Panacea or bad medicine? HSAs spill into the workplace: health savings accounts will be good for business. Workers may not fare as well.

PRESIDENT Bush thinks health saving accounts just might save employers and their employees from out-of-control costs that will make medical care unaffordable even for the middle class.

Dr. Bruce Landres and the insurance broker who helped him cut the health insurance costs at his 15-employee physician practice in Brentwood would find that hard to argue.

Landres had been paying up to $6,000 a month on premiums for his employees and their dependents at Brentwood Comprehensive Medical. But he now pays about half that because he adopted a plan that includes health savings accounts. Not only is he paying less, but he's coveting more employees.

"What we've saved has significantly reduced our overhead," he said. "It's amounted to a significant difference."

His insurance broker, Jeff Miles, puts it more effusively.

"These things can be a dream come true for a business," Miles said. "Anyone who calls these programs just a tax shelter for the wealthy, that's phony."

HSAs are the most talked about vehicle in the trend toward consumer-driven health care, which aims to hold down rising costs and business premiums while also giving employees more choice in how they spend their health care dollars.

The accounts allow employees to squirrel away pretax dollars to pay their deductibles, and are combined with high-deductible insurance plans that lower monthly premiums.

The combination aims to ease soaring health care costs for employers and it furthers the Bush administration's long-standing goal of steering Americans from an entitlement mindset to an ownership society.

At least 25 percent of employers reported they were very or somewhat likely to offer an HSA-eligible plan in 2006, according to the California Healthcare Foundation's most recent employer survey. But just how many have done so is unclear.

"All firms are really looking hard for a solution to mitigate the increasing premiums, but it will take a while for that data to get reported to us," said Jill Yegian, the Oakland-based foundation's director of health insurance programs. "California's longer history with managed care than the rest of the country held down premiums for quite a while. But while HMO rates are still lower than the national average, PPO rates are now higher."

Several big name Los Angeles-area employers such as Northrop Grumman Corp. offer HSA-eligible plans, but others such as Rosemead-based Edison International and Thousand Oaks-based Amgen Inc. are holding off offering such plans as an option for their workers.

"HSA is a relatively new concept and we continue to evaluate it to see if it fits in Amgen's overall employee benefits strategy," said spokeswoman Mary Klein.

While high-deductible plans have the potential of creating upheaval in the group insurance market if they become popular, insurers serving the California market are trying to outdo each other in offering such plans for fear of losing market share.

WellPoint Inc., the parent of Blue Cross of California, last year augmented its own HSA-eligible offerings by acquiring Lumenos Inc., an Alexandria, Va.-based national consumer-driven health plan provider that administers Northrop Grumman's program. Competitors such as Cigna Corp. have also geared up.

"We certainly expect to grow our membership in these plans, not only from among our existing members but also in new membership," said Jack Biscoglio, head of product innovation and consumerism for Cigna, which now offers HSA-eligible plans for large employers in the state, and plans to expand them to mid-size employers by midyear.

The White House's goal is to expand the number of Americans using HSAs to 21 million by the end of the decade. But it's a far off goal at this point.

Around 3 million people as of January have enrolled in a high-deductible plan that qualifies them to open an HSA, according to industry trade group America's Health Insurance Plans, about triple the number of a year earlier.

But only 1 million eligible consumers also have opened an HSA, which critics contend is an indicator that the plans may be well-suited for young, affluent workers who can utilize the tax-shelter aspects of the plans, while lower-income workers are struggling to meet their deductible.

Fine print

HSAs started becoming widely available in late 2004. Similar to a 401(k), workers contribute pre-tax dollars to an account that can be invested in mutual funds or other vehicles until needed. Unlike a retirement account, the money can be withdrawn at any time, but only for specific health care uses such as meeting the deductible on a qualified health plan.

HSAs have more flexibility than the more familiar flexible health spending accounts. If an employee is able to save more than they need to cover out-of-pocket costs, the balance can roll over and continue to grow over the years with wise investment and be transferred with the employee to a new job. After age 65, the funds can be spent for purposes unrelated to health care with no penalty, but taxation similar to a traditional IRA.

In addition, people who don't have workplace insurance or are unemployed also are eligible to open HSAs, though they currently don't have all the tax benefits. That's a shortcoming that Bush's latest proposals, previewed in this year's State of the Union address, aim to rectify by making the plans more for attractive for both employees and employers.

The plans are generally cheaper for employers. But many feel in order for them to catch on, companies will have to use some of those savings to offset employee deductibles. The Kaiser Family Foundation estimates that employers, even if they do so, can still come out ahead, calculating that a business that might pay $3,284 per employee in a traditional plan might only need to pay $2,850 for coverage in high-deductible plan.

"The strategy behind it just isn't a cheap PPO," said Tony Cerdan, senior director, product and marketing for individual, small group and government members for Blue Shield of California, which has 130,000 members in HSA-eligible high-deductible plans in the state.

Employers get tax benefits if they chip in and even some breaks if they don't, sometimes even enough to offset the plan's administrative costs. That's because under certain HSA arrangements, employers don't have to pay certain payroll taxes on employee contributions to the account. That can raise employer savings even more.

Meanwhile, the Bush administration's proposal would allow employees to put even more money into the accounts each year to cover more out-of-pocket costs. For this year maximum annual contributions to an account are limited to the lesser of the plan's deductible or a fixed amount: $2,700 for individuals and $5,450 for a family.

However, a big problem remains: HSA-eligible health plans must have an annual deductible of at least $l,050 for individuals, $2,100 for a family--amounts that are far more than what a worker who gets insurance through an employer typically pays. Kaiser surveys estimate the average annual deductible for the most common employer-subsidized managed care plan is $323 for an individual and $679 for a family.

Furthermore, some critics contend that the high-deductible plans frequently don't cover as many medical costs as the traditional, employer-paid medical plan.

Convincing employers

Those kinds of disparities have turned off some employers.

Linda Griego's downtown L.A. restaurant Engine Company No. 28 offers an HMO plan to its 50 employees.

Griego struggles to keep the employee share of the premium low enough so that lower income workers don't decide to opt out. She said she feels a personal obligation to do so, and as a result, HSAs are for now out of the question because they are more expensive for her employees.

"My employees are very price sensitive," Griego said. "I couldn't think about offering one of these high-deductible plans even if it would lower my cost. My people are already at the threshold of what they can pay."

Still, just as 401(k)s have come to replace many pensions. HSAs potentially could have a comparable impact on traditional employer-subsided comprehensive health insurance.

That has huge implications for a wide variety of industry and public policy interests. Proponents of consumer-driven health plans theorize that if consumers are made to take more responsibility for paying for their care, they'll make wiser choices. But health policy experts and consumer advocates fear widespread use of the plans undermine a core insurance principle about the need to spread risk among a wide range of policyholders.

"To the extent that they do succeed, as the president would like, the departure of young, healthy people from these comprehensive plans would put some of them into a premium death spiral," said E. Richard Brown, director of the UCLA Center for Health Policy Research. "Underlying insurance is the cross subsidy of the sick by the healthy and of the elderly by those not so old."

Critics also argue getting patients to use less health care and seek less expensive providers will hardly put a dent in rising costs driven in large part by the latest medical technology or breakthrough prescription drug.

Mary Floyd, WellPoint's western region vice president of individual and small group sales, disagrees. She noted that Blue Cross of California's HSA-compatible program for small groups, which has a $2,400 deductible for individuals and $4,800 for families, includes coverage for annual exams, health screenings and some laboratory tests that are not subject to the deductible.

"I believe HSAs are a definite tool for the future," she said. "I think everyone needs accountability for their own health."

HSAs: PANACEA OR BAD MEDICINE?

Navigating the New Health Care

Understanding the difference among consumer driven plans can be tricky for both businesses and their employees.

HEALTH REIMBURSEMENT ARRANGEMENT (HRA)

Description: An employer-funded account that reimburses employees for qualified medical care expenses, typically combined with a high-deductible health plan. Employer may elect to include some or all medical expenses.

Eligibility: An employee whose employer offers an HRA.

Contributions: Solely the employer. No federal income tax law limits. Unused amounts in an HRA may be carried over, subject to any limits set by the employer.

Contribution Limits: Employers typically set limits, usually equal to or less than the amount of the deductible of employees' health plan.

Tax Treatment: Employer contributions are generally excluded from employee's gross income.

Portability: Yes, but only at discretion of the employer. COBRA regulations also apply.

FEDERAL HEALTH SAVINGS ACCOUNT (HSA)

Description: A tax-exempt trust or custodial account created exclusively to pay for the qualified medical expenses of the account holder and his or her spouse or dependents. Includes all internal revenue code approved medical expenses.

Eligibility: Individuals and families who do not have competing medical coverage and are covered by a qualified high-deductible health plan.

Contributions: The employee, employer, or both. In addition, a third party can contribute on behalf of the employee. HSA funds may be carried over indefinitely during a participant's lifetime.

Contribution Limits: Up to 100 percent of the deductible amount of the accompanying high-deductible health plan, up to a maximum in 2005 of $2,650 for an individual account, $5,250 for a family account.

Tax Treatment: Contributions are prior to federal taxes but after state income taxes. Employer contributions, earned interest and investment income are all taxable as gross income for state income tax purposes.

Portability: Yes. Employees may take funds with them when they leave or change jobs.

Source: China