When health savings accounts arrived on the scene in November 2003, there were those who confidently declared that—in these days of skyrocketing health-care premiums—they would help preserve employer-sponsored health-care insurance. Supporters also believed that HSAs, which by law must be linked to a high-deductible health plan (HDHP), would compel Americans to be more attentive to their health and become better health-care consumers.
|THE BENEFITS OF A HEALTH SAVINGS ACCOUNT|
On the other side of the aisle were those who eyed the HSA approach suspiciously: Will it be detrimental to sickly and older workers? Will Americans willingly give up their “copay-and-go” mentality? Will Congress, needing to find more sources of revenue, at some point renege on the HSA’s tax-favorable status?
Fifteen months later, the concept of an HSA combined with an HDHP is still very much in its infancy. And while it has quite a way to go before it is really cemented in place as a solution to the health-care coverage crisis, it is on the move.
HSAs were initiated when President Bush signed the Medicare Modernization Act into law in November 2003. An HSA is a tax-exempt account established for the purpose of paying medical expenses.
HSAs are available to individuals who enroll in an HDHP, are not enrolled in Medicare, are not covered by another health plan and are not claimed as dependents on someone else’s federal tax return. An HDHP is a health plan with an annual deductible no less than $1,000 for individuals and $2,000 for families. The maximum-allowed contribution to an HSA in 2005 is $2,650 for individuals and $5,250 for families. Employer and employee contributions to an HSA are made with pretax dollars, and interest earned on the account and withdrawals for qualified medical expenses are tax-free. In addition, unused funds and interest are carried over, without limit, from year to year.
Some insurance and financial advisors who have studied and sold HSAs over the last year have learned that the product does fill a great need and serve a critical purpose. The need: It has enabled some small businesses to continue to offer health-insurance benefits to their employees. The purpose: For some employees and individuals, HSAs are the only reason they still have affordable health-insurance coverage—or any health-insurance coverage at all.
While HSAs appear to be a viable solution for many employers and individuals, generally speaking, the hue and cry for them hasn’t been very loud. The reasons? For one, the product is still so new that not a lot of people—advisors, employers or consumers—are banging at the door to learn more about it. In fact, despite growing publicity, most U.S. workers have neither heard of health savings accounts nor understand how they work, according to a survey by Watson Wyatt Worldwide.
Two, there is a concern about who HSAs are good for and who they are not good for. Three, moving toward an HSA is a huge—to say the least—shift in the way an employer offers and a consumer takes advantage of health-insurance coverage. HSA-HDHP products are a sharp departure from traditional health plans like HMOs and PPOs.
It’s a change. Change is good, but change is also scary.
We spoke with advisors and employee benefits experts to find out firsthand what they have experienced and heard in the last year as the HSA-HDHP combination made its debut. They also shared their thoughts on the types of businesses and individuals that are ideal prospects for HSAs and what questions advisors can expect from clients who are dipping their toes in the HSA water.
Lukewarm but heating up
Linda Ray, RHU, LUTCF, CLTC, of Better Benefits Inc., in Metairie, La., is a member of NAIFA-Greater New Orleans and a NAIFA trustee. She has yet to see significant excitement about HSAs among business owners, but is confident the product will turn a corner toward wider acceptance.
Right now, she says, “Employers are very apprehensive about making changes that are going to strongly affect their employees’ and their out-of-pocket expenses. They’re becoming more and more aware because they are seeing more information about the HSA, and they are very interested in trying to find new, innovative ways of lowering their premiums, but I don’t feel it has really hit a stride. It is starting to pick up, and I feel that once employers start understanding the impact of HSAs on future premiums, they will start making it a part of what they offer to their employees.”
Steve Kraus, a principal of Deloitte Consulting and the architect of Deloitte’s 2004 Consumer-Driven Health Care Survey, echoes Ray’s thoughts. “It’s a significant change, and the educational component is critical,” he says, “but the interest is certainly growing. Our survey suggests that about 20 percent of companies have CDHPs in place, and we expect that can potentially double by 2006.”
There is further evidence that HSAs are gaining ground. America’s Health Insurance Plans (AHIP), a trade association that represents health insurers, recently released a report that indicates that as of September 2004, 438,000 people were covered by HSA-HDHP products—346,000 in the individual market, 79,000 in the small-group market and 13,000 in the large-group market. This rate of acceptance of HSAs outpaced earlier experiences with similar account-based, high-deductible plans. Roughly 40,000 Archer Medical Savings Accounts—the precursor to HSAs—were established during their first year of existence, according to Karen Ignagni, AHIP president and CEO.
It's time to get on board
The momentum toward HSAs means that advisors who stepped back and observed from the sidelines while HSAs hit the streets need to suit up now and be prepared to present the product to their clients. If they don’t, other advisors who recognize the financial squeeze that increasing health-care premiums are putting on businesses will swoop in. The question is which clients are ideal targets for HSAs.
In theory, says Fred Bean of Bean Hamilton Corporate Benefits in Little Rock, Ark., any type of business can be a good match. “But in reality,” explains Bean, a member of NAIFA-Little Rock and president of the Association of Health Insurance Advisors, a conference of NAIFA, “the prospects who will be more receptive are members of professional organizations such as lawyers, accountants, doctors, dentists, insurance agents, etc.—small organizations.”
Advisors working this small-group market should expect clients to demand dual-option plans, says Bean. Why? “Because on the one hand you have a lawyer, a doctor, an insurance agent making a large income, and on the other hand, you have their receptionists making $10 an hour and staff making $20 an hour. For lower-wage people, it’s scary rather than appealing to go to a two-, three- or four-thousand-dollar deductible,” he says.
Ray also thinks the ideal market for the HSA is the small-group market—from a five- to a 20-person group—especially closely held corporations. “They are looking at really saving some dollars,” she says. “I think those are the ones that are really feeling the impact of rising premiums.”
What about the large-group market? Larger, benefit-rich employers are less likely than smaller employers to be squeezed by the increasing cost of health insurance. Therefore, for the large-business market, Bean says, the HSA will be just one of the many choices for employees. So it might not catch too many employees’ eyes. Ray agrees. “I don’t see the larger groups having to take that drastic measure,” she says, “where the base plan is a high-deductible plan and then the individual can ‘buy up’ to a more traditional plan.”
Education is key
Because using the HSA requires a considerable shift from traditional plans like HMOs and PPOs, educating employers and employees is very important. Ray shares an example of one of her clients, a doctor group of about 15 employees, which illustrates that education is a key component in making the HSA concept work.
“We talked about their desire to reduce their costs and reduce federal taxes. The group consists of all single employees. The employer put $500 into the fund at the beginning of the year for each employee, and they went to a $2,500 deductible. The employer was very willing to hold an employee meeting to educate employees on how they have to get involved. We also showed the employees that the HSA is theirs.
It makes them a little more involved to go out and shop for prescriptions, make sure the doctor is billing them properly, etc. They’ve been very receptive to it. We saved 33 percent off their renewal cost,” says Ray.
Bean’s home state of Arkansas provides another example of the crucial role an advisor must assume in educating employers and employees about HSAs. Arkansas, a small state, has 70,000 state employees. It began offering an HSA to state school teachers and state employees. (The State of Arkansas is not Bean’s client.) Bean explains that the only effort made to educate employees about the HSAs was a letter sent to each of them. Clearly it was not enough.<
“Of the 70,000 state employees, 47 state employees and 160 state teachers purchased an HSA,” says Bean. “If someone receives just a letter from his employer that says ‘Here’s a new deal,’ he’d probably say, ‘Why would I really want to do this? Is it worth it?’”
The right fit
Advisors who have jumped the education hurdle with a client may meet another obstacle: The makeup of the business might deem an HSA to be an inappropriate fit. “For instance,” Ray says, “many of the employees of a client I met with just today are very small-wage earners, making $7 to $8 an hour. When we started talking about high-deductible plans, they felt that taking away the copay and putting a $1,700 deductible on an employee would be too great of an impact, no matter what the premium is at the present time.”
Ray wasn’t bothered by their decision. The point, she says, is that the employer was open to looking at these plans and what they can do to reduce future costs. Getting the HSA on a client’s radar screen is the reason Ray takes every opportunity to talk up the still-new option. “I present it in every group. I can at least start the conversation this year,” she says.
Deciding against HSAs
Another of Ray’s clients seriously considered the HSA but decided against it for the time being. The client is a brother-and-sister-owned company, and Ray figures she could have saved them anywhere from 25 percent to 38 percent with an HSA. They didn’t bite.
“The two individuals who had family coverage, meaning they would have had the highest deductible on the calendar-year basis, were the two owners. Once they started looking at it—the potential savings and the potential costs should someone become sick—they realized that they would have had the biggest blow to their own wallets. So they made the decision not to do it. They pay 100 percent of the premium for employees, and they decided to take on the increased premium. That makes it sound a little tough until you look at how it could have affected them personally. You have to look at the worst-case and the best-case scenario for your clients,” says Ray.
Over the past year, Bean has learned other reactions to HSAs that health-insurance advisors should expect from their clients and prospects: “Based on my experience, I would say these are the top three statements from clients. One, ‘My employees can’t afford that kind of deductible.’ Two, ‘I thought there’d be more savings than this.’ And three, ‘My employees won’t understand that kind of program. It’s too complicated.’”
Nothing is perfect
Dan Rashke, CEO of Total Administrative Services Corp., has been involved in the tax-advantaged employee benefits field for more than 20 years. He acknowledges that there are no perfect matches for the HSA. As a general rule, though, he believes that the concept of a high-deductible plan—where someone is going to take on more exposure for himself—will generally work well for employers who recruit younger and therefore typically healthier employees.
The people who are a difficult sell, says Rashke, are employers who are in geographic markets that are government- and union-based. “I don’t think these employers will be able to jump right away to an HSA,” Rashke says, “because their employees are used to some pretty lucrative benefits. To make a switch or jump to a high-deductible health plan won’t be attractive to them.”
The individual market
HSAs can be a great alternative for individuals shopping around for coverage. Just as in the group market, however, it’s not the answer for everyone. “When you ask what the market is for those who will look at an HSA on an individual basis and those who will not,” says Ray, “I’d say families with several small children or a spouse who goes to the doctor a lot probably wouldn’t be as good a candidate as perhaps a couple or a self-employed individual who hardly goes to the doctor or has maybe one prescription filled in a year.”
Ray is getting lots of calls from individual clients facing an increase in their renewal premium. They are telling her that they can’t take a 30 percent bump and ask her what they should do.
Her response? Homework. “I ask them to write down how often they went to the doctor last year,” says Ray, “and how much it was. Did they have tests done? How many prescriptions do they get each month and how much did they cost? They’ll come back with a list and say, ‘All total maybe it came to $3,000.’ I’ll then show them that with an HSA and a high-deductible health plan in place, this is what your potential savings are in premium, this will be your potential out-of-pocket expenses, and everything after that in network is covered 100 percent. They can see it on paper.”
Sometimes the calculations come out in favor of the HSA, sometimes they do not.
A team approach
Health-insurance advisors who embrace the HSA as an option for clients who are scratching their heads and wondering how they’re going to afford their health-insurance premiums have many options to offer. While the HSA is but one option, all signs suggest that it could become one of the more favorable choices for clients—individual and business alike.