Health Savings Accounts to Play Key Roles, Post Reform

Health plans that qualify participants to open a tax-advantaged Health Saving Account (HSA) have been widely available to groups and individuals since at least 2005, and after a rather slow start, they are finally taking off in a big way.

A survey by the benefits consulting firm, Aon Consulting and the International Society of Certified Employee Benefit Specialists (ISCEBS), found that in 2009, 44 percent of U.S. employers offered their employees what is commonly known as a consumer-driven health (CDH) plan. These plans either incorporated an HSA or a Health Reimbursement Arrangement (HRA) in their plan design to help employees pay out-of-pocket expenses with tax-free dollars.

Aon/ISCEBS reports that 56 percent of those employers offering CDH plans in 2009, used the HSA model, 35 percent used the HRA model, and 9 percent used both. Over the previous three years, the study learned that the gap had widened between HSAs and HRAs, as the number of employers offering HSAs rose from 48 percent to 56 percent, and the number offering HRAs dropped from 43 percent to 35 percent.

The Aon/ISCEBS survey found that employers offering a CDH plan in 2009 were doing so mainly to:

• Control health plan costs (38 percent).
• Introduce “consumer engagement” into the purchasing of health care for long-term change (35 percent).
• Expand employee choices (14 percent).
• Encourage better use of health care services (9 percent).
• Provide a vehicle for retiree medical savings (3 percent).

So, it seems that while Washington debated change, employers were already at work affecting their own health care reform program by adopting plan designs that encourage employees to take a bigger role in managing their health and their health care spending.

Then on March 23, President Obama signed into law the sweeping health care reform legislation known as the Patient Protection and Affordable Care Act (PPACA). It would not surprise anyone reading this article to say that (PPACA) will bring massive changes to the way health insurance is designed, sold and purchased. What might surprise some readers, however, is that HSAs are expected to play an even larger role in benefit plan offerings going forward.

Considering all the changes PPACA will bring, especially the closing of tax loopholes, HSAs have come through the process pretty much in one piece. Think about the hit that Flexible Spending Accounts (FSAs) will take in 2013, when a $2,500 annual cap (indexed for inflation) will take effect, and then look at the changes that were made to HSAs.

The only modifications that PPACA made to HSAs were to:

1. Restrict the use of tax-free dollars to purchase over-the-counter drugs not prescribed by a doctor. This change goes into effect in January 1, 2011, and also impacts FSAs and HRAs; and,
2. Increase the tax on HSA distributions that are not used for qualified medical expenses from 10% to 20%, also effective January 1, 2011.

Before going further, this might be a good place to remind ourselves where HSAs came from. The HSA was a part of George W. Bush’s health care reform bill, passed in 2003, that gave us Medicare Part D, the popular program that provided seniors with prescription drug coverage.

The HSA is a tax-advantage medical savings account that is available to Americans who are enrolled in a Qualified High Deductible Health Plan (QHDHP). The funds contributed to the account are not subject to federal and most state income taxes. Iinterest paid, or any investment income earned on deposits is non-taxable, and the funds can be removed from the account tax-free to pay for qualified medical expenses.

Unlike an FSA, HSA funds rollover and accumulate year after year if not spent. Also, HSAs are owned by the individual, a feature that makes them different from the employer-owned HRA.

Proponents of HSAs say that they help reduce the growth of health care costs and increase the efficiency of the health care system by encouraging people to save for future health care expenses, allow the patient to receive needed care without a gate keeper to determine what benefits are allowed and make consumers more responsible for their own health care choices.

So how did this Bush-era health plan with its triple tax advantage and emphasis on personal responsibility survive an Obama health care reform juggernaut hungry for “pay-fors” necessary to fund the expansion of coverage?

Some insiders say that reformers within the administration and on Capitol Hill came to realize that the low-premium HSA-type health plans coupled with the ability to save tax-free dollars is exactly what was needed to draw the young and healthy into the insurance pool alongside the old and not so healthy.

This spread of risk will be critical to making the entire health reform scheme work, and the penalties set out in the legislation for not being covered are arguably not high enough to convince the intentionally uninsured to go out and buy health insurance, at least not their father’s low office co-pay, high premium plans.

Another role that HSAs will play in the post-reform landscape will be to help employers provide their employees with “affordable” coverage and thus avoid penalties. PPACA contains some specific mandates as to what affordable health insurance should look like. Beginning in 2014, companies will be required to offer plans in which employees' contributions are no more than 9.5% of their household incomes. How this will be determined is still being worked out by regulators. Nevertheless, if a company fails on this measure and employees apply for government assistance through the yet-to-be-built health insurance exchanges, the employer will be fined $3,000 per affected employee. (The fine drops to $2,000 after the first 30 employees).

This affordability issue is likely to impact a large number of employers. A recent Mercer analysis of close to 3,000 employer-sponsored health plans found that nearly 40% of employers may be at risk for violating this affordability provision.

Once again, HSA-qualified plans are expected to come to the rescue. Their lower premiums will be useful to employers who want to continue providing employee health benefits as a recruitment and retention tool, but who also want to avoid paying this additional tax. By offering lower-premium HSA-qualified plans, employers can make their health plans affordable to a wider range of employees.

The law also requires a minimum level of coverage — specifically, that health insurance plans cover 60% or more of medical costs — but most HSA plans appear to be well within that constraint.

Given the economic necessity of attracting young “invincibles” into the insurance pool and the requirement that employers offer workers “affordable” health coverage, HSA-type plans look like they continue to be well positioned for growth and will play key roles in the new world of health care reform.

About The Author

SVP of Business Development & National Accounts

First Horizon Msaver, Inc.

Marty has over 25 years of experience in the health benefits industry. His career includes senior marketing and sales roles with third party benefits administrators, HMOs, and -- for over 12 years – the corporate offices of Humana, Inc. He has also been the president of a marketing communications firm specializing in health care.

Marty is a member of the senior management team that has propelled First Horizon Msaver to become one the nation’s leading HSA administrators, recognized for its innovation and as a model for banks wishing to achieve success in the HSA marketplace.

Marty, a graduate of The Ohio State University is an avid social networker and writes a well-followed blog covering innovations in health care: healthplaninnovation.com.

For more information:

Martin Trussell, SVP Business Development & National Accounts
First Horizon Msaver

7400 West 110th Street, Ste 520

Overland Park, KS 66210

(913) 317-2085

mtrussell@firsthorizon.com