The term “health insurance” is commonly used in the United States to describe any program that helps pay for medical expenses, whether through privately purchased insurance, social insurance, or a non-insurance social welfare program funded by the government. Synonyms for this usage include “health coverage,” “health care coverage,” “health benefits,” and “medical insurance.” In a more technical sense, the term describes any form of insurance that protects against injury or illness.
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The health insurance industry in America has changed rapidly during the last few decades. In the 1970s, most people who had health insurance had indemnity insurance. Indemnity insurance is often called fee-for-service. In traditional health insurance, the medical provider (usually a doctor or hospital) is paid a fee for each service provided to the patient covered under the policy. An important category associated with indemnity plans is consumer-driven health care (CDHC). Consumer-directed health plans allow individuals and families to have greater control over their health care, including when and how they access care, what types of care they receive, and how much they spend on health care services.
However, these plans are associated with higher deductibles that the insured has to pay from their pocket before claiming insurance money. Consumer-driven health care plans include Health Reimbursement Plans (HRAs), Flexible Spending Accounts (FSAs), high deductible health plans (HDHps), Archer Medical Savings Accounts (MSAs), and Health Savings Accounts (HSAs). The Health Savings Accounts are the most recent and have witnessed rapid growth during the last decade.
WHAT IS A HEALTH SAVINGS ACCOUNT?
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States. The funds contributed to the account are not subject to federal income tax at the time of deposit. These may be used to pay for qualified medical expenses at any time without federal tax liability.
Another feature is that the funds contributed to the Health Savings Account roll over and accumulate yearly if not spent. The employees can withdraw these at the time of retirement without any tax liabilities. Withdrawals for qualified expenses and interest earned are also not subject to federal income taxes. Consider speaking with a TurboTax Live tax expert online from the comfort of your Dallas home if you need help. According to the U.S. Treasury Office, ‘A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care.
HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses tax-free. Thus, the Health Savings Account is an effort to increase the American healthcare system’s efficiency and encourage people to be more responsible and prudent about their healthcare needs. It falls in the category of consumer-driven health care plans.
Origin of Health Savings Account
The Health Savings Account was established under the Medicare Prescription Drug, Improvement, and Modernization Act passed by the U.S. Congress in June 2003, by the Senate in July 2003, and signed by President Bush on December 8, 2003.
Eligibility –
The following individuals are eligible to open a Health Savings Account –
– Those covered by a High Deductible Health Plan (HDHP).
– Those not covered by other health insurance plans.
– Those not enrolled in Medicare4.
Also, there are no income limits on who may contribute to a HAS, and there is no requirement to have earned income to contribute to a HAS. However, HASs can’t be set up by those dependent on someone else’s tax return, and children cannot set them up independently.
What is a High Deductible Health Plan (HDHP)?
Anyone wishing to open a Health Savings Account (HSA) must enroll in a high-deductible health plan (HDHP). The Medicare Modernization Act, which introduced HDHPs, gave HDHPs a boost. An HDHP is a health insurance plan with a certain deductible threshold. This limit must be crossed before the insured person can claim insurance money. It does not cover first-dollar medical expenses. So, an individual has to pay the initial fees, called out-of-pocket costs.
In several HDHPs, immunization and preventive health care costs are excluded from the deductible, meaning the individual is reimbursed. HDHPs can be taken by individuals (self-employed and employed) and employers. In 2008, insurance companies in America offered HDHPs with deductibles ranging from a minimum of $1,100 for Self- and $2,200 for Self- and Family coverage. The maximum out-of-pocket limits for HDHPs are $5,600 for Self- and $11,200 for Self- and Family enrollment.
These deductible limits are called IRS limits set by the Internal Revenue Service (IRS). In HDHPs, the relation between the deductibles and the insured’s premium is inversely proportional, i.e., the higher the deductible, the lower the premium, and vice versa. The major purported advantages of HDHPs are that they will a) lower healthcare costs by causing patients to be more cost-conscious and b) make insurance premiums more affordable for the uninsured. The logic is that when the patients are fully covered (i.e., have health plans with low deductibles), they tend to be less health-conscious and cost-conscious when going for treatment.
Opening a Health Savings Account
Individuals can sign up for HSAs with banks, credit unions, insurance companies, and other approved companies. However, not all insurance companies offer HSA-qualified health insurance plans, so it is important to use an insurance company that provides this type of qualified insurance plan. The employer may also set up a plan for the employees. However, the account is always owned by the individual. Direct online enrollment in HSA-qualified health insurance is available in all states except Hawaii, Massachusetts, Minnesota, New Jersey, New York, Rhode Island, Vermont, and Washington.
Contributions to the Health Savings Account
Contributions to HSAs can be made by an individual who owns the account, by an employer, or by any other person. When made by the employer, the contribution is not included in the employee’s income. When made by an employee, it is treated as exempted from federal tax. For 2008, the maximum amount that can be contributed (and deducted) to an HSA from all sources is:
$2,900 (self-only coverage)
$5,800 (family coverage)
The U.S. Congress sets these limits through statutes indexed annually for inflation. A special catch-up provision for individuals above 55 years of age allows them to deposit an additional $800 for 2008 and $900 for 2009. The maximum amount an individual can contribute also depends on how many months he is covered by an HDHP (pro-rated basis) as of the first day of a month. For example, if you have family HDHP coverage from January 1, 2008, until June 30, 2008, then cease having HDHP coverage, you are allowed an HSA contribution of 6/12 of $5,800, or $2,900 for 2008.
If you have family HDHP coverage from January 1, 2008, until June 30, 2008, and have self-only HDHP coverage from July 1, 2008, to December 31, 2008, you are allowed an HSA contribution of 6/12 x $5,800 plus 6/12 of $2,900, or $4,350 for 2008. If an individual opens an HDHP on the first day of a month, he can contribute to HSA on the first day. However, if they open an account on any day other than the first, they can contribute to the HSA starting next month. Contributions can be made as late as April 15 of the following year. Contributions to the HSA over the contribution limits must be withdrawn by the individual or be subject to an excise tax. The individual must pay income tax on the excess withdrawn amount.
Contributions by the Employer
The employer can contribute to the employee’s HAS account under a salary reduction plan known as the Section 125 plan. It is also called a cafeteria plan. The contributions made under the cafeteria plan are made pre-tax, i.e., excluded from the employee’s income. The employer must contribute on a comparable basis. Comparable contributions are contributions to all HSAs of an employer, which are 1) the same amount or 2) the same percentage of the annual deductible. However, part-time employees working less than 30 hours a week can be treated separately. The employer can also categorize employees into those who opt for self-coverage only and those who opt for family coverage. The employer can automatically make contributions to the HSAs on behalf of the employee unless the employee specifically chooses not to have such contributions by the employer.
Withdrawals from the HSAs
The employee owns the HSA and can make qualified expenses from it whenever required. They also decide how much to contribute and withdraw for qualified expenses, which company will hold the account, and what type of investments will grow it. Another feature is that the funds remain in the account and roll over from year to year. There is no use it or lose it rules. The HSA participants do not have to obtain advance approval from their HSA trustee or medical insurer to withdraw funds. The funds are not subject to income taxation if made for ‘qualified medical expenses.
Qualified medical expenses include costs for services and items covered by the health plan but subject to cost-sharing, such as deductibles, coinsurance, or copayments, as well as many other expenses not covered under medical plans, such as dental, vision, and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; and transportation expenses related to medical care. Nonprescription, over-the-counter medications are also eligible. However, qualified medical expenses must be incurred on or after the HSA was established.
Tax-free distributions can be taken from the HSA for the qualified medical expenses of the person covered by the HDHP, the individual’s spouse (even if not covered), and any dependent (even if not covered).12 The HSA account can also be used to pay the previous year’s qualified expenses, subject to the condition that those expenses were incurred after the HSA was set up.
The individual must preserve the receipts for expenses met from the HSA as they may be needed to prove that the withdrawals from the HSA were made for qualified medical expenses and not otherwise used. Also, the individual may have to produce the receipts before the insurance company proves the deductible limit was met. Suppose a withdrawal is made for unqualified medical expenses. In that case, the amount withdrawn is considered taxable (added to the individual’s income) and is also subject to an additional 10 percent penalty. Normally, the money cannot be used for medical insurance premiums. However, in certain circumstances, exceptions are allowed.
These are –
1) Pay for health plan coverage while receiving federal or state unemployment benefits.
2) COBRA continuation coverage after leaving employment with a health insurance company.
3) Qualified long-term care insurance.
4) Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for Part A (hospital and inpatient services), Part B (physician and outpatient services), Part C (Medicare HMO and PPO plans), and Part D (prescription drugs).
However, if an individual dies, becomes disabled, or reaches age 65, withdrawals from the Health Savings Account are considered exempt from income tax and an additional 10 percent penalty, irrespective of the purpose of those withdrawals. Funds can be withdrawn from the HSAs using different methods. Some HSAs provide account holders with debit cards, some with cheques, and some have options for a reimbursement process similar to medical insurance.
Growth of HSAs
Ever since the Health Savings Accounts came into being in January 2004, their numbers have grown phenomenally. From around 1 million enrollees in March 2005, the number has grown to 6.1 million enrollees in January 2008.14 This represents an increase of 1.6 million since January 2007, 2.9 million since January 2006, and 5.1 million since March 2005. This growth has been visible across all segments. However, the growth in large and small groups has been much higher than in the individual category. According to the projections made by the U.S. Treasury Department, the number of HSA policyholders will increase to 14 million by 2010. These 14 million policies will cover 25 to 30 million U.S. citizens.
In the Individual Market, 1.5 million people were covered by HSA/HDHPs purchased in January 2008. Based on the number of covered lives, 27 percent of newly purchased individual policies those purchased during the most recent full month or quarter) were enrolled in HSA/HDHP coverage. In the small group market, enrollment stood at 1.8 million as of January 2008. In this group, 31 percent of all new enrollments were in the HSA/HDHP category. The large group category had the largest enrollment, with 2.8 million enrollees as of January 2008. Six percent of all new enrollments in this category were in the HSA/HDHP category.
Benefits of HSAs
The proponents of HSAs envisage several benefits from them. First and foremost, it is believed that as they have a high deductible threshold, the insured will be more health-conscious. Also, they will be more cost-conscious. The high deductibles will encourage people to be more careful about their health and healthcare expenses, shop for bargains, and be more vigilant against excesses in the healthcare industry. This, it is believed, will reduce the growing cost of healthcare and increase the healthcare system’s efficiency in the United States. HSA-eligible plans typically provide enrollee decision support tools that include, to some extent, information on the cost of health care services and the quality of health care providers.
Experts suggest that reliable information about the cost of particular healthcare services and the quality of specific healthcare providers would help enrollees become more actively engaged in making healthcare purchasing decisions. Health insurance carriers may provide these tools to all health insurance plan enrollees but are likely more important to HSA-eligible plans, who have a greater financial incentive to make informed decisions about the quality and costs of health care providers and services.
Lower premiums associated with HSAs/HDHPs are believed to enable more people to enroll in medical insurance. This means that lower-income groups who do not have access to Medicare will open HSAs. No doubt, higher deductibles are associated with HSA-eligible HDHPs. Still, tax savings under HSAs and lower premiums are estimated to make them less expensive than other insurance plans. The funds put in the HSA can be rolled over from year to year. There is no use it or lose it rules. This leads to a growth in the savings of the account holder. The funds can be accumulated tax-free for future medical expenses if the holder so desires. Also, the savings in the HSA can be grown through investments.
The nature of such investments is decided by the insured. The earnings on savings in the HSA are also exempt from income tax. The holder can withdraw his savings in the HSA after turning 65 without paying taxes or penalties. The account holder has complete control over their account. The owner of the account since its inception. A person can withdraw money as and when required without any gatekeeper. Also, the owner decides how much to put in their account, how much to spend, and how much to save for the future. The HSAs are portable. If the holder changes their job, becomes unemployed, or moves to another location, they can still retain the account.
If the account holder desires, he can transfer his HSA from one managing agency to another. Thus, portability is an advantage of HSAs. Another benefit is that most HSA plans provide first-dollar coverage for preventive care. This is true of all HSA plans offered by large employers and over 95% of small employers’ plans. It was also true of over half (59%) of the plans that individuals purchased.
All plans offering first-dollar preventive care benefits included annual physicals, immunizations, well-baby, well-child care, mammograms, and Pap tests; 90% included prostate cancer screenings, and 80% included colon cancer screenings. Some analysts believe that HSAs benefit the young and healthy as they do not have to pay frequent out-of-pocket costs. On the other hand, they have to pay lower premiums for HDHPs, which help them meet unforeseen contingencies.
Health Savings Accounts are also advantageous for employers. The benefits of choosing a health Savings Account over a traditional health insurance plan can directly affect the bottom line of an employer’s benefit budget. For instance, health savings accounts depend on a high deductible insurance policy, which lowers the premiums of the employee’s plans. All contributions to the Health Savings Account are pre-tax, thus lowering the gross payroll and reducing the amount of taxes the employer must pay.
Criticism of HSAs
Health Savings Accounts’ opponents contend they would harm America’s health insurance system more than good. Some consumer organizations, such as the Consumers Union, and many medical organizations, such as the American Public Health Association, have rejected HSAs because, in their opinion, they benefit only healthy, younger people and make the health care system more expensive for everyone else. Stanford economist Victor Fuchs states, “The main effect of putting more of it on the consumer is to reduce the social redistributive element of insurance.
Some others believe that HSAs remove healthy people from the insurance pool, making premiums rise for everyone left. HSAs encourage people to look out for themselves more and spread the risk around less. Another concern is that the money people save in HSAs will be inadequate. Some believe that HSAs do not allow enough savings to cover costs. Even the person who contributes the maximum and never takes any money out will not cover health care costs in retirement if inflation continues in the health care industry.
Opponents of HSAs also include distinguished figures like state Insurance Commissioner John Garamendi, who called them a “dangerous prescription” that will destabilize the health insurance marketplace and make things even worse for the uninsured. Another criticism is that they benefit the rich more than the poor. Those who earn more will get bigger tax breaks than those who earn less. Critics point out that higher deductibles and insurance premiums will take away a large share of the low-income groups’ earnings. Also, lower-income groups will not benefit substantially from tax breaks as they already pay little or no taxes. On the other hand, tax breaks on savings in HSAs and further income from those HSA savings will cost billions of dollars of tax money to the exchequer.
The Treasury Department has estimated HSAs would cost the government $156 billion over a decade. Critics say that this could rise substantially. Several surveys have been conducted regarding the efficacy of the HSAs. Some have found that the account holders are not particularly satisfied with the HSA scheme, and many are even ignorant about the workings of the HSAs. One such survey conducted in 2007 of American employees by the human resources consulting firm Towers Perrin showed low satisfaction with account-based health plans (ABHPs). People were less generally happy with them than those with more traditional health care. Respondents said they were uncomfortable with the risk and did not understand how it works.
According to the Commonwealth Fund, early experience with HAS-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems. Another Employee Benefits Research Institute survey found that people enrolled in HSA-eligible high-deductible health plans were much less satisfied with many aspects of their health care than adults in more comprehensive plans. People in these plans allocate substantial income to their health care, especially those with poorer health or lower incomes. The survey also found that adults in high-deductible health plans are far more likely to delay or avoid getting needed care or to skip medications because of the cost. Problems are particularly pronounced among those with poorer health or lower incomes.
Political leaders have also been vocal about their criticism of the HSAs. Congressman John Conyers, Jr. issued the following statement criticizing the HSAs: “The President’s health care plan is not about covering the uninsured, making health insurance affordable, or even driving down costs. Its real purpose is to make it easier for businesses to dump their health insurance burden onto workers, give tax breaks to the wealthy, and boost banks and financial brokers’ profits. The health care policies concocted at the behest of special interests do nothing to help the average American. In many cases, they can make health care even more inaccessible.” A report by the U.S. Government Accountability Office, published on April 1, 2008, says that the enrollment rate in HSAs is greater for higher-income individuals than for lower-income ones.
A study titled “Health Savings Accounts and High Deductible Health Plans: Are They an Option for Low-Income Families? Catherine Hoffman and Jennifer Tolbert, which the Kaiser Family Foundation sponsored, reported the following key findings regarding the HSAs:
a) While premiums for HSA-qualified health plans may be lower than traditional insurance, these plans shift more financial risk to individuals and families through higher deductibles.
b) Premiums and out-of-pocket costs for HSA-qualified health plans would consume a substantial portion of a low-income family’s budget.
c) Most low-income individuals and families do not face high enough tax liability to benefit significantly from the tax deductions associated with HSAs.
d) People with chronic conditions, disabilities, and others with high-cost medical needs may face even greater out-of-pocket costs under HSA-qualified health plans.
e) Cost-sharing reduces health care use, especially primary and preventive services, and low-income individuals and the sick are susceptible to cost-sharing increases.
f) Health savings accounts and high deductible plans are unlikely to increase healthcare coverage among the uninsured substantially.
Choosing a Health Plan
Despite the advantages offered by the HSA, it may not be suitable for everyone. While choosing an insurance plan, an individual must consider the following factors:
1. The premiums to be paid.
2. Coverage/benefits available under the scheme.
3. Various exclusions and limitations.
4. Portability.
5. Out-of-pocket costs like coinsurance, co-pays, and deductibles.
6. Access to doctors, hospitals, and other providers.
7. How much and sometimes how one pays for care.
8. Any existing health issue or physical disability.
9. Type of tax savings available.
The plan you choose should be according to your requirements and financial ability.
