RespiteMatch.com Health Blog

By Albert B. Crenshaw
Sunday, February 5, 2006; F02

Despite a good deal of pre-State of the Union huffing and puffing, the Bush administration apparently plans to seek fairly modest changes in the law covering health savings accounts (HSAs) and other “consumer-driven” types of medical insurance.

Even without the better tax breaks Bush is talking about, though, the popularity of these plans is growing — at least with employers. Two of the reasons are that, so far, surveys indicate that HSAs are cheaper for companies than traditional insurance and that employers’ costs for these plans are rising less rapidly.

That, of course, is what backers of these plans have long said would happen. Set up as a combination of a high-deductible insurance policy to cover serious illnesses and a tax-preferred savings/investment account for routine expenses, HSAs are supposed to curb health care costs by discouraging unnecessary use of medical services while encouraging careful shopping for those that are necessary.

The mechanism is the savings/investment account, whose contributions can be kept and perhaps used for other purposes if they are not needed for medical care. In other words, the less you spend, the more you get to keep.

The account may be funded by the insured person or family, by the employer or shared between them.

(There is an alternative, known as a health reimbursement arrangement, or HRA, which is similar to an HSA but with somewhat different rules, including a requirement that the employer, and only the employer, fund the account.)

But while costs to employers may be restrained, it remains to be seen whether the plans truly curb overall costs. That is because they have another, less obvious feature: risk shifting.

In traditional health insurance, the insurer — or the employer, which is actually the insurer in the case of most large companies — picks up most of the costs after a typically modest initial deductible is satisfied.

In an HSA, that deductible is large — $1,000 for a single person, $2,000 for a family — and the total annual out-of-pocket expenses, not counting premiums, can be as much as $5,100 for a single person or $10,200 for a family. Out-of-pocket expenses include co-pays and other fees as well as the deductible.

Now, taking on more risk yourself can make plenty of sense in many contexts. Opting for a higher deductible on your car insurance is a good way to save on premiums if you are confident you would have the money to fix $500 or $1,000 worth of damage if you had to.

And you might assume that a well-funded savings/investment account would put you in much the same spot — able to save on premiums by “self insuring” for the deductible.

But you need to be careful: Unlike car accidents (one hopes), illness can be an ongoing thing. A person with a chronic illness might deplete his account year after year, never accumulating a cushion and being compelled to dig into his own pocket for uncovered costs up to the out-of-pocket limit.

And a worker needs to be conscious of who is funding the account. The more of the burden an individual, rather than the employer, bears, the more he or she is self-insuring for everything less than the deductible and out-of-pocket limits.

Then, too, there is the question of how much tax-preferred savings Americans can afford. Already we have 401(k) plans and IRAs for retirement and 529 plans for education, which, fully utilized, allow families to put aside tens of thousands of dollars into deductible or tax-free accounts. Indeed, the total of possible tax-preferred savings far exceeds many families’ entire income, let alone the amount they can afford to save.

On the other hand, HSAs clearly make sense for healthy, well-paid workers, especially young singles. They offer another tax benefit that, over the years, could really add up if the owner is healthy enough to avoid tapping it.

They also offer in the individual market what amounts to catastrophic coverage along with the savings opportunity — features that may appeal to self-employed people and young workers who have not yet nailed down a steady job or one with benefits.

Federal workers are now offered HSAs, and according to Congress’s Government Accountability Office, the workers opting for an HSA are slightly younger, predominantly male and single (or taking self-only coverage), and better paid than other federal workers the same age.

Last year was the first in which federal workers were offered HSAs, and the GAO found that enrollment was “modest.” It also cautioned that one year’s findings might not be predictive of future trends.

But the enrollment pattern of the federal workforce for 2005 “does raise the possibility that individuals with certain demographic characteristics may be disproportionately attracted to these plans,” the GAO said in its report, which was released last week. For example, it noted that HSA enrollees “had consistently higher incomes across all age groups.”

Although the GAO left it at that, saying more data are needed, the findings reinforce the worry of some experts that HSAs will draw healthier, wealthier workers out of traditional insurance plans, leaving the latter dominated by poorer, sicker people. That trend would likely force premiums up for traditional plans whose participants would be those least able to afford higher costs.

The message here for individuals is that workers who are offered an HSA (or its variant, the HRA) need to analyze their choices carefully. What, exactly, are you getting? Who funds the account? How healthy are you and, if you have one, your family? How much of your medical bills could you afford to pay if you had to?

These plans do offer a chance to build yet another nest egg, something we all need. It’s an opportunity, but as with most economic opportunities, it comes with risks.

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Officials of the Pension Benefit Guaranty Corp., the government’s pension insurance agency, will meet with workers and retirees covered by United Airlines’ retirement plans for ground employees, flight attendants and managers this week.

The meetings will be held Tuesday and Wednesday in Chantilly. For a complete schedule, go to http://www.pbgc.gov/media/news-archive/2006/pr06-21.html

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Gender reassignment surgery doesn’t qualify as a deductible medical expense, the Internal Revenue Service has ruled. A recently released memorandum concluded that such surgery does not appear to meet “the strict standard” imposed by Congress in barring deductions for a procedure that is “directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.”