HSAs Have a Long Way to Go

President George Bush’s recent State of the Union Address briefly highlighted the struggles many Americans face dealing with health care costs. The speech mentioned health savings accounts (HSAs) as one way to help alleviate the issues and to help employees of small businesses get the same benefits as those working at large companies.

HSAs first become available in 2003. Here’s how they work. Individuals sign on to a high-deductible health insurance plan providing coverage for serious medical conditions or catastrophic care. Deductibles can be as high as $1,500 or $2,000. Then, an HSA account is set up into which an individual or an employer makes tax-free contributions to cover eligible, out-of-pocket medical expenses up to the amount of the health insurance deductible. Money invested in that account that isn’t used can remain and grow tax free.

HSAs have not caught on as quickly as many experts would have expected. There is a lack of understanding of HSAs and until recently there was a lack of guidance from the IRS on what type of services may qualify to be paid by an insurance company prior to meeting the deductible (i.e. preventative care and certain prescription drugs). Further, no prescription co-pays are currently allowed, making HSAs less attractive for consumers of prescription drugs. Also, many companies had already established high-deductible plans and health reimbursement accounts (HRAs) prior to 2003, making the shift to HSAs an additional expense.

However, the Bush administration believes expanding HSAs is a good idea. Why? They see several benefits. There is a belief that 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 care dollars are spent. They will also "feel the costs" more directly. With more "skin in the game," perhaps they will forgo unnecessary care or shop around for more cost-effective health care.

Critics suggest that expanding HSA use will shift the burden to people who use medical care the most. Ten percent of Americans account for 70 percent 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 of these plans, the unhealthy become more and more in debt.

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

1. 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 and not touch them 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.
2. 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 versus specific costs for specific procedures. To be effective, cost and quality information cannot be generic.
3. While consumers are allowed to fully fund their HSA bank account up front, most people elect to fund it throughout the year on a monthly basis. The problem becomes that if services or care is needed, you have not yet accumulated enough money to pay for it. Therefore, you are left with the dilemma of having to pay with after tax dollars and waiting months or even years to reimburse yourself with qualified pre-tax contributions. For example, if your deductible is $2,000 and you incur a $2,000 charge in January, you will not have the pre-tax money from your paycheck set aside until late in the year. Yet you 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 have begun offering HSA accounts. Twelve percent of employers with 500 to 2,500 employees and 10 percent of employers with 10,000 employees offer HSA plans. Yet only 2 percent of companies with 10 employees or less offer the plans.

With the spotlight now on HSAs, more employers will seriously consider these plans and more Americans will begin using these accounts. Additional education and information is necessary to help make these plans work effectively for participants and accomplish the cost savings the Bush administration envisions.