Health Savings Accounts (HSAs) are booming. More than 10 million people now have them, according to an annual census released by America's Health Insurance Plans (AHIP). That's a jump of 25 percent in the past year. HSAs are linked with high-deductible health plans. To qualify, you must pay at least the first $1,200 in qualifying health expenses ($2,400 for families) before you can start to use your insurance. That's a minimum. Most plans have much higher deductibles -- $2,000 to $3,000 for individuals with group policies, and roughly double that for families. Deductibles are higher still for typical individual policies.
Preventive or "wellness" procedures such as annual physicals and mammograms are not subject to the deductible and are covered right away -- often at 100 percent with no co-pays. Maximum out-of-pocket expenses are capped at $5,950 a year ($11,900 for families). That's an upper limit. The AHIP report finds most plans have maximum exposures that are roughly half of these caps. To help pay the bills, you get to contribute up to $3,050 annually ($6,150 for families) in pre-tax dollars into your HSA. Employers may chip in some of that contribution as well, and many do. Employer contributions of $500 to $1,000 are common. People 55 and older can toss in another $1,000 a year.
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While you can use the HSAs to pay for expenses, some experts advise participants to let their HSA balances build up in they can afford it. Unlike health retirement accounts (HRAs), unspent balances in HSAs can rollover indefinitely from year to year. Unneeded plan balances can be invested like 401(k)s, and the earnings from these investments will never be taxed so long as withdrawals are spent on qualifying health expenses. And with such expenses in retirement looming as a big wild card, wouldn't it be nice to build up a tax-sheltered nest egg to help pay those bills when the time comes?
Financially, the only bad news about HSAs is that people can no longer contribute to them when they turn 65. There are exceptions when a 65-year-old person is still working and using private insurance and not Medicare. Or when that 65 year-old is still carried on the private health policy of a spouse who is still working. "Once you're enrolled in Medicare, you no longer can contribute into an HSA, but you can still use an HSA," says Kathy Campbell, head of product engineering at Aetna.
Medically, the impact of HSAs has so far been as eye-opening as their potential financial benefits. Employers and insurers have been sensitive to allegations that these lower-cost plans shift health spending to individuals so that employers can reduce health care benefit expenses. To date, however, any cost savings to employers have not been associated with reduced health care for employees.
Among large private insurers -- UnitedHealthcare, WellPoint, Aetna, and Cigna -- all said internal studies have persuasively shown that people with their high-deductible HSA plans actually take better care of themselves than people with traditional health insurance coverage. "People do not skimp on the care that they need," says Will Giaconia, vice president in charge of consumerism products at Cigna. "In fact, they get more engaged in their health."
It turns out that when people have their own money on the line, they become more informed health care consumers. They appreciate not paying for preventive services and they use them. They see the bottom-line charges for health procedures, courtesy of increasingly transparent and data-rich insurance company web sites. They shop for better prices. They use generic drugs more than people with traditional coverage. And because generics are generally so much cheaper than branded drugs, people with HSAs demonstrate better records of taking their drugs as prescribed.
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"The simple act of putting the dollars in the hands of individual consumers is the thing that really creates the behavioral change," Giaconia says, equating the change to the different drinking habits of people at open versus cash bars.
Big private insurers report 20 percent year-over-year gains in numbers of people with HSAs. Companies love them because they generally cost them less than traditional plans. They also can be flexibly designed so that employers can provide employees with attractive incentives for taking good care of themselves.
People in WellPoint's consumer directed health plans used 20 percent more preventive services than people in the company's traditional plans, says Tracey Stanton, senior director of product management. "It's our fastest growing product line," she says of HSAs. WellPoint has 1.4 million HSA members, including a million in group policies and 400,000 in individual policies.
In many respects, the story of HSAs mirrors some of the most optimistic projections of what can happen to health care spending under the massive reform law that is being implemented over the next several years. "I don't think in health care reform they've tackled the issue of cost," says Aetna's Campbell. HSAs can help achieve cost-reduction goals, she says, by promoting understanding of how to purchase health care, and what that care really costs.
In and of itself, health reform has only a modest impact on HSAs. Beginning next year, Campbell notes, over-the-counter drugs will no longer be considered eligible expenses in an HSA. Also, the penalty for withdrawing HSA funds to pay for non-qualified expenses will rise to 20 percent from 10 percent. UnitedHealthcare, which says it has 1.6 million HSA participants, projects that HSAs could become more widely used under health reform, providing employers a cost-effective way to meet mandates to offer coverage to all employees or face financial penalties.
HSAs were created by a 2003 law. Partly because of their newness, people have not built big rollover balances in the plans, and have not become active investors. Most participants spend down most if not all of their cash balances during the year. Some plans say less than 10 percent of participants use the investment features of their plans. At OptumHealth Financial Services, which provides HSA investment and servicing for UnitedHealthcare plans, CEO Chad Wilkins says only 2 percent of account holders have investment accounts. Older participants are more likely to have investments, he says, and as participants age, he expects investment balances to accumulate.
While it is illegal for Medicare recipients to fund HSAs, experts at health insurers agreed the incentives of self-directed health plans would work well for older health consumers. "HSAs are one of the best tools developed for seniors to accumulate assets" to pay for health care expenses in their later years, says Cigna's Giaconia. "There's no reason that we shouldn't be thinking about providing these kinds of plans to older Americans as well."
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