hole in your budget (around $4,000 for families). Assuming you follow the rules of your managed care plan, you’d only have the requisite co-payments.

I understand the HDH-something, but what does the Health Savings Account do?

The account accompanies some high deductible plans and functions as a payment mechanism. It’s similar in some respects to IRAs (individual retirement accounts) in that owning one offers tax advantages. With HSAs your (or your employer’s) contributions are deductible, so your take-home income reported on your tax return is less. Withdrawals used for medical expenses (i.e. those yearly OB/GYN visits) are tax-exempt, as well as any account earnings.

There’s a catch, though – you can’t use your HSA to pay your monthly premium, so that money is still taxed. HSA funds only go toward your deductible and out of pocket expenses not including your premium. There’s also a limit on how much you or your employer can put in the account per year– either $2,650 or 100% of the deductible for an individual and $5,250 or 100% of the deductible for a family, whichever is lower. And you can’t use the money for anything other than medical bills without being penalized – a 10% tax.

Hold on – I need to call my bank and tell them to switch my account to an HSA.

Unfortunately it’s not that easy. First, most banks do not offer HSAs. You need to call your insurance company to find out where you can open an HSA. Further, your high deductible health plan (HDHP) must pass two tests in order for you to open an HSA. The minimum deductible on your health plan must be $1,000 for an individual or $2,000 for a family. Your plan must also have an out of pocket spending limit of $5,100 for an individual and $10,200 for families.

If all systems are go on those requirements, and your employer actually offers an HDHP (only 20% of employers offered such plans in 2005), you can get yourself a Health Savings Account. Just remember the rules – you can only put in a certain amount every year, and you can only spend it on medical bills.

Think hard before you sign up for a plan. Take careful accounting of how much you spend in co-pays if you choose a managed care plan, and be sure to set aside money for your deductible if you choose a high deductible plan. Do your research. You should never go without health insurance.

 
Kate Steadman, a native of the reddest of red states, Kansas, graduated from the University of California, Santa Cruz in June with a B.A. in sociology and pre-med requirements fulfilled. Kate has worked at the National Women’s Health Network in Washington, D.C. and the Venice Family Clinic, the largest free clinic in the nation, in Los Angeles. She has an unhealthy fascination with health care and will be moving to Washington , D.C. to work in health policy. When she’s not reading about health issues, she enjoys staring at her computer, listening to NPR, and knitting.

If you have a question or suggestion for Kate regarding Critical Condition, contact her at ksteadman@gmail.com.

Related Stories

• Gender-Neutral Housing Comes to Princeton
• Campaign Communications Director, Repower America
• Toke Up Marijuana Laws
• Send a Health Care E-Card
• The Battle for Pittsburgh