Health Savings Accounts – A Leap of Faith

Bylined Article by Alt Benefit Consultants President Sharon Alt

Tuesday, February 26, 2008

They say that if a couple waits until everything’s perfect to have a baby, they never will. At some point, we have to just take a leap of faith.

Health Savings Accounts, the latest generation of health insurance products, just turned 4 years old. Keeping with the baby theme, they were conceived when President Bush signed the Medicare Modernization Act in December of 2003 and born on January 1st, 2004. Hailed by many as the savior of the health insurance industry, HSAs arrived to much fanfare. This initial excitement quickly waned, though, when agents and consumers realized that insurance companies weren’t going to price these products to sell. While carriers bragged about the plan’s ability to reduce utilization by giving consumers some “skin in the game”, they didn’t factor this predictable behavior change into the plan premium. Instead of putting their money where their mouth was, they based their pricing solely on the actuarial value of the benefits being provided.

Around the time HSAs were going through their terrible two’s carriers finally began to receive some empirical data that proved that HSAs do, in fact, modify behavior and result in a decrease in claims. They adjusted their rates accordingly, resulting in a wider difference in premiums between traditional PPOs and the new, copay-free plans. However, many people believe high-deductible plans are still over-priced as the second level of predictable behavior change, a change in the way medical providers do business, is not factored into the rates. With a significant percentage of their patients on consumer-directed plans, providers would be forced to compete on cost and quality. But to reach that level of enrollment, we need a further price reduction on HSA-compatible plans. Insurance companies need to take a leap of faith.

Surprisingly, the federal government has actually helped the process by removing some of the roadblocks that initially made HSAs difficult to sell. Legislation passed in December of 2006 allowed people with HDHPs to contribute the full federal limit to their accounts regardless of their deductible and without pro-rating the contribution based on what month their plan started. The legislation also allowed for a one-time rollover from an HRA or FSA into an HSA.

I recently had an opportunity to visit with Craig Keohan, president of First Horizon Msaver, an HSA administrator based in Kansas City. Mr. Keohan also serves as chairman emeritus of the American Bankers Association Health Savings Account Council. In this role, he has attended roundtable discussions with President Bush and his key cabinet members to discuss legislation impacting the insurance industry and regularly meets with members of Congress to discuss future HSA development. Keohan was instrumental in the positive legislative changes we saw in 2006 and recently helped draft a bill sponsored by Senator Orin Hatch that would make HSA plans even more user friendly. I asked Mr. Keohan to summarize the changes that would occur if the bill passes. There are several.

The first change would allow people to use HSA funds to pay for any type of health insurance premium regardless of their circumstances. Current law only allows HSA funds to pay for COBRA or for insurance premiums when a person is receiving state unemployment benefits.

The bill would also give people more time to set up their accounts. When people enroll in an HSA-qualified plan, they sometimes let a few months elapse between the time their coverage starts and the time the HSA is set up and becomes operational. However, the IRS does not allow for medical expenses incurred during that gap to be reimbursed with HSA funds. This bill would allow all expenses incurred after HSA-qualified coverage begins to be reimbursed from the HSA as long as the account is set up by April 15th of the following year.

We would also see expanded eligibility for two groups – veterans and people on Medicare – if the bill passes. Current law prohibits veterans from contributing to their HSAs if they have utilized VA medical services in the past three months. This bill would remove those restrictions. And because Medicare Part A enrollment is automatic for most seniors receiving Social Security, the bill would allow people with Part A only to continue to contribute to their HSA.

Another positive change from the legislation is that it would allow individuals age 55 or older to make catch-up contributions to the same health savings account. Current law requires the contributions to be deposited into separate HSA accounts.

The bill also provides clarification of FSA rollovers to HSAs. Currently, employees transitioning from an FSA to an HSA for the first time are allowed to roll over unused FSA funds only if their employer offers the 75 day FSA “grace period”. This bill removes that restriction.

And a huge change proposed by the bill is to expand the definition of “preventive” drugs to include prescriptions and over-the-counter medications that prevent the worsening of or complications from chronic conditions. This will provide additional flexibility to health plans that want to provide coverage for these medications and will remove a perceived barrier for people with chronic conditions.

Last but not least, the bill makes several changes to the definition of “qualified medical expenses” in Section 213(d) of the Internal Revenue Code. The modification would affect all health care programs using the definition and would allow Americans to deduct the cost of fees for “direct practice” physicians that bill their patients on a flat-fee basis in advance of receiving medical services. They could also deduct the cost of exercise and physical fitness programs as well as nutritional and dietary supplements up to $1,000 per year.

Whether this bill passes or not will depend in large part on the result of the upcoming presidential election, but in my opinion we should proceed with the assumption that HSAs are here to stay and do everything we can to help promote the cause. To quote Hillary, it takes a village, and in order to help this new generation of health plans reach its true potential we’re going to need some help from insurance companies, agents, consumers, and our legislators. The alternative is to sit around and wait for the government to try to fix what we in the private market have been unable to. I don’t believe anyone wants see that happen.

I would like to thank Craig Keohan for taking the time to explain the Hatch Bill and for everything he does for our industry. Mr. Keohan can be reached at ECKeohan@firsttennessee.com.

Contact Information:
Alt Benefit Consultants
Allison Brinkman
Tel: 859.291.4302