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January 01, 2005

Health Saving Accounts

What is a HSA?

Like its precursor MSA, or Medical Savings Account, the HSA is a two-component health plan consisting of a tax-deductible, high deductible catastrophic health insurance plan, and a tax-free claims expense reimbursement and tax-deferred savings plan. 
Reimbursements from the savings plan account, for those expenses deemed eligible (as defined under a more liberal and far broader federal definition) are received 100% tax free, while all other withdrawals are taxable as ordinary income with an added penalty when taken prior to age of 65. Simply stated, the HSA is just the permanent expansion of the former MSA, but with several very meaningful enhancements.

Why a HSA, or Health Savings Account?

The primary reason is affordability, and the secondary open choice in doctors and hospitals.  Many vendors of the precursor MSA required insureds to use only network-listed doctors and hospitals, making them much like the less desirable and restrictive HMO (Health Maintenance Organizations with their Staff Models or IPAs – Independent Physician Associations), or the slightly less restrictive PPO (Preferred Provider Organizations).  The reason they did so is because such networks provide Insurers with pricing discounts that “may” be passed onto the consumer, either by increased benefits, lower policy premiums, or both.

Like these former MSA models there will also be versions of the new HSA offering discounted network-linked models; however, a significant advantage of an HSA that's, “made of the right stuff”, is one that places no such restrictions on an insureds freedom to seek out and negotiate services from any doctor or any hospital of their choosing.  However, for this to work out properly, there needs to be an incentive to cost control.  Therefore, on the cost side of the equation, only when consumers have a good portion of their assets at stake will they be compelled to shop for and receive more cost effective and reasonably priced health care.  This will mean higher first dollar deductibles, which conveniently will cause the consumer to think before spending, thereby helping to dampen spending and the associated higher costs.  After all, who really needs to pay the high costs of medical insurance for an occasional, and relatively low cost check up, cold or flu?  What is really needed by all is coverage that handles the more costly, catastrophic health care costs associated with surgery, hospitalization and chronic health conditions. 

Government and health Insurers, have proven to be largely ineffective in controlling long-term health care costs, until perhaps now.  Enticing consumers into zero, or very low co-pay HMOs or low deductible PPOs, has only wrongly reinforced the consumer misconception of the health care Medical Insurance ID Card and plan as equal to a “credit card”…but with one slight of hand; namely, that it is a one way proposition supported by, and paid for by, some fat-cat Insurer paying for all consumer excesses.  Little did consumers know, until perhaps having passed through the last decade where premiums & health care costs have again reached all time highs, that all of this spending has come back with a fury to bite them in the form of reduced benefits, more cost shifting by the Insurers, and increased out of pocket expenses at the premium gas pump!  Indeed, the piper has returned and is seeking inflation-adjusted payment.  With cost increases once again averaging in excess of 12-20% annually, under most any health plan model, one can easily see the immediate need for a timely, longer-term solution and alternative to the present highway-to-ever-increasing-health-care-costs system. 

HSAs to the rescue! 

MSAs, with limited carriers who actually understood the model, have proven stable and able to control long term costs more effectively then their HMO, PPO, EPO, or other such cost-containment model counterparts. One such MSA carrier reports an industry breaking 80% policyholder persistency, with rate renewals way under their US counterparts, and they (and the few others like them), are ready to go with enhanced, and now permanently expanded, new HSA models. 

The HSA Enhancements 

With the permanent expansion of MSAs into HSAs, come a number of key improvements and advantages over all prior and parallel existing models, of all types, for example: 

• First, and foremost, now anyone can have an HSA.
• Premiums, for the catastrophic health insurance component, are 100% tax deductible to those who are self-employed, although this is under consideration to be expanded to cover all persons.
• Personal contributions into the Health Savings Account component are 100% tax deductible for all individuals, whether or not they are self-employed, Partners or S-Corporation owners (the only ones who were eligible under the prior MSA models), and such deposits accumulate tax-deferred.
• HSA savings account contributions may be made each year up to 100% of the policy deductible.  So, a $5,150 deductible, the highest available family deductible for 2004, can be fully deducted, unlike the precursor MSA, where a single person could previously only tax deduct up to 65% of their deductible, or 75% for parties of two or more (Family).
• Individuals ages 55-65 may make additional "catch-up" contributions of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter.  A married couple can make two catch-up contributions as long as both spouses are at least age 55.
• New lower deductible limits have been introduced for Single $1,000, and Family of $2,000 (these newer lower deductible plans will cost more, and also do not provide the needed tax savings to make the HSA pricing equation work well, although they will help to interest virgin newcomers into looking into HSAs).

New deductible limits will be tied to the Consumer Price Index starting January 1, 2004 onward.