HSAs, which were authorized by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, are portable health savings accounts that consumers can use to pay for qualified medical expenses. The accounts are offered in conjunction with a high deductible health plan that provides security against catastrophic medical costs. Both employers and employees can contribute to HSAs, currently up to $5,150 for a family per year and $2,600 for individuals.
While the prescription drug portion of the legislation has received lots of attention in the media and from seniors, the group it most directly affects, the HSA feature received much less notice. Yet some analysts believe that it will have far-reaching effects on businesses and their employees and will dominate the way insurance coverage is financed for at least the next decade.
A survey by Mercer Human Resource Consulting found nearly three-quarters of U.S. employers describe themselves as "very likely" or "somewhat likely" to offer HSAs by 2006.
"HSAs fit well into a consumer-directed strategy, for they combine high-deductible health plans that cut the employer's cost of health benefits with a tax-free savings account that the consumer can use to purchase medical services," says Kim Bellard, a vice president at Highmark.
Highmark, a health insurance company, is planning to offer an HSA coupled with a high-deductible plan in January. And several other companies in the region have announced that they will offer HSAs. Mellon Financial has entered alliances with two firms to offer products that administer health coverage and the financial components of an HSA. Managed Care of America Inc. and Northwest Savings Bank have agreed to create an HSA product as well.
HSAs, which have been available since Jan. 1, are beginning to catch on in part because of guidance issued by the IRS to clarify the rules regarding their use. Employer contributions to an HSA are tax-deductible to the employer, but not taxable to the individual if the distributions are used to pay qualified medical expenses.
HSAs are expected to replace medical savings accounts, or MSAs, because of the more generous federal tax break they offer to consumers, their portability and the trend toward consumer-driven health care, a movement to give consumers more responsibility for their choices when it comes to health care.
"The clear trend among employers is to try to enlist employees as allies in the effort to control health care cost growth by educating them about the problem and encouraging them to be more thoughtful consumers of health care through changes in plan design and related initiatives," says Jim Foreman, a managing director with Towers Perrin, a global professional services firm.
For employers, premium costs for high-deductible plans can be as much as 50 percent less than the premiums for conventional plans with lower deductibles.
HSAs hold some clear advantages over MSAs. HSAs are open to all employers, while MSAs are only available to the self-employed or businesses with 50 or fewer employees. For HSAs, a high-deductible plan is one in which the deductible is $1,000 for individuals and $2,000 for a family.
MSAs carry a "use it or lose it" requirement -- if the funds aren't used in the year specified, they are relinquished to the employer. In contrast, HSA funds can be carried over from year to year, and earnings grow tax free.
"This is important, since earnings, such as interest and dividends, generally constitute taxable income for taxpayers," says Joseph Nicola, director of the employee benefits services group for accounting firm Alpern Rosenthal.
Steve Feinberg, owner of a franchise of Fiducial, a business accounting and advisory firm, says workers looking for more control over their health spending are likely to be attracted to HSAs. Employers who couldn't afford to sponsor a health plan for their workers, says Feinberg, may find that an HSA is a lower-cost option that allows them to offer one.
Beverly Kossum, vice president with insurance/employee benefits firm HDH Group, says that HSAs are appropriate for virtually any employee group, with the possible exception of those with an extremely rich benefits plan. Kossum also points out that many companies offer several benefit options with varying levels of coverage, and one that provides a high-deductible plan coupled with an HSA arrangement may be attractive to some employees.
Younger workers in good health and willing to risk carrying a high deductible may opt for such a plan; if they remain healthy, the HSA account can grow year to year. And if employees lose their jobs and their employer-based coverage, they won't necessarily have to go without insurance.
Says Kossum: "You can use your HSA money to pay your COBRA premiums."
How to reach: Highmark, www.highmark.com; TowersPerrin, www.towers.com, HDH Group, www.hdhgroup.com, Fiducial, www.fiducial.com