Health savings account coverage tops 6 million!

By Rob Smith, Ceridian manager of Government Relations

Over 6 million Americans are now covered by health savings accounts (HSAs), according to two independent studies by the Government Accountability Office (GAO) and America's Health Insurance Plans (AHIP).

This is big news considering tax-advantaged HSAs only became available in 2004 and, along with consumer-directed health plans, represent a new way of thinking about a health benefits system that hasn't changed much in over 60 years.

The government allows families to contribute up to $5,950 ($3,000 for individuals) that the account holders can use to pay for out-of-pocket medical expenses. The accounts are paired with a high-deductible health plan of at least $2,300 for families or $1,150 for individuals. This allows account holders to cover the deductible before their insurance coverage kicks in. The remaining money carries over from year to year for future use. As long as it is used to pay for qualified medical expenses, the account holders never owe taxes on that money. In addition, the financial institutions that administer HSAs offer investment options similar to those provided for 401(k) plans. Any interest or investment gains the account generates are tax free as well.

Financial incentives, expanding options
HSAs are attractive for a number of reasons beyond the tax advantages. Annual premiums for the high-deductible health plans the accounts are paired with average $1,274 lower than those of traditional employer-sponsored health plans (Kaiser/HRET Annual Survey of Employer-Sponsored Health Benefits, 2007). This provides significant savings to employers and employees.

HSAs also are making an impact on the individual market. The AHIP survey found that in 2007, more than a quarter of those who enrolled in an individual, nonemployer high-deductible health plan with an HSA were previously uninsured. The remaining individual market account holders chose to replace their previous coverage with an HSA.

The United States has never had a strong individual health insurance market. Our entire health insurance structure has been built upon a law from the World War II era that excluded employer-sponsored health coverage from taxation. Those who purchase coverage on the individual market do not receive the same tax advantages and must spend far more money to purchase comparable coverage.

The significant premium savings of high-deductible health plans and the tax advantages of an HSA may not completely negate the tax differences between individual market and employer-sponsored plans. But, they can help close the gap and allow some to have coverage that otherwise would be unable to afford it.

This trend is well supported in a 2006 AHIP study on the individual health market. The study found that 23 percent of the families who purchased coverage on the individual market were enrolled in an HSA, even though these accounts had only been available for three years. More Americans will seek care on the individual market as health insurance prices continue to increase and fewer businesses are able to afford to maintain their employer-sponsored plans.

Big benefit for small businesses
Small businesses can also benefit from HSA and high-deductible health plans. Companies with a large employee base can negotiate lower premiums for their health benefits, unlike employers with fewer workers. Smaller businesses are hardest hit by health cost increases. In 2006, the Congressional Budget Office found that for every 1 percent increase in health insurance costs, 200,000 to 300,000 individuals lose health coverage.

The 2008 AHIP study shows that the number of lives covered by an HSA with a high-deductible health plan through a small business has increased from approximately 100,000 to about 1 million from March 2005 to January 2008. Given that small businesses make up over 99 percent of all U.S. employers, the increased popularity of HSAs among this critical portion of our economy should have a large effect if this trend continues.

Wellness and prevention: Keys to success
While the tax advantages, cheaper premiums and greater individual market penetration HSAs can provide are some of their most evident selling points, they can also help improve account holders' health. The tax code may seem to be a strange place to look for ways to improve the health of the U.S. population, but it makes a lot of sense when you look at HSAs in the context of consumer-directed health as a whole. As the old saying points out, a pound of prevention is worth a ton of cure.

Treatable and manageable chronic diseases and conditions such as heart disease, diabetes, smoking-related illnesses and obesity account for three of every four dollars Americans spend on health care each year. A 2008 survey by the National Business Group on Health found that increasing health care costs are employers' chief cost concern. This is certainly well placed since health care costs have increased over 75 percent since 2001. The National Business Group on Health also found that employees' poor health habits are the top challenges employers face to maintain affordable benefit coverage (2008 National Business Group on Health/Watson Wyatt Employer Survey on Purchasing Value in Health Care). While chronic conditions cannot always be prevented, they often can be, and their effects can certainly be lessened through healthy lifestyle changes.

Employers have a vested interest in helping their employees make better health decisions as sick employees are less productive employees. And, HSAs with high-deductible health plans can help. While account holders must cover the deductible before their insurance coverage kicks in, most high-deductible health plans cover preventive care services before the deductible is met.

In 2007, AHIP conducted a study on preventive benefits offered in conjunction with HSAs. They found that 84 percent of HSA/HDHP plans purchased on the individual and group markets provide first dollar coverage for preventive services. And 99 percent of large employer HSA/HDHP plans offered this full coverage. Some of the more common services include, but are not limited to, infant and child care, colonoscopies, immunizations, mammograms, annual checkups, pap smears, prostate medication, weight management and smoking cessation programs.

While over 60 percent of employees currently have access to wellness and preventive services, only about 10 percent of them actually use them. Most traditional health plans provide little or no incentives for employees to utilize wellness programs. The American medical system and insurance coverage is geared more toward treating disease rather than preventing it. Compare the cost of a smoking cessation program to the cost of treating lung cancer, and it's easy to see our current approach to health care isn't exactly the most dollar friendly.

HSAs give employees a financial incentive to utilize the free (or at least cost-shared) preventive services to stay healthy so they don't have to spend money out of their accounts to meet their deductibles. Employees in traditional plans may also be able to use these services to get healthier, but those plans do not provide the initial financial push to get them on the right track.

Active usage, strong savings
The 2008 AHIP HSA survey found HSA holders, on average, spend about $1,000 of their accounts each year and maintain an average balance of approximately $1,300. This information shows that participants are making active use of their accounts and are still able to take advantage of their savings power. These numbers seem to dispel HSA opponents' contentions that wealthy individuals will use the accounts as tax shelters rather than for their intended purposes. While $1,300 can be helpful to pay for medical expenses, it's hard to argue it amounts to a huge tax shelter for the very rich.

Living in the future?
HSAs seem to be on a healthy track. 401(k) retirement plans, which are very similar to HSAs, faced some of the same skepticism when they became available in the early 1980s, but now they are the most popular retirement savings vehicle. With over 6 million covered lives in the four years they have been in existence, HSAs are on a similar adoption course. Approximately 70 percent of large employers plan to offer HSAs within the next five years. Studies have documented that HSAs not only help cut down on health care costs. They can help employees invest for their future health needs through their savings accounts and by taking advantage of wellness and preventive services. The information available now appears to indicate that HSAs and high-deductible health plans may be the cure for what ails health insurance.

For more information about HSAs, visit these Web sites:

Survey of Preventive Benefits in Health Savings Account (HSA) Plans

JANUARY 2008 Census Shows 6.1 Million People Covered by HSA/High-Deductible Health Plans

Health Savings Accounts: Participation Increased and Was More Common among Individuals with Higher Incomes

The One Percent Strategy: Lessons Learned From Best Performers