Are health savings accounts a true cure-all?

It's no secret to most Californians that more than 6 million people remain uninsured. Nationwide that figure jumps to 43 million people. Legislators have long strugged with how to provide for them. Our President George W. Bush has endorsed health savings accounts (HSAs), which were created by the Medicare prescription drug law on December 8, 2003. The early numbers look promising as 438,000 HSAs were opened during the first 9 months these were made available. That's four times more than signed up in three years for Medical Savings Accounts, which HSAs replaced.

HSA accounts are tremendous tools for employers to save money while giving benefits and responsibility to their workers. Once consumers control payment of medical care they are more likely to shop for services and inquire about their care and cost. This should lead to improved quality of care and patient satisfaction.

I like to call these accounts "Medical IRAs" since they work so much like a traditional IRA. Money is contributed (up to the amount of the deductible in most cases) on a tax deductible basis into an account owned by the individual to pay for future medical expenses. As that money grows over time, it will give a lot more options to the consumer. Indeed if they do not use that money for medical expenses then they could withdraw the money at normal retirement age to help them fund their retirement. However, the list of items this money can be used for (without paying income tax) is wonderfully long and extensive. Items include prescription drugs, deductibles of the health plan, premiums on long term care insurance or to buy long term care services, COBRA premiums, health insurance for those on unemployment, Medicare Part A & B premiums, abortion, sterilizations, psychiatric care, wellness programs, many types of cosmetic surgery, installation of an elevator to alleviate cardiac conditions, fluoride devices, hair transplants, etc, etc. You get the idea ... it's a very liberal list. lf anyone would like the complete list simply email me and I'll get it to you. The HSAs are always paired with a qualified High Deductible Health Plan (nearly all insurers offer these) and are open to everyone. Deductibles on these plans vary from $1,000 to as high as $6,000 for family coverage. Similarly, the tax deductible contribution you may make to the HSA account varies from $1,000 to a high of $5,150.

Widespread acceptance requires more education among both employers and employees. They also require further price and tax incentives. I try to get employers to commit some of their health insurance money for HSAs. Once companies understand it, they usually encourage their employees to take it. HSAs should be an option for employees, not the only type of coverage. An HSA might not be the best choice for people with several children or medical problems. Although contributions accumulate if they're not used, high-deductible policies can be a financial drain on people with large families or big medical problems. So far, HSAs have been more popular with high-wage earners. People with low wages are more likely to pick an HMO where they pay $15 per doctor's visit instead of the full cost of up to a $2,600 deductible.

A typical long-range thinking employer will offer the HSA alongside an HMO. The employer will then offer to fund the premium savings difference into the HSA account on the employee's behalf. It's a beautiful thing to see as the money goes in (tax deductible to the company) to the employee's account on a tax free basis. Over a long period of time ... say 20 years, the money in that HSA account can easily grow to $60,000-$70,000 or more (depending on how the HSA money is invested). By the way, if the money is taken out to fund retirement normal income taxes will apply without penalty as long as it is taken out at age 65 or later.

Californians have less incentive to sign up for an HSA than residents of most other states. Here, workers' contributions reduce their taxable income on federal tax returns, but not on state returns. State Sen. Abel Maldonado, R-Santa Maria, is proposing not only a state tax benefit, but also a tax credit for companies offering health insurance for the first time. HSA's will continue to evolve as time goes on.

HMOs are more affordable here than in other parts of the country, so HSA pricing doesn't save that much yet. Eventually we will have a more attractively priced HSA product here. Also, many employers stick with HMOs because with high-deductible insurance, employees must pay for prescription drugs out of the HSA until the deductible is spent. People are used to having a pharmacy card with a low co-pay which the HSA takes away. The deductible on the health plan must be met before pharmacy benefits are covered by the insurance. Still, don't discount the value of the drug discount programs negotiated by the insurance companies- that alone saves tremendously over the retail price of the drugs.

U.S. health care spending will outpace overall inflation and wage growth over the next 10 years, making medical care harder for the government, employers, workers and uninsured Americans to afford. The increases apply to federal spending and to private spending on health insurance premiums, the latter of which will grow faster than disposable income in each year through 2014, according to new projections released 3/2/2005 by the federal Centers for Medicare and Medicaid Services.

Although the long-term national health spending growth rate will slow a bit compared with recent years, more low-income workers are likely to forgo job-based health care because it is too expensive, several analysts said. The new figures, which show the government picking up nearly half of total health care spending by 2014, also suggest that Medicare and Medicaid are far more immediate cost concerns for federal policy-makers than Social Security.

"It is absolutely clear that as costs increase, more low-wage people will become uninsured," said David Cutler, an economics professor at Harvard University and an expert in health care finance. "This is going to lead to continued erosion of health insurance coverage," said economist Paul Ginsburg, president of the Center for Studying Health System Change, a non-partisan health-research group in Washington. Rather than pay rising insurance premiums, he said, "low-income workers would just as soon have the money because they can't afford to spend so much of their income on health care."

Public and private spending for health care will total $3.6 trillion by 2014 -according to the annual Medicare-Medicaid report--about $11,046 per person-and eat up a record 18.7% of gross domestic product. That is up from a projected $1.94 trillion in 2005 that will likely account for 15.6 percent of annual GDP and average $6,423 per person. The government will fund 49 percent of all health spending in the United States by 2014--a record share-largely because of the new Medicare prescription-drug benefit.

President Bush hopes to offset growth in the uninsured population by expanding Medicaid coverage, said Health and Human Services Department official Bill Pierce. That can be done at no extra cost if states are given the flexibility to change or offer less-generous Medicaid benefits without federal approval, Pierce said. Congress has yet to give Bush that authority. Bush also would provide poor families with annual tax credits of $1,000 to help purchase private health care.

Despite the escalating cost of health insurance, few employees understand the full and growing magnitude of their company's investment. More than one-quarter (28%) of full-time employees believe that their company spends less than $1,000 per employee annually on medical and nearly half (49%) believe their company spends less than $2,000, according to the MetLife 2004 Employee Benefits Trend Study Only 27% of full-time employees estimate correctly that their company spends $4,000 or more per year. Nationally, companies spend an average of $7,289 per employee annually for family coverage and $3,137 for single coverage, according to the Kaiser Family Foundation and Health Research and Education Trust.

Employee communications may be partially to blame for the misperceptions by today's workers. Currently, only 31% of employees give their companies' benefits communications program high marks. Roughly the same percentage (36%) give high marks to their companies' benefits package, up only slightly from last year (32%).

"Rising healthcare premiums are having an impact on many companies' bottom lines," notes Beth Hirschhorn, chief marketing officer, MetLife. "Yet far too many employers are not taking the time to educate their employees on the value of their investment, causing employees to underestimate the worth of their individual and family benefits." As a result, many employees take their employer-funded benefits for granted and do not invest the time to research the products that best fit their needs.

Currently, 60% of full-time employees don't understand which benefits best meet their needs. To fill the gap, 27% of full-time employees overall rely on friends and relatives for financial advice, while 46% don't consult with anyone. "A robust communication and educational plan is a critical component of any benefits program," notes Hirschhorn. "Our research shows that when employees understand their insurance and retirement needs, they make better decisions and have higher levels of benefits and job satisfaction."

In fact, among full-time employees who are highly satisfied with their companies' employee benefits, overall job satisfaction is nearly three times as high as it is for employees who are not satisfied."

Paul Boulet is an Account Executive at Barlocker Insurance Services, Woodland Hills Branch, and can be reached by email at [e-mail] or by phone at 818-593-7001.