7 things you should know about an HSA plan

7 Things You Should Know About an HSA

by C. Dean Richard, JD, RHU
"the HSA king"

Health Savings Accounts (HSAs) have been promoted as the salvation of small businesses in desperate need of affordable health insurance plans. Here are some examples (some of which relate to medical savings accounts, the predecessor to health savings accounts):

Steve Forbes dubbed the MSA as the "medical-IRA".
Forbes magazine has called medical/health savings accounts "Super-IRAs".
Business Week proclaimed that MSAs are "almost too good to be true".
Kiplinger's Personal Finance Magazine observed that "if you are self-employed, you should jump at the chance to open an HSA".
The American Medical Association published a series of articles strongly supporting medical/health savings accounts--these plans are promoted on the AMA's insurance Web site.
President Bush strongly supports the HSA as part of the solution to the national health care crisis (rumor has it the President's tax returns reflect ownership of an HSA).
The insurance industry and the employee benefit industry strongly support the use of health savings accounts.
Business think-tanks across the country repeatedly focus on ideas to expand the use of this promising financial tool in the marketplace.

And the list goes on...but, alas, the HSA is not for everyone.

Here are some things you should know before you consider switching health plans to a HSA plan:

1. An HSA plan can cut overall health costs by an average of 40% for many people.
Nevertheless, approximately 1 in 3 people who apply for a HSA plan either do not qualify (for the underlying health insurance that is required) or do not achieve any net savings in overall health costs. Those most likely to save the most money are the self-employed, relatively healthy with historically few medical expenses.

2. Health savings accounts restore freedom of choice.
An HSA plan puts individual consumers back in control of their own health care. This also means that each individual must be more responsible for his/her own health care decisions. This approach of self-reliance is not always popular or appropriate for everyone, especially those who have become comfortable with HMO-type "co-pay" plans.

Health savings accounts are designed to encourage efficiency and cut waste in health care. If you are "addicted" to co-pays, you may not sleep well at night with an HSA (although it has been our experience that our clients report sleeping remarkably well with all the extra cash they have saved with an HSA safely tucked away in a special tax-sheltered savings account).

3. Health savings accounts reduce income taxes.
The amount you contribute into your HSA account is deducted from your taxable income in the same manner as contributions into a traditional IRA account--regardless of whether you spend it or just save it. Interest and investment earnings in a HSA accumulate tax-deferred. (Withdrawals are tax-FREE when used to pay qualifying medical expenses!) If you are eligible for the maximum contribution to an HSA and choose to continue paying "full price" for a traditional plan, it is then correct to say you are over-paying your federal taxes by an average of $1,600 per year (for a typical family).

4. You must have a qualifying HSA-type health insurance policy in place first before
you can open a health savings account.
Not just any "high deductible" plan will qualify under IRS Regulations. Be sure you are insured with an IRS qualified policy. (hint: if you are searching this site for information, chances are good that you do NOT already have an HSA qualified policy) These insurance plans are available to most small business firms with 2-50 employees, in addition to individuals and families who meet insurability guidelines with insurance companies offering individually underwritten plans.

5. You must be insurable in order to qualify for the HSA-qualified health insurance policy.
Unless coverage is being offered under small group reform laws (generally groups with 2-49 employees), your policy will be individually underwritten. This means that some "pre-existing" conditions may not be fully covered. Alternatively, some companies may opt to cover certain "pre-existing" conditions in exchange for slightly higher premiums. Unfortunately, some health conditions simply render an individual uninsurable (examples: diabetes, chron's disease, heart attack, etc.). Underwriting laws do vary by state, so feel free to contact us with any questions about a particular condition prior to submitting an application.

You should not switch to a HSA plan when the management of existing medical expenses is more important than saving up-front medical insurance premiums. Do not change health plans: in the middle of ongoing medical treatments; after a major health issue has been diagnosed; or if any family member is pregnant.

Generally, it is relatively hassle-free to qualify, i.e. no medical exams, etc. Most insurance companies offering HSA coverage will issue based on your application answers, perhaps accompanied by a follow-up telephone interview. In some cases, medical records may be requested, and companies always reserve the right to order a paramed exam.

6. Although HSA rates are low, they are not always as low as you might expect.
This happens for one main reason. Simply stated, the underlying insurance policy is actually a "Cadillac" type of policy. It does have a "high" deductible, as required by law, but for a family it is a true "one family deductible". Thus, it is not uncommon for rates for a 5000 family deductible with 100% coverage after the deductible to be comparable to a 2500 "per person" deductible plan with 80/20 coverage after the deductible.

The low net cost of an HSA plan is achieved after factoring in the benefits of lower taxes, made possible by the tax-deductible contribution to the HSA account. Thus, if obtaining the lowest possible gross premium is your main concern, you may wish to consider a high deductible, non-HSA policy, especially if you do not see the benefit to contributing to a tax-deductible savings account.

UPDATE: Some companies are now offering "hybrid" HSA plan options that offer substantially lower premiums. In general, these policies offer individual deductibles, with a limit on family deductible expenses in line with current HSA family deductible guidelines. Additionally, these policies typically offer full coverage in-hospital with limited coverage for out-patient expeses. Premiums are often 50% lower for these "hybrid" options in states with generally higher health insurance premiums.

7. An HSA offers your best chance to keep a lid on health insurance rate increases.
Make no mistake-you will have rate increases with your HSA insurance policy. Because an HSA qualified policy is still a health insurance policy at heart, there is no logical reason to presuppose that an HSA policy would be immune to rate increases required by an insurer to keep paying claims and stay in business. But you can expect that the actual dollar amount of any future rate increases will be substantially lower compared to traditional health insurance plans (regular PPO and HMO plans--this is true because insurers base increases on percentages, and the same percentage of a lower base premium results in a lower dollar increase). It's not a perfect solution-but it is the most cost-efficient solution for lots of qualified people.

(hint: don't be misled by insurance agents who "brag" about their policy's low rate of increase in the past year or two--for one thing, they may be lying (gasp!) but more importantly, what happened last year is, for all intents and purposes, irrelevant as to what may happen in the future--with the possible exception of a plan that had substantially higher than normal increases in the past year or so)

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