April 5, 2005
Health savings accounts: bad idea for MAPE members
Market-oriented politicians and their supporters are pushing health savings accounts (HSAs) as a new way to cut employers’ health-care costs and give people control over their own health care. While HSAs may be good for some individuals, they are bad for MAPE members and for low- and middle-income people in general. They shift costs to insured individuals, and they fail to address what’s really broken in the overall health care system.
How HSAs work
HSAs provide health insurance to individuals, and as part of group plans. Employers may offer HSAs to their employees, and fund, partially fund or not fund them. Individuals also can buy HSAs from insurance agents who sell the products.
By federal law, an HSA plan must have a high annual deductible insurance plan -- from $1,000 to $5,100 for an individual and $2,000 to $10,200 for family coverage. (A deductible is an amount the insured person must pay before the insurance policy coverage starts paying benefits.) The employee has to pay the premium for the insurance that provides coverage after the deductible is met.
The individual contributes money to the HSA on a pretax basis, which reduces the person's taxable income. The maximum annual contribution is equal to the deductible, but it is capped at $2,650 for an individual and $5,250 for a family. A person's employer may contribute to the employee's account. However, according to the IRS code, the employer can pull its contributions back out of the employee's account every year. The money in the account can be invested as in a retirement account.
The money in the account is available to the insured person, tax free, to pay for health care expenses such as MRIs, non-formulary prescriptions, copays for doctor bills and hospital bills and so on. At the end of the year, any money remaining in the account stays there and the person begins a new contribution year to add to the balance. HSAs are portable -- they aren't tied to employment. People with employer-provided HSAs may change or lose jobs, but they keep their HSAs because they own them.
Issues with HSAs
HSAs sound pretty good, so what's the catch? For one thing, if you want to accumulate money in the account, you have pay into it. Saving works for most people only if they do it regularly. For example, if you have an HSA with a $2,000 deductible, you should save at least $76.92 out of every biweekly paycheck to the account (at least $153.84 for a family plan), unless you’ll have $2,000 available whenever you need it. And that’s in addition to the insurance premium you pay. But, if your income is low or moderately low, you may not have room in your budget for the additional biweekly expense.
Supporters of HSAs say that the premiums are lower than in traditional group insurance. HSAs are new since the beginning of 2004, so it remains to be seen if that’s true, how much lower the premiums will be, and how much the individual’s employer will contribute. (In the private market, family premiums are about $1,000 per month.)
Supporters of HSAs also claim that people with HSAs use fewer prescriptions and make fewer doctor visits than people in traditional group health insurance. What they fail to discuss, however, is whether people in HSAs are as healthy as other people. They also fail to discuss whether prescription and provider usage is lower because people just don’t want to spend money, despite their health or illnesses.
You also should note that you would have to meet the deductible whenever it comes due. If you or a dependent have a serious accident or illness before you've saved enough in the account to pay the deductible, you still have to come up with all money at that time. And, each year, you have to meet a new deductible. So, if you don’t have at least $2,000 in your HSA when you have a serious accident or illness, you will have to come up with the balance of the cash needed to meet the deductible. Again, if you are a low-or middle-income person or family, you may not have the money available.
In another example, suppose that the employer contributes $1,000 to each employee’s HSA and pays part or all of the insurance premium. That should help, because then you’d need to save only $38.46 (pretax) out of every paycheck -- if you can afford to -- and a lower monthly premium. But what guarantee would you have that the employer won’t have a budget crisis next year and cut the HSA contributions? None. Given recent history, that’s very likely to happen, so you’d have to accumulate the full $2,000 yourself to cover the deductible. And, as noted earlier, the employer is allowed to take back its contribution from your account.
In short, if your income is high or if you’ve accumulated some wealth, you probably can handle an HSA. But for most people, HSAs are a financial gamble they probably can’t afford. Another question state employees should ask is whether the Heath Care Expense Account (HCEA) would still be available. Currently, you may contribute pretax money to your HCEA and later submit medical, dental and related bills for reimbursement. HCEAs currently have no cap. Since your HSA would have an annual contribution cap and may not be available to pay for everything HCEAs currently cover, you could lose some benefits if HSAs replace HCEAs.
Who benefits from HSAs and who may suffer
Unlike traditional health insurance pools, high-deductible HSAs can leave people financially at the mercy of a catastrophic medical event or a series of events. People with tight budgets, ongoing medical issues, small children who have many childhood illnesses and accidents, or occupations with physical or other risks could get into serious financial trouble if their health is insured under an HSA. As people age, many of them develop conditions needing ongoing treatment or prescriptions, which often are quite expensive.
What if you’re young, healthy, have no kids (who get sick a lot by virtue of being kids), and have money available to save? In that case, HSAs might be attractive -- as long as you stay young, healthy, childless and don’t increase your expenses much. But if you and others like you think that’s likely and you all opted for an HSA, you’d leave your less healthy and lower-income coworkers in the traditional insurance plan. And that would start a spiral of higher and higher premiums and copays that the covered employees eventually couldn’t afford. That could result in their possibly being unable to afford to get any health care they have to pay for, and that could lead to greater absenteeism and lower productivity in the workplace.
Proponents of HSAs claim that individuals who have them would become more responsible for their own health care, because they would know what everything costs and make decisions accordingly. Opponents of HSAs counter that individuals with traditional health insurance know a lot about what medical costs are and already do that. Some opponents also point out that health care isn’t a commodity where cost should be the primary driving force. After all, the issue is health, without which nobody functions very well. They stress that the focus should be on providing good health care to everyone, not just on costs. Rather than isolating everyone with their own health issues, the health-care system should pool together as many people as possible to get the maximum cost effectiveness along with better health.
HSAs may be good for some people, but they are a bad choice for most MAPE members and other low- and middle-income people.
