Follow the leader: as Wal-Mart and other mega-employers offer health savings accounts, some industry experts believe it's only a matter of time until more companies jump on the HSA bandwagon.

Key Points

* Health savings accounts are designed to put consumers in charge of health-care decision-making while curbing rising health-care costs.

* The accounts could capture 15% to 50% of the health-care market by 2010.

* Insurers are educating employers and employees about HSA offerings and their benefits.

In January, the nation's largest employer began offering lower-cost health insurance to its more than 1.3 million employees. Arkansas-based retail giant Wal-Mart Stores Inc. introduced its Value Plan, which costs workers as little as $23 per month and $11 in select markets. It also introduced an HSA Qualified Plan, which for the first time will offer Wal-Mart employees health savings accounts linked to a high-deductible health plan.

Some believe it's only a matter of time until other employers follow Wal-Mart's lead.

HSAs allow participants to make tax-free contributions and withdrawals for qualified medical expenses, provided the accounts ate paired with high-deductible health plans. Deductibles are generally a minimum of $1,000 for a single person of $2,000 for a family.

The accounts were created by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and are designed to put consumers in charge of healthcare decision-making while curbing rising health-care costs. The Bush administration predicts that within five years, 6 million individuals and families will be using HSAs to put aside more than $79 billion.

Insurers say they are up to the challenge of making HSAs more available to consumers. Insurers are educating member companies to remove the old roadblocks of a relatively new market and lack of awareness, and they predict it won't be long before HSAs surpass the now-popular health reimbursement accounts. HRAs, created in 1954, are employer-funded benefit plans that reimburse employees for qualified medical expenses.

On the Rise

The Center for Studying Health System Change estimates that HSAs could capture 15% to 50% of the health-care market by 2010. By mid-2005, about one year after implementation, the plans had already surpassed the peak market penetration achieved over nearly 10 years by their predecessor, the Archer Medical Savings Accounts, said Karen Ignagni, president and chief executive officer of America's Health Insurance Plans.

Destiny Health has noticed the HSA tide changing. The insurer is seeing interest in the accounts across businesses of all sizes, with the strongest growth in white collar and professional companies such as law firms, physician groups and accounting firms, said Stuart Slutzky, rice president of group products for Destiny Health.

Larger employers, in particular, are taking notice--"at least as far as putting HSAs in as an offering--not necessarily as a replacement to traditional options they have," said Joe Smith, vice president of product and marketing for individual and small group for PacifiCare. But HSA enrollment still falls short of the popular HRAs, he said.

That may soon change. Small and midsized companies--markets that have turned to HRAs during the past several years--are now interested in offering HSAs as part of their employee benefits packages. For example, while 386 of Aetna Inc.'s middle-market and national account customers now have ah HRA, 271 offer an HSA. That is expected to grow even higher this year. More than 1,500 of its small employers now offer a high-deductible health plan compatible with an HSA.

It's not just the group market that's interested in HSAs. In 2005, individuals purchased a significant portion of initial HSAs, with nearly half the covered people over the age of 40, according to America's Health Insurance Plans. About 40% of Blue Cross Blue Shield of South Carolina's sales of high-deductible health plans came from individuals in 2005, with another 35% by the small-group market, said Jim Deyling, vice president of marketing and sales for the small group and individual markets division.

Some in the industry believe HSAs may soon surpass HRAs in terms of market share. "HRAs have been around longer, and the market has bad more time to digest them, but we now see a lot of innovation around plan designs on the HSA side. That should drive greater take-up in the future," said Slutzky.

But that won't happen overnight. "While HSAs are the newest and in some ways most attractive option, most employers ate still torn between HRAs and HSAs--both of which have different rules, benefits and considerations tot employers and employees," said Sander Domaszewicz, principal and leader of Merccr Consulting's National Health Care Consumer Specialty Practice.

HSAs also are taking a bite out of the nation's uninsured problem. In 2005, 30% of the individual policies were purchased by people who were previously uninsured, according to America's Health Insurance Plans.

A Growing Appeal

Since HSAs carne onto the scene in January 2004, many employers have found that they not only provide reduced premiums and lower fixed costs, but they also deliver more benefit dollars to employees and offer tax savings. For employees, the plans offer tax savings, are portable and flexible, and offer control of how they spend their dollars on qualified medical expenses defined by the IRS.

Perhaps one of the greatest benefits is that HSAs provide incentives for employees to get involved in their health-care decisions. "It's all about the idea of ownership," said Destiny Health's Slutzky. "Historically, employees have been disengaged from the cost of health care, haven't had incentives to ask questions, and perceived no value out of their health plan unless they used it. HSAs provide them with value whether they're using the plan or not, because they're still building equity in their account. It gives people incentive to care about the cost of health care and ultimately make better, more appropriate decisions," he said.

Now consumers are being engaged, and their decisions around health-care choices are paying off. More individuals, for instance, choose a less-expensive local urgent care center over the emergency room when appropriate, and an increasing number are turning to generics over brand-name drugs, said Domaszewicz. A health savings account is not "a single-stop solution to health-care issues, but it's an important piece of any health-care strategy that can help create a more sustainable health-care system in the United States," he said.

Following Suit

The publicity around Wal-Mart and several other leading employers moving to HSAs is helping change the HSA landscape.

"Typically, larger employers are the early adopters, and the smaller market follows suit," said Destiny Health's Slutzky. "The more publicity you see with stories like Wal-Mart, the more we'll see a trickle-down effect into other segments."

Wal-Mart believes HSAs provide associates a tax-free savings vehicle for future needs and price transparency, said Dan Fogleman, a corporate spokesman. "HSAs allow us to offer high-deductible health plans on the front end that allow consumers to understand the true cost of medical care." At the same time, he said, the price transparency will help put downward pressure on what he calls "skyrocketing health-care costs facing all employers." Wal-Mart matches employees' HSA contributions dollar-for-dollar up to $1,000, depending on the plan level, he said.

Another retail mega-giant--The Home Depot--also recently began offering its associates an HSA option. "We believe that our associates are our greatest competitive advantage, and our company is committed to continually reviewing our benefits package in an effort to meet the needs of our associates," said Ileana Connally, vice president of benefits for The Home Depot. "Conceptually, HSAs are a good tool for individuals with low medical bills, as it allows for pretax savings. Associates enrolling in HSAs believe they're a good option to allow individuals to successfully plan for their health-care needs."

A Silver Bullet?

But not all observers believe high-deductible health plans are for everyone.

Critics argue that Wal-Mart's move to lower-cost health coverage, including an HSA, will have a dire effect on low-wage and sick employees. Wal-Mart counters, however, that the Value Plan and the HSA Qualified Plan ate among as many as 18 different health-care options available to its associates, with plans available to both full- and part-time employees, said Fogleman. "We employ hundreds of thousands of students, second-income providers and senior citizens," he said. "These ate people at every stage of life, and no one plan is right for everyone, so we offer a full menu of affordable options." He noted that the company also is providing access to insurance for people who didn't previously have access. "Thirty percent of our associates didn't have coverage from any source before coming to work for Wal-Mart. We estimate 160,000 people have come off the list of America's uninsured just by coming to work for us."

High-deductible health plans also may come with some hefty price tags. A recent report entitled "What High-Deductible Plans Look Like: Findings From A National Survey of Employers, 2005," published in Health Affairs, found that deductibles average about $1,901 for single coverage and $4,070 for family coverage in HSA-qualified high-deductible health plans. And one in three employers offering a high-deductible health plan that is HSA-qualified does not contribute to HSAs established bv their workers, according to the report.

In addition, HSA enrollees may underuse necessary health-care services. A recent Employee Benefit Research Institute Issue Brief said that individuals with consumer-directed health plans and high-deductible health plans were significantly more likely to avoid, skip or delay health care because of the costs than were those with more comprehensive health insurance. Such incidences were particularly pronounced among individuals with health problems of with incomes under $50,000.

Providing Relief

Despite concerns, many insurers agree that HSAs are one way to control rising health-care costs.

"Trend rates on full replacement business at 3%, to 4% for the entire health-care spend compared to 25% to 12% on traditional plans, will have a huge impact on overall costs," said Doug Kronenberg, chief strategy officer for Lumenos Inc., a provider of consumer-driven health plans. About 25% of the company's consumer-driven plans now are HSAs, and that's expected to grow. The company's research shows that 50% to 75% of large employers will be in a consumer-driven health plan over the next three years, primarily HSAs. "We've hit a tipping point, and all evidence shows that we're reducing costs, and satisfaction levels ate increasing. It's clearly where health care is going in the future," Kronenberg said."But we have to make sure we maintain integrity of the idea: to provide a means to getting people engaged and the support to help them. They want help, and as an industry we can't just throw out sloppy products to gain headlines and develop products later on." Assuming the industry does it right, he said, growth and satisfaction level will continue to climb.

But it's important to remember that HSAs are part of the solution, not the whole solution, said Robin Downey, head of product development for Aetna. "High-deductible health plans can make health insurance affordable, and when combined with an HSA, they're an opportunity to save for retirement. But you need to offer the plans alongside other things like sound medical management programs, a lot of educational materials, communication and tools that provide both price and quality transparency." Health plans without an HRA or HSA may still need other such features and can be part of the solution, she said.

Greater education may lead to more widespread HSA adoption. Along with education, carriers need to look at ways to make HSAs more palatable and easier for employers to implement, said Blue Cross Blue Shield of South Carolina's Deyling. They also need to provide better tools for employees and individuals so they can move toward more consumerism when it comes to health care. "One of the worst things that ever happened to the industry was that HMOs isolated people from the true cost of health care," he said. "Consumers don't understand that a doctor's visit is probably at minimum $60 to upwards of a couple hundred dollars. And it will be hard to go back from there and may be a reason why more employers haven't jumped to high-deductible health plans."

Some insurers are developing other ways to make HSAs even more attractive for their members. For instance, the Blue Cross Blue Shield Association recently announced its creation of The Blue Healthcare Bank to handle HSAs and other financial tools around consumer-directed health plans. The bank will offer debit cards that allow consumers to pay healthcare expenses out of their accounts, and even credit lines if costs exceed their savings. The association said about 70 million of its members in Blues plans nationwide could benefit from the bank.

But how long HSAs will stay in the spotlight remains to be seen. Some insurers believe a spike in HSA enrollment will continue during the next five years or so. But some believe the industry may then see another new type of health-savings vehicle--possibly a spin-off of today's HSA.

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Learn More

Aetna Health and Life Insurance Co.

A.M. Best Company # 08189 Distribution: Brokers, consultants, retail network (pharmacy products)

Blue Cross Blue Shield Of South Carolina 

A.M. Best Company # 01727 Distribution: Independent agents, brokers, consultants, direct sales reps, direct

Destiny Health Insurance Co.

A.M. Best Company # 60357 Distribution: Independent brokers, joint venture partnerships with Guardian Life Insurance Company of America and Tufts Health Plan

PacifiCare Life and Health Insurance Co.

A.M. Best Company # 07278 Distribution: National accounts staff, brokers

For ratings and other financial strength information about these companies, visit www.ambest.com.

Consumer Plan Comparison

HSAs have emerged as the most
compelling consumer-driven-health-plan
platform.

                                     HAS   HRA   FSA

Pretax dollars used for health       *     *     *
expenses

Used for out-of-pocket health        *     *     *
expenses

Employee contributions allowed       *           *
                                                 *
Employer contributions allowed       *     *     *
                                                 *
Employers receive expense            *           *
deductions for payments

Works under any health plan                *     *

Pre-funded                           *           *

Unused balance rolls over annually   *     *

Investment options with tax free     *
growth

Portable for consumers               *

Funds can be used for any            *
purpose at retirement age

Source: DiamondCluster Research