Building A Better HSA Program

President Bush’s State of the Union address mentioned health savings accounts as one vehicle to help Americans pay for health care and to help employees of small businesses get the same benefits as those working at large companies.

But the government and private companies may have to come up with ways to solve the problems that are slowing the spread of HSAs and HSA-compatible high-deductible health plans.

HSAs have been on the market since 2003, and they have not caught on as quickly as many experts would have expected.

Few members of the general public understand HSAs, and, until recently, there was a lack of guidance from the Internal Revenue Service concerning important questions, such as what types of services HSA-compatible plans can cover before the insureds meet their deductibles. The IRS has ruled, for example, that HSA-compatible plans can pay for certain types of preventive care and prescription drugs before the insureds meet their deductibles.

For now, HSA plans cannot offer ordinary prescription co-pay arrangements. That makes HSAs less attractive for consumers who use prescription drugs.

Finally, many companies already had established high-deductible plans and health reimbursement accounts prior to 2003. Those companies see shifting to HSAs as an unnecessary additional expense.

But the Bush administration believes expanding HSAs is a good idea.

Officials see several benefits. One is the idea individuals who can accumulate the money in an HSA and let it grow tax-free will have an incentive to be more careful about how their health care dollars are spent. If they have “more skin in the game,” they may forgo unnecessary care or shop around for more cost-effective health care.

Critics suggest expanding HSA use will shift the burden to people who use medical care the most–to the 10% of Americans who account for 70% of medical spending. These people will be caught over years and years paying high deductibles and accumulating little money in their HSAs. In fact, these changes could be damaging to the “risk pooling” of traditional insurance. As healthy people accrue the benefits from the HSA plans, the unhealthy will find health care becoming more and more expensive, critics say.

For the Bush HSA plan to work, HSAs will need to overcome some basic shortcomings:

It is difficult for many individuals to set aside cash. The savings component of the HSA requires additional out-of-pocket funds that must be set aside in a bank or other savings account. Individuals may not touch those funds until they incur medical expenses. Yet people’s ability to save has decreased dramatically over the last few decades. Consider the fact that many people fail to maximize 401(k) accounts or flexible spending accounts, despite many financial incentives to do so.

For the consumerism aspect of HSAs to work, access to the information necessary to compare costs and quality will need to become much more robust. Right now, information is still weak. Not all insurance companies provide concrete information, and if they do, they provide ranges of costs vs. specific costs for specific procedures. To be effective, cost and quality information cannot be generic.

While consumers are allowed to fund their HSA bank accounts fully up front, most people elect to fund HSAs throughout the year, on a monthly basis. The problem becomes if services and care are needed, the consumer has not yet accumulated enough money to pay for them. Therefore, the consumer is left with the dilemma of having to pay with after-tax dollars and waiting months or even years to reimburse themselves with qualified pretax contributions. For example, if the deductible is $2,000 and the consumer incurs a $2,000 charge in January, the consumer will not have pretax money from paychecks set aside until late in the year. Yet the consumer must come up with the money out of pocket to pay the $2,000 charge in January and wait to get reimbursed.

Some companies, especially larger companies, have jumped on the bandwagon and started offering HSA accounts: 12% of employers with 500 to 2,500 employees and 10% of employers with 10,000 employees offer HSA plans. Yet only 2% of companies with 10 employees or fewer offer the plans.