Primed for growth: health savings accounts, which offer many advantages over other consumer-driven health plans, are likely to gain momentum in 2005.

As part of the 2003 Medicare Modernization Act, health savings accounts this year joined the consumer-driven health-care market already populated by flexible spending accounts, health reimbursement arrangements and various insurance products.

HSAs will have more impact on how health care is financed than any of the other consumer-driven options due to some subtle, but significant differences. These differences will create rapid growth and allow many health plan members to accumulate significant sums of money for future health-care needs. HSAs became available on Jan. 1,2004, less than a month after President Bush signed the modernization act into law, so HSAs will gain real momentum after Jan. 1, 2005.

HSAs are tax-advantaged trust or custodial accounts created for the benefit of an individual covered under a qualified high-deductible health plan. The employee, the employer or any other person may make contributions to the account. The funds can be used to pay for qualified medical expenses tax-free, and unused funds actually carry forward to future years.

To participate in a HSA, the individual must be covered by a qualified high-deductible health plan. For self-coverage, the minimum deductible is $1,000 with a maximum out-of-pocket of $5,000 (including the deductible); for family coverage, the minimum deductible is $2,000 with a maximum out-of-pocket of $10,000. Beginning in 2005, the minimums and maximums are indexed to the cost of living rounded to the nearest $50. The benefit limitations apply to in-network benefits only, allowing less generous benefits out-of-network. A high-deductible health plan can be either insured or self-funded.

HSAs are different than the other consumer-driven options and have the ability to significantly change behaviors, reduce employer costs and reward the member.

There are really only two types of money in health care: health-plan member money and other people's money. It's obvious which money source will be used more carefully. Health-plan members really don't care if other people's money is from their employer, an insurer or someone else.

HSAs are the first mainstream consumer-driven option about health-plan member money and therefore are the option most likely to change behavior, engaging members in making decisions about their health and health care. Regardless of who makes the contribution, the money belongs to the member. It's their money to accumulate, manage and take with them from job to job or into retirement.

Health reimbursement arrangements are about the health plan's money. The plan document governs how the funds are accessed and for what they can be used. Typically the member forfeits any unused balance upon termination of employment. Flexible spending accounts work similarly, encouraging you to spend rather than save as unused funds are lost to the member at the end of the year. In the event of an urgent need, the funds cannot be accessed for nonqualified expenses.

Insurance benefits that incorporate consumer-driven health-care features are funded by premium. Although the benefit may accumulate to future years if not used, the money belongs to the insurer rather than the member.

Because health-reimbursement arrangements are typically nominally funded, interest is not usually credited on the unused balances. So, a member that has $2,000 a year put into an arrangement for 20 years has a potential balance of $40,000 if they make no withdrawals. If that same $2,000 were put into an HSA for 20 years, earning a 6% return, the balance would be $73,571 if none of the funds were withdrawn. The potential to accumulate made the HSA balance 84% larger than the HRA balance. At 8%, the balance grows to $91,523, 129% more than the HRA.

Members are able to manage their HSA funds using various investments, allowing them to construct a portfolio that reflects their individual needs and risk tolerance. The ability to accumulate for future years is a strong incentive to remain engaged in their health and health care.

People like choice, particularly when it comes to something as important as their health. HSAs provide members the greatest choice of any of the consumer-driven options. They can even use the funds for nonqualified expenses (subject to tax and penalties). This flexibility further engages the member as a partner in managing health-care costs.

Jerry L. Ripperger, a Best's Review columnist, is director of Consumer Health for Principal Financial Group, Des Moines, Iowa. He can be reached at [e-mail].