For most employers the cost of health insurance is a front-burner issue that only seems to get hotter as the flames get higher. Premium increases have registered in the double digits for three years running according to surveys conducted by the Kaiser Family Foundation, Menlo Park, Calif. And many businesses with fewer than 50 employees are seeing premiums jump from 18 to 35 percent, reports the Midwest Business Group on Health, a Chicago-based consortium of 80 employers.
Such increases are not sustainable. No wonder the National Federation of Independent Businesses cites affordable health insurance as the No. 1 small-business concern.
Is the only answer to drop health insurance altogether? Not necessarily. More employers are looking at a new vehicle called the Health Savings Account (HSA), which promises to reduce wasteful medical spending by appealing to employees' self interest. Under these plans the individual who spends less money on medical care ends up with more cash in pocket. And employee control over medical spending means, in turn, a lower financial burden for the employer.
"There is likely to be an explosion of employer interest in HSAs," says Mark D. Wincek, head of the benefits and compensation practice at the law firm Kilpatrick Stockton and a partner in its Washington office. "These programs allow consumers to actually function like consumers. That re.ects a genuine paradigm shift."
Indeed, business owners are lining up for more information. Three out of four employers say they will consider taking on HSAs, according to a new survey from Mercer Human Resource Consulting, New York. Nearly one in five employers are "very likely" to offer an HSA by 2006 and over half say they're "somewhat likely" to offer the new plans by that time.
HSAs took effect Jan. 2004. While many employers are launching the plans now, Wincek expects the ball to roll faster in 2005 and the following year. "Most large companies work on a calendar year cycle and those who are planning to launch HSAs are doing the groundwork now for January 2005," he says. (Large companies, which drive innovation in health insurance, were not able to use the Medical Savings Account, the predecessor to the HSA.)
HOW THEY WORK
An HSA combines two financial vehicles. The first is a personal, employee-owned savings account dedicated to money earmarked for future medical needs. The second is a high-deductible health insurance plan. This plan kicks in when medical expenses exceed the specified deductible. Trustees for HSA plans may be any of a number of financial institutions such as banks, credit unions and insurance companies.
Both the employer and the employee can make contributions to the savings account. Employer contributions are excluded from employee income for tax purposes, and employee contributions are deductible from taxes. Annual contributions can be made up to the deductible, which must be at least $1,000 for individual coverage and at least $2,000 for family coverage.
Annual out-of-pocket (including deductibles and co-pays) will not exceed $5,000 for individuals and $10,000 for families.
Money withdrawn is not taxable if it is used to pay for qualified medical expenses including specialist visits, drugs and long-term care services as well as the purchase of continued health care coverage for the unemployed individual (via COBRA). The interest and investment earnings generated by the account are also not taxable while they remain in the HSA.
Funds withdrawn for non-medical purposes will be included in the account holder's gross income, taxed accordingly and subject to a 10 percent penalty.
Come retirement time the money in the savings account can be withdrawn without penalty.
Given the above description, it's apparent how health-care expenses are reduced: Employees will spend money only on health care that's really needed. The less the employee spends the bigger the accumulated nest egg.
"As an employee I know that I will save money if I take a little more active role in my health," says Marcus B. Newman, an employee benefits consultant at GCG Financial, an insurance services firm in Bannockburn, Ill. "It encourages me to be more attentive."
So less money will be spent on health care, as employees become careful medical shoppers. But will prudent spending translate into lower insurance costs for employers? The answer is most often "yes" for smaller organizations facing large premium hikes. Newman gives an example: One of his clients has three employees in a traditional health insurance plan and faces a 39 percent premium hike that will bring monthly outlays to $3,700. By switching to an HSA with a monthly outlay of $3,072 the group will save nearly $8,000 in annual premiums.
An attractive feature is that employers need not put any money into the savings accounts, although they may opt to do so. "Straight up employers can say 'We will put less money on the table,'" points out Wincek. "Such employers may feel better about switching to HSAs because they have been thinking of getting out of the business of providing health care altogether." That the employer is put in the driver's seat is one of the biggest attractions of HSAs: Business owners can feel more in control of premium levels.
The HSA as a full replacement product for smaller employers, then, is looking pretty good. But how about larger businesses. They will be loathe to dissolve their current insurance offerings and will likely add HSAs as an additional option. In such cases employer contributions to the HSA will need to be equivalent to those of other plans. Whether these larger employers will enjoy savings is still an open question.
WHAT'S THE CATCH?
Nothing good comes without cost.
And while HSAs seem like an imaginative solution to the health insurance puzzle, there is a hidden price: The programs require employees to shoulder more responsibility for their own insurance plans. That means a level of labor, and of attention to detail, to which most employees are unaccustomed.
First, for each health care expenditure the employee must make sure the proper paperwork is filed. Second, the employee must make sure each expenditure is allowed under the terms of the high deductible health insurance policy. The difficulty is that HSA law allows individuals to spend their savings account money on a larger array of medical procedures than are included in the benefits schedules of the accompanying insurance policies.
The burden of responsibility, then, is being shifted from the shoulders of the employer to those of the employee. "HSA funds need to be used wisely or there won't be enough money left over to pay for necessary medications and procedures," says Wincek.
The message is clear: Employees will need to sit down and read the lengthy fine print of the insurance policy's "Explanation of Benefits" (EOB) to figure out what procedures are reimbursable. "In the past people have tossed their EOBs into the garbage," says Newman. "With an HSA plan you absolutely have to read them."
Of course, reading the fine print of insurance policies and managing financial paperwork are not the most popular activities for most of us. The problem is even worse for those without a firm command of the English language. "These plans will be problematic for organizations with non-English speaking work forces," warns Newman. "Most of the instructional material is in English."
THE ROAD AHEAD
HSAs can be circuit breakers for health insurance programs that have grown too hot to handle. Finesse the educational demands and you may find an HSA a great way to lower the flames under the health insurance pressure cooker.
Get More Info
For the most comprehensive and authoritative information about Health Savings Accounts (HSAs), visit The U.S. Department of the Treasury Web site at treas.gov/offices/public-affairs/hsa/.
The law firm of Kilpatrick Stockton has made available a continuing round of excellent reports on HSAs. Go to kilpatrickstockton.com then click on "Publications" and then "Legal Alerts." Then scroll down to the "Employee Benefits" section for several HSA communications.