Health Savings Accounts Tiptoe Into The Market

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So, are health savings accounts ready?

The short answer, for producers who want to set up relatively simple HSA programs, is, “Sure.”

The long answer is, “The new guidance that the Internal Revenue Service hopes to release this summer could come in handy.”

When President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on Dec. 8, 2003, he ignited a firestorm of debate about how the United States should and should not help retirees with prescription drug costs.

He also brought HSAs to life. HSAs, which resemble the old Archer Medical Savings Accounts, join a third kind of account, the 18-month-old Health Reimbursement Arrangement.

Employers can deduct contributions to both HSAs and HRAs from taxable income, and employees can roll unused assets over from one year to the next without paying federal income taxes on the assets.

Employers can contribute whatever they want to HRAs, but the maximum combined HSA contribution for employers and employees is the same as the deductible for the health insurance that accompanies the HSA. The current maximum is $2,600 for individuals and $5,150 for families, according to early Internal Revenue Service guidance.

HSAs replace Archer MSAs for employers that want new, MSA-like health benefits programs.

Some health insurance experts, including analysts at the Employee Benefit Research Institute, Washington, question whether account-based health plans will have much effect on health care costs, or much appeal for employers.

Although participation in consumer-driven, account-based plans probably has doubled in the past 12 months, Meredith Rosenthal, a Harvard University researcher, estimates total enrollment may be only about 600,000.

Many Blue Cross and Blue Shield plans are just starting to introduce health plans based on the older HRA account design.

In the central California area, sales of HRA-based plans have been slow, according to Susan Polk, a San Luis Obispo, Calif., health insurance broker.

But Polk, who has been in the insurance industry long enough to remember when employers paid $9 per month for health coverage for single employees, says she thinks the HSA law could lead both to strong sales of HSAs and stronger sales of HRAs.

“Sometimes, when you offer 2 things, its easier to sell 1 thing,” Polk says.

Janet Trautwein, a former benefits broker who now serves as vice president of government affairs at the National Association of Health Underwriters, Arlington, Va., says she thinks HRAs and HSAs could end up having a far more powerful effect on the U.S. health finance system than the managed care movement.

Once a company negotiates tough provider contracts and sets up review systems to discourage use of unnecessary care, it has pretty much wrung all the cost savings that it can wring out, Trautwein says.

When, on the other hand, employers set up HRAs and HSAs for their employees, “people will continue to become more savvy consumers,” Trautwein predicts. “Youre completely changing the way people decide to make their purchases.”

How does this translate into a sales strategy for producers in the trenches?

For one thing, experts interviewed say, the flavor of the day is “plain vanilla.”

On the surface, the language of the new HSA looks reasonably clear, but lawyers and accountants at organizations such as the AAHP-HIAA, Washington, are poring over the text of the HSA bill and the IRS guidance to find out what questions they should be asking.

“Our members our working through the issues, and we will be submitting a request for further guidance,” says AAHP-HIAA spokesman Mohit Ghose.

“Theres still some guidance thats needed,” agrees Ed Pudlowski, a senior manager in the Dallas office of Ernst & Young L.L.P.

Because of all the questions that remain, “its probably too early for anyone to put in HSAs and scrap the other plans,” says Timothy Stanton, a benefits lawyer at Gardner Carton & Douglas L.L.P., Chicago.

Congress approved a compromise version of the HSA legislation without much notice, and benefits firms and trade groups have been so confused that their summaries of the HSA law often give different information about basic topics such as HSA contribution limits.

But the lawyers who wrote the HSA law did their best to get HSAs off to a quick start by borrowing many ideas from the law that governed the old Archer MSAs.

Because most policies that complied with the Archer MSA requirements comply with the new HSA requirements, some carriers, such as WellPoint Health Networks Inc., Thousand Oaks, Calif., and Fortis Health, Milwaukee, say they already have or soon will have policies on the shelf that comply with the HSA law requirements.

“In the states that we do business in, it looks very good,” says Timothy Bireley, vice president of small group product management at Fortis.

Any insurance company, any bank and any entity that was authorized to act as a trustee for MSAs can handle HSA trust assets, according to the Treasury guidance.

The HSA law does not give employers or HSA trustees responsibility for verifying that employees use HSA funds for authorized purposes. Account holders are responsible for keeping the receipts and other documents they might need to justify their HSA expenditures to IRS auditors.

But benefits experts warn producers against rushing to design tricky programs that maximize HSA tax benefits in ways that defy common sense. The experts also warn against trying to combine HSAs with HRAs, flexible spending accounts or other types of personal health accounts without waiting for more advice from Washington.

The IRS published its first guidance on the HSA law in the Jan. 12 issue of the Internal Revenue Bulletin.

In the guidance, IRS officials say they believe an employer can offer an HSA through a cafeteria plan, but the officials ask for public comments on 7 questions, including questions about the relationship between HSAs, HRAs and health FSAs.

Benefits experts are warning producers about another danger: a provision in the HSA law that forbids use of HSAs with health plans that provide “first dollar” coverage for anything other than preventive care.

Some “high deductible” policies might violate the HSA law by providing low-deductible coverage for certain medical service, and some states with especially rich health insurance mandates might forbid insurers from selling HSA-compatible policies to employers with fewer than 50 employees, experts say.

Moreover, the IRS might not be the only agency coming out with guidance. Some in Washington say the U.S. Department of Labor and the U.S. Department of Health and Human Services could be coming out with guidance of their own.

Producers interviewed say many producers are coping with the uncertainty by recommending HRAs for big employers that want account-based programs now, recommending either HSAs or HRAs for small employers that are willing to take a little risk, and waiting at least a few months to recommend HSAs to employers with a low tolerance for surprises.

Because of all the open questions, most big employers probably will wait until 2005 to introduce HSA-based health programs, according to Kate Sullivan, health care policy director at the U.S. Chamber of Commerce.

“Theyre still hesitant to go into HSAs knowing that new regulations will be coming out,” Sullivan says.

“The actual HSA concept is most of interest to smaller employers at this stage,” reports Don Cullen, benefit operations director at The Young Agency, Syracuse, N.Y.

Then theres the matter of administration.

Polk recommends that producers setting up account-based programs for employers of any size should encourage employers to use debit cards or other electronic card system to administer claims.

“We have gotten away from the old-fashioned reimbursement idea of insurance,” Polk says. “Now everythings done online.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.