A Cure for the Health Insurance Crisis?
Health Savings Accounts offer a cheaper way to provide health coverage—but at what price?
Health Savings Accounts are:
- An innovation that finally will give small business owners a chance to control health care costs.
- A still-experimental system that forces employees into high-deductible insurance programs, which could drive your best workers away.
If you answered yes to both, you are probably among the millions of business owners who are intrigued—and confused—by the new Health Savings Accounts.
As every U.S. business, from the sole-proprietor startup to General Motors and Wal-Mart, wrestles with the unpredictable and escalating cost of health insurance, Health Savings Accounts are emerging as an enticing option. The system, sometimes billed as a healthcare “IRA,” is a variation on earlier programs, such as the Medical Savings Account. The accounts work like Flexible Spending Plans, which let employees set aside pretax dollars to cover out-of pocket medical expenses, but with a key difference: HSAs do not have the “use it or lose it” feature of FSAs, under which employees forfeit any FSA money that has not been drawn down for legitimate health or dependent care expenses during the calendar year. In theory, HSAs allow consumers to roll over unused HSA funds and build up tax-free savings that can be used later in life to purchase supplemental healthcare coverage, including long-term care coverage.
But there is a catch. The HSA legislation, signed in December 2003, mandates that HSAs be used only in high-deductible health-insurance plans. Deductibles must be at least $1,050 for an individual and $2,100 family coverage. The maximums are $5,000 and $10,000, respectively. According to Health Affairs, a health policy newsletter, so far deductibles are “relatively high,” averaging $1,870 for single coverage and $3,686 for family.
Maximum annual contributions to the plans are pegged to the deductible. And the HSA dollars cannot be used to pay for the premiums for the healthcare plan itself (although the money can be used to buy coverage during unemployment, through a COBRA plan, for example).
Despite the lure of immediate cuts in premium costs of 30 percent or more (mostly because of the high deductible), relatively few employers and individuals have jumped into HSAs. There are several reasons, not least of which is that the plans are hard to understand and are, understandably, a hard sell to employees who are used to a conventional insurance plan.
So far, about four percent of companies that offer employee health benefits have enrolled an estimated 2.4 million workers in HSA-eligible programs, including the older HRA (Health Reimbursement Arrangement) plans, according to Health Affairs. Steve Parente, a professor of Health Policy and Management at the Carlson School of Management at the University of Minnesota, predicts the number will hit 3 million by yearend.
Look for accelerated growth next year. For one thing, major corporations, including WalMart, are jumping on the bandwagon—seizing HSAs as a way to replace current health insurance with high-deductible plans. “The only path we’re on is to high deductibles,” says Ric Joyner, president of the National Association of Professional Benefits Administrators and Chief Operating Officer of Eflexgroup.com, a benefits administrator. If that happens, more small businesses may feel comfortable about introducing high-deductible plans, because there will be less risk of losing employees to larger companies. In addition, as account balances begin to rise (they’re now estimated to be around $1,600), more insurance and financial-services giants are expected to start marketing HSA plans to small businesses.
| Helpful Links for HSA Information |
When the marketing blitz arrives, small business owners should be prepared. Unless the choice is between an HSA and no insurance coverage—the stark reality for many businesses, especially small startups—the decision is still complicated. For one thing, the promise of long-term savings may be illusory. “Small employers are desperate to do something about healthcare costs,” says Paul Fronstin, director of the Health Research and Education Program at the nonpartisan Employee Benefits Research Institute. “And HSAs are going to play a big role for a couple of years, but employers are going to find that they are not saving as much as they expect.”
How so? One reason is that the deepest discounts on premiums are being offered now, as employers shift costs to workers and health insurers (who pushed the HSA legislation that included high-deductibles), compete for sign-ups. But maintaining lower rates will depend on an as-yet-unproved premise: that employees who are paying the first $2,000 or $5,000 for coverage out of their own pockets (albeit using pretax dollars) will become wiser consumers, thinking twice about visiting the doctor for the proverbial hangnail and shopping around for lower fees. If employees do cut usage, when renewal time comes around the employer will see lower premium increases, to reflect lower costs. The employer can even “reward” employees by using some of the savings to provide company matches in HSA accounts.
But will that happen? “The policy wonks are thinking we’re going to start shopping around and bargaining with doctors,” says Mark Ferris, a financial planner who runs Yankee Cents Financial Services in Old Saybrook, Conn. Farris questions that scenario and critics of HSA plans point out the obvious hole in the logic: For employees with chronic diseases or with large families, there may not be any place to cut. There is no data yet to indicate that HSA enrollees have reduced their healthcare consumption. In addition, insurance rates are based on many factors, including the performance of investments made by insurers.
And there is a risk. In some cases, the introduction of HSAs has caused turmoil. Joyner says that at a recent conference in St. Louis, he chaired a session on HSAs in which a woman from an accounting firm told how the company’s move to a high-deductible plan backfired. “She said that the employees perceived that the switch from a $250 deductible to a $2,500 deductible was a $2,250 pay cut and within three months, a third of the employees had left,” he says. In addition, they were particularly critical of one feature of the HSA plans: loss of a discount pharmacy plan—enrollees had to pay out of pocket for prescriptions up to the deductible. The firm was blindsided by the reaction. “Employees can shop around for companies with better benefits now, because the economy is good,” Joyner says.
Just ask Scott Testa, founder of Mindbridge Software Inc., in Norristown, Pa., who pulled the plug on his HSA/high-deductible plan, because “at the end of the day, it wasn’t worth it.” The company, which makes software for creating corporate intranets, found that the perceived cut in benefits caused disruption in the workplace. Departing workers cited the high-deductible in exit interviews and the program became a deal-breaker when Mindbridge was recruiting. “When it comes to people’s benefits, if they don’t understand why things are changing, I guess it’s pretty scary,” says Testa. “People just did not get it.”
Joyner, who expects many small businesses to embrace HSAs, despite the risks, says he has an approach to introducing the changes that won’t leave the owner looking like Simon LeGree. Look for advice from Joyner and other experts on employee benefits as Small Business Review continues its coverage of healthcare in future issues.
