Lately, I’ve been hearing a lot about “consumer-driven” health insurance plans in the news. Today, our President will be giving his State of the Union address, and will probably be emphasizing the adoption of these consumer-driven insurance plans in order to help alleviate the costs of healthcare. I am most familiar with Health Savings Accounts (HSA), but many people don’t know much about them. Here’s an overview.
HSAs are used only in conjunction with High-Deductable Healthcare Plans (HDHP), with a minimum deductible of $1,000 for individuals, and $2,000 for family coverage. An employee (and employers, if you’re lucky) deposits pre-tax dollars to fund an HSA in order to cover medical expenses until the deductible is reached, then the insurance takes over the costs of healthcare such as doctor visits, surgeries, etc. The annual contribution limits for 2006 are $2,700 for individuals, $5,450 for families, or up to the amount of the deductible, whichever is the lesser. Money deposited into that account can also be used to pay for healthcare related items also, such as over-the-counter medications, bandages, and surprisingly enough, lactose-free milk/lactase enzyme supplements (we’re both lactose intolerant). These healthcare expenses would NOT apply towards the deductible.
These HSAs are also like retirement accounts in many ways. Money that is deposited in these health accounts rollover year after year, meaning that you don’t have to spend what is in the account before the end of the year, unlike Flexible Spending Accounts (FSA). The funds in the account can then be invested and grow tax-free. Funds can be taken out anytime to pay for healthcare expenses, or can grow and be withdrawn as income, penalty free, after the age of 65. Funds taken out to cover non-medical expenses before that are taxed and are subject to a 10% penalty. Lastly, the HSAs are “portable” meaning that if you switch jobs, your HSA goes with you. YOU own the HSA, not your employer.
Generally, the HSAs are combined with HDHPs such as PPOs, meaning that consumers are 100% in charge of how much they want to participate in their healthcare, from choosing how much to find their accounts to choosing doctors. There is an argument that choice is a bad thing when it comes to these plans, as consumers are looking for cheap healthcare and do NOT fund their HSAs, and have trouble making good healthcare decisions on their own such as picking the right doctor.
When I first starting working at my company, they offered a standard PPO health plan, which they paid the premiums for. Since then we have switched to an HSA combined with a HDHP with a $2,500 deductible. These types of accounts have only existed since late December 2003, and since then more and more businesses have been picking them up. These types of plans are especially lucrative to small businesses such as the one I work for because they don’t have to pay high insurance premiums for their employees. It could be argued, however, that businesses would be reluctant to help fund these accounts because of their portability. Luckily for me, my company contributes 100% of the deductible to our HSAs every year, essentially giving me free healthcare (not to mention free milk).
Nonetheless, HSAs aren’t for everyone. I’m not sure if this is unique to our insurance plan, but prescriptions are full price, but count towards our deductible. Some people in my company have very expensive prescriptions, and would blow through the $2,500 in a few months. After the deductible is met, our insurance covers 80% of prescription costs — clearly not an advantage for the person with a lot of monthly healthcare costs. Also, visits to the doctor’s office are paid out of the HSAs, but after the claim has been adjusted with the insurance provider. These can be pretty expensive if you go a lot. But, for people in my company, mostly young and healthy adults, this seems to be a good solution.
Another risk is that when the accounts are new and do not have a lot of funds, an emergency can cause a major financial setback due to the high deductibles. This is something we have had many arguments about, as I’m more of a “what’s the worst that can happen” kind of guy, and she is a “you’ll get hit by a bus” kind of girl. I’ve only had the plan since September, there isn’t that much money in it since my employee only deposits 25% of the yearly deductible costs every quarter. If I did happen to get hit by a bus or get mauled by fluffy kittens, we would have to take a pretty big financial hit to cover the deductible. So I’ve been trying real hard to avoid busses and kittens.
U.S. Treasury – Health Savings Accounts (U.S. Treasury)
Fact Sheet: Guidance Released on Health Savings Accounts (White House)
Prognosis Is Mixed for Health Savings (NYTimes)
Health saving accounts (CNNMoney)