Weighing the HSA healthcare remedy: health savings accounts are quite new, and their purported advantages aren't well known to many companies. An HSA expert talks about how they work and what they can offer.

What is a health savings account (HSA) program, and what can it do for my business? Those are questions that are being heard more and more often these days, given that the accounts are new and the whys and wherefores aren't always well-known.

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Quite simply, HSAs offer large and small firms the ability to deliver a cost-efficient healthcare plan to employees while retaining more dollars in the company coffers.

An HSA program has two parts: a high-deductible health plan (which usually costs less than other health plans) and a tax-advantaged, portable savings account for payment of current medical expenses which builds like a medical individual retirement account (IRA).

Congress created these accounts late in 2003; they hit the market early in 2004 and are steadily gaining in popularity. That's not surprising, given that healthcare is the number one concern of small and medium-sized businesses, which have faced double-digit cost increases each of the last five years.

In 2004, the first year that HSAs were available, 10 percent of U.S. businesses adopted them in some form, according to data from the Small Business Digest. In 2005, an estimated 23 percent of businesses will offer HSAs to their employees, and predictions are that by the close of 2010, half of insured workers will be covered by some form of HSA.

In general, HSA features include: they are available to U.S. taxpayers covered by a qualified high-deductible health plan; contributions are tax-deductible; they are owned by the taxpayer and are portable; accumulated HSA funds carry over from year to year; HSA funds can be invested and earn interest, tax-free; they can be used to pay for many more healthcare offerings tax-free; money saved is an inheritable asset.

Experts both for and against HSAs agree that there needs to be a massive education program in place to instruct both employers and employees. Where HSAs are offered as part of a suite of offerings, they generally do not fare well, primarily because the accounts aren't yet well understood. However, in situations where they are mandated and properly administered, there are frequently strong positive feelings about this new approach to healthcare.

Advantages to the Company

1. High-deductible health plans cost less (rather than trying to pay for another year of double-digit premium increases, your business could be saving money).

2. Health insurance is the No. 1 benefit sought by employees, and an HSA program will enable your company to continue offering health insurance or perhaps start offering it, while helping employees build a retirement nest egg.

3. The cost of the insurance premium and any contribution to employees' HSAs are tax-deductible.

4. Can make your company more competitive by enabling it to attract and keep better, healthier employees.

5. HSAs can pay for many more procedures, such as acupuncture, visits to the chiropractor, laser eye surgery, cessation programs (prescribed for smoking, drugs, weight loss) and fertility enhancement.

A company can start an HSA program at any time. First, you need to find a qualified high-deductible health plan (HDHP). Good plans pay for both catastrophic and routine medical care, once you have paid out-of-pocket for the first thousand(s) of medical fees. To qualify under the HSA program, an HDHP must have the following restrictions:

* Individuals must have an annual deductible of at least $1,000.

* Families must have an annual deductible of at least $2,000 (a deductible or deductible between $2,000 and $5,000 works well for individuals and families).

* The annual out-of-pocket maximum for individuals must not exceed $5,100 (2005 level, indexed for inflation).

* The annual out-of-pocket maximum for families must not exceed $10,200 (2005 level, indexed for inflation).

* No co-pays are allowed (no "first-dollar" coverage) until the minimum deductible amount has been met. (Some states require "first-dollar" mandates for preventative care, which have been excluded until Jan. 1, 2006; these exceptional co-pays count towards the deductible.)

As a best practice, check with at least three vendors and get at least three competitive bids for high-deductible policies. It is important to get each bid broken down into inclusions and exclusions, so you can compare them in detail.

Reputable insurance providers should provide you with:

* Premium schedule (dates when premium payments are due);

* Benefits schedule (detailed list of what is or is not covered);

* Premium rates and ALL applicable administrative fees (monthly and setup fees);

* A copy of a sample agreement and application form (to review before you sign up);

* Checkable references from other clients with similar needs.

A good HSA will have the following features:

* Easy deposits--in person, by mail, by electronic transfer, or through an automatic payroll deposit mechanism.

* Easy withdrawals with a checkbook or debit card.

* An attractive daily compound interest rate on your deposits (2 percent annual percentage rate, or APR, is the current norm).

* Reasonable charges for administering the account (annual fees under 2 percent are common, although some vendors offer "no fee" accounts).

* Ability to check balances and recent account action at any time, by phone, by the Web and by monthly printed account summaries.

* A yearly printed statement of all deposits and detailed data on all debits or expenses, to satisfy the IRS requirements for reporting.

* Federal Deposit Insurance Corp. (FDIC) insurance.

Whether your company contributes to your employees' health savings accounts is optional. But companies switching from a traditional health maintenance organization (HMO) plan should be prepared for employee "sticker shock." The first time they visit the doctor, instead of a $15 or $20 office-visit copay, they may wind up writing a check for $75, $100 or even $300 (if the doctor is out of network).

This can take some adjustment. After all, most of us are probably not used to thinking about how much most procedures cost because we have been just paying a small percentage. Anticipate this first awkward moment, and consider putting a starting balance in your employees' HSAs.

Also, encourage your employees to think of a HDHP like homeowner's or renter's insurance, with its high deductible.

More importantly, understand that doctor visits did not suddenly get "more expensive." Remind your employees that the company has been paying the bulk of doctor's fees on their behalf. Remember, too, that the company's premiums have likely gone down with the switch to an HDHP.

The most critical part of setting up an HSA program is communicating it to your employees. As a suggestion, outline the benefits to them in a 10-minute presentation. Provide a handout so employees can review the material. And, provide a management contact for follow-up questions.

Consider key points to help you "make the sale" for a HSA:

1. It's a money saver -- a "better rainy day fund," superior to even IRAs in its ease of use.

2. It's a tax saver -- money put into an HSA by the employee comes "off the top" as a deduction from gross wages.

3. It's money in their pocket -- an employee's share of a premium for a high-deductible policy will be lower.

4. It's an improved retirement account -- the health savings account doubles as a retirement account. Plus, larger sums than for an IRA can be deposited into an HSA.

5. It's portable -- unlike health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs), HSAs are not a "use it or lose it" employee benefit. They are owned and controlled by the employee.

In summary, HSAs are still the new kids on the block, and there is uncertainty about how they work and what they offer. In the end, they may fare much like IRAs, which initially got off to a bumpy start but are now held by a vast majority of Americans.

RELATED ARTICLE: HSAs Getting Traction at Big Firms

Major corporations are still acting cautiously toward HSAs, according to the 10th annual survey of large employers conducted by Watson Wyatt and the National Business Group on Health, released in March. The survey found that 8 percent of employers now offer HSAs, and another 18 percent plan to offer them in 2006. However, another 47 percent are considering offering the accounts.

"HSAs and high-deductible health plans (HDHPs) are grabbing attention partly because they are new and they attack some of the drivers of healthcare costs--frequent use of health services paid for by others. HSAs and HDHPs, in contrast, provide incentives for employees to become more active in their healthcare decision-making," says Helen Darling, president of the National Business Group on Health. "However, despite the advantages of HSAs, employers have some concerns and are waiting to see whether HSAs will help lower overall healthcare costs."

Three out of four employers agree that HSAs are effective vehicles to engage employees more in managing their health; 60 percent also agree that HSAs will expand options for employees. However, about half of the respondents (49 percent) aren't sure whether HSAs will help lower healthcare costs.

"While HSAs offer great promise, employers cannot rely solely on HSAs and high-deductible health plans to solve healthcare cost problems," says Ted Chien, global director of group and healthcare consulting at Watson Wyatt. "Employers also need to provide employees with information, tools, financial incentives and lifestyle behavior programs. Employers that adopt this type of broad consumer-directed approach will be better positioned to effectively engage employees and control costs."

RELATED ARTICLE: What an HSA Can Pay For

Professional care:

Medical doctors

Dentists

Optometrists

Nursing services

Emergency care

Christian Science practitioners

Chiropractors

Psychiatrists

Psychologists

Acupuncturists (but not herbalists)

Therapists (certain certifications may be required)

Treatments not often covered by health insurance:

Alcoholism or drug addiction treatment

Fertility enhancement

Laser eye surgery

Prescribed weight-loss or stop-smoking programs

Special schools and homes for the mentally retarded 

Medical equipment, appliances and other personal items:

Artificial limbs and prosthetics

Dentures and other artificial teeth

Contact lenses and eyeglasses 

Braille books and magazines

Crutches and wheelchairs

Hearing aids 

Guide dogs and other helper animals

Birth control pills 

Costs that may be incurred when seeking treatment:

Trips and travel exclusively for the purpose of a treatment

Meals and lodging associated with such trips

Qualifying treatment-related expenses:

Telephone or television modifications for disability

Legal fees related to treatments

Medical conferences (must be related to a condition)

Plus, other types of insurances premiums:

Dental or vision care

COBRA continuation coverage when you leave a job

Temporary insurance coverage while receiving unemployment benefits

Quality long-term care (medical expenses and insurance up to allowable limits)

Medicare Part A or Part B and Medicare HMO

JoAnn Mills Laing ([e-mail]) is President of Information Strategies Inc., a marketing and information firm based in Fort Lee, N.J. She also manages www.HSAfinder.com, an independent source for information on health savings accounts for individuals and employers.