When you are coming up with ways to market and explain health savings accounts, one useful exercise might be to think about the differences between the HSA program and the old medical savings account program.

Medical savings accounts hit the market in 1997. Insurance carriers hoped qualified individuals would seize the opportunity to achieve tax benefits and take control of their health care expenditures.

For years, underwriters of individual medical policies had heard entrepreneurs complain about a tax system that denied them the same tax advantages enjoyed by participants in large employer-sponsored plans. The MSA gave entrepreneurs tax advantages.

What’s more, many carriers believed the innovative MSA alternative would resonate strongly with independent-thinking, self-reliant entrepreneurs who preferred to have greater direct control over all aspects of their lives–including their health care decisions.

The carriers were disappointed.

Looking back, the MSA was the best product that could be offered at the time. Although the product foundered, it taught employers, brokers, insurers and policy-makers valuable lessons that may well transform the entire health insurance industry.

Design by committee

As the Clinton administration watched health care costs skyrocket, it looked for practical alternatives to a third-party payment system characterized by high administrative costs and widespread application of increasingly expensive health care technologies.

After considering reforms such as managed competition, the administration compromised on a narrow, temporary MSA program that promised to help qualified self-employed individuals lower costs, gain tax benefits and reclaim direct health care decision-making power.

The program worked well enough for some early adopters. In many cases, they reduced their overall health care costs by purchasing low-cost, high-deductible insurance policies that covered catastrophic illness, and they invested the premium dollars they saved in tax-free MSAs.

That way, the early MSA holders could avoid paying to insure the cost of routine health care services. In theory, the MSA holders also could choose health care providers based on quality and cost, and manage the direct payments themselves through their MSAs.

But three factors prevented greater adoption.

First, prospects objected to the program’s restrictive qualification guidelines. MSAs were open only to the self-employed and small business owners, and Congress established an income ceiling that excluded many business owners.

The institution that dominates the American health insurance culture, the large business, could not use the MSA.

Second, early policyholders found medical and financing decisions time-consuming and difficult to make, and they found their accounts surprisingly frustrating and laborious to administer. In many cases, hours of research failed to produce the comparative cost and quality data necessary to make well-informed treatment choices, because hospitals had no incentive to publish this information.

Third, the future viability of MSAs depended on annual congressional approval. This status made these policies difficult to sell–and gave agents little incentive to try. It also discouraged insurance carriers from investing in product innovation or for other financial institutions, such as banks, to even enter the market. This, in turn, limited consumer’s MSA choices.

Lessons learned

By 2003, health care costs had continued to rise, and legislators were more determined than ever to reverse the trend. This time, they had the benefit of hindsight. They built into the new HSA program features that gave it a much greater chance to succeed.

Their most important decision was to make the HSA program a permanent program that is equally accessible to all consumers who buy a qualifying high-deductible insurance policy. This decision positioned the program to benefit from free market forces that would ultimately drive greater adoption.

Just two years after their introduction, HSAs have become an attractive and affordable option for a broad range of consumers. America’s Health Insurance Plans, Washington, says three million U.S. residents now have HSA-eligible coverage, and others are predicting that 40% of privately insured U.S. residents will have HSA-eligible coverage by 2010.

High-deductible health plan policyholders span every age, geographical location and income bracket. The HSA plans are now a highly desirable option for self-employed entrepreneurs, businesses of all sizes and millions of Americans who previously lacked health care coverage.

A bright future

As the product gains momentum, insurance agents are recognizing the powerful revenue opportunity before them and are investing the time to learn its nuances. They’re also discovering that their ability to offer clients a more sensible and cost-effective health insurance option helps them strengthen relationships and cross-sell other products.

Insurance carriers are encouraged equally by the early success of HSAs, and they’re investing in product innovation to build and maintain competitive advantage. Some carriers have developed simple, convenient online applications and robust toolkits that help agents market these products and streamline the sales process. In addition, banks have found the HSA to be an attractive product offering that complements their investment and planning expertise, creating a range of product choices in which consumers can invest their HSA contributions.

To support policyholders, insurance carriers also have created tools that greatly simplify account administration. Some have introduced checks and debit cards, while others are offering new investment options such as mutual funds.

Now that HSAs have achieved broad-based awareness, public and private entities are addressing the issues of access to quality and cost data. For example, consumers can visit the Website floridacomparecare.com to research prices for various medical procedures for all hospitals in the state. The site also provides hospital-to-hospital comparisons of patient outcomes. While much still remains to be done in the area of price transparency, this is a strong beginning.

In addition, some companies have developed Web tools that allow policyholders to research specific medical conditions along with their anticipated tests and procedures. Others are including itemized lists in their statements to help policyholders track their costs, while others are beginning to aggregate cost and quality information.