Health Savings Accounts After the Election

Freedom Benefits Association issued an update on the current status of health savings accounts after the presidential election. The release highlights the seven major issues nagging Health Savings Accounts.

November 14, 2004 - Health Savings Accounts may play a significant role financing health care in the second half of this decade after making a very quiet debut under federal tax law at the beginning of this year. The Bush administration strongly supports the program. Health Savings Accounts enjoy a wide base of political popularity in the area of health care financing where there are few other points of national consensus. Yet there are still at least eight major problems nagging Health Savings Accounts as we know them today:

1) Part of the "Three-Pronged Approach" Theory
President Bush promoted Health Savings Accounts during his re-election campaign as part of the administrations planned three-pronged approach (or four-pronged approach, depending on which stump speech you heard) to reform the U.S. health care system. The other major "prongs" in the Presidents plan are medical malpractice reform and the promotion of association health plans. All three of these proposed solutions are untested. There is actually no evidence that Health Savings Accounts reduce overall costs when utilized by a diverse population. Previous test groups, including those who participated in the medical savings account pilot program have consisted largely of younger healthy applicants. The idea behind Health Savings Accounts is to cut out the middleman and put consumers in charge of paying for their own routine health care expenses. Health insurance would be used only to cover catastrophic expenses. Consumers would naturally be more conservative in spending their own funds and this would reduce unnecessary consumption. In theory it sounds great. Critics argue that since neither the employer nor the employee is actually required to fund the account, there is no assurance that money will be available when medical expenses are incurred. We could wind up with a population covered only be catastrophic health insurance and no coverage for more common medical expenses actually a step backwards from our current position. Separately, there is little likelihood that the many small business employers without health plans would suddenly adapt health plans without significant legal or financial incentives. President Bush talked about providing refundable tax credits for small businesses that adapt health plans early in his re-election campaign but this program seems economically unfeasible in the near term even with the President spending his new post-election "political capital".

2) A Tax Shelter for the Rich
Prominent Democrats including Wisconsin Governor Jim Doyle have called Health Savings Accounts a tax shelter for the rich. A few years ago Business Week magazine called medical savings accounts almost too good to be true referring to the surprisingly generous tax advantages. (Medical Savings Accounts were the legislative predecessor to Health Savings Accounts). While it is certainly true that the early adapters of health savings accounts have been well informed and generally more affluent crowd, the promotion to the masses has not even begun. It may simply be too early to issue a mass condemnation of the strategy.

3) The Health Savings Plan You Cant Get
Todays Wall Street Journal (11/3/04) article headline about Health Savings Accounts "The Health Savings Plan You Cant Get: Why Employers Are Slow to Try HSAs". The fact is that the vast majority of Americans do not qualify for a Health Savings Account under current law. The problems are technical or legal in nature and vary from state to state; these issues are not discussed in this article. More discussion of the interplay between federal and state health care policy and insurance laws can be found in other articles on the authors Web site at www.TonyNovak.com. Very few - far less than one percent - of Americans can open a health savings account today.

4) Still Too Expensive
Freedom Benefits Association handled thousands of inquiries for health savings accounts during the first ten months of their existence. Most of these inquiries came from people who were looking for lower cost alternatives to traditional health plans and then abandoned the quest for a Health Savings Account when they saw the cost of the underlying insurance. The basic problem is this: if you cannot afford and old-style traditional health plan then you are not likely to be in a position to consider a health savings account plan either. Health Savings Accounts do save money and improve the health care system over the long term, but they dont make health care suddenly affordable to people who cannot afford it now. If lowering cost immediately is the highest priority, health savings accounts are usually not the best option. Plans with limited coverage like "Basic Health Insurance" at www.basichealthinsurance.net and short-term medical coverage like those at www.MedSave.com and www.FreedomBenefits.net offer much greater cost savings than Health Savings Accounts.

5) Wrestling for Legal Control
State laws govern health insurance. Federal law governs income taxes. The success of Health Savings Accounts requires a coordination of state and federal law. This just is not happening in yet in many states. Federal law of promoting cheap high deductible insurance is in direct opposition to the underlying intent of most state health insurance laws that have focused on adding mandatory coverage to health insurance. This underlying philosophical battle may need to be resolved before Health Savings Accounts really catch on. It might even be feasible to have federal law pre-empt state insurance laws where Health Savings Accounts are at issue, copying the legal approach used to control the legal disparities in pension plans.

6) Quiet Disinterest
Banks and financial institutions are smart enough to realize that they cant make any money offering Health Savings Accounts to their customers. There just are not enough Health Savings Accounts and the average account balance is too low (something less than $1000) as compared with IRAs and other financial products. The market is already saturated by the handful of firms competing to offer independent Health Savings Accounts. This is not likely to change much, even over the next few years. Data gathered by firms who participated in the Medical Savings Account pilot program from1996 through 2003 gave some disheartening information to other financial companies who were considering jumping into the Health Savings Account market. The clearest message was that there is little money to be made competing to offer no-fee, no-load health savings accounts. Some independent financial firms that charge fees for Health Savings Accounts are already facing customer resistance. One prominent Health Savings Account administrator made significant changes last month to cut costs and hopefully improve marketability of their products. As a result, most financial firms are in no rush to offer Health Savings Accounts.

Likewise, the nations largest managed care health insurance companies recognize that Health Savings Accounts are in direct philosophical conflict with their own business model for controlling health care costs. You can not have a patient control all of their health care under $5,000 through their own account, for example, and then suddenly step in and apply a managed care approach to the catastrophic charges above $5,000. It just will not work from a practical perspective. Managed care companies argue that their own internal cost controls are more effective than those built into todays health savings account plans. This argument will remain valid until an effective method of integrating the two approaches is available but do not expect this type of wholehearted co-operation anytime soon, according to some industry sources. Since these types of managed care health plans provide care for the majority of Americans, change might be slower than we would like to think.

7) Missing Treasury Procedures
The Internal Revenue Service has still not determined how to verify eligibility for Health Savings Account deductions, or at least that information has not been made public. Current law intentionally exempts the administrators of Health Savings Accounts from verifying eligibility for deposits from their customers. As a result, some plan administrators report that they know that many of the accounts they handle are not legitimate Health Savings Accounts. The available audit procedure information points to the possibility of ugly surprises for taxpayers who honestly believed they had their Health Savings Account in order. The audit procedure used for Medical Savings Accounts was particularly harsh on taxpayers; all deductions were thrown out until the taxpayers could prove that they were entitled to the benefits. There is no indication that the audit procedure will be any different for health savings accounts. (See the tax section of the Frequently Asked Questions at www.healthsavingsaccount-hsa.com for more information on tax treatment and potential problems).

8) Lack of Coordination in Claims Processing
There is also some concern that double-billing problems may occur when health care providers bill both the patients health insurance plan as well as the individuals health savings account. Duel billing is already the prevailing practice in the medical service accounting but health insurers have a well-developed process for coordinating the claims made to multiple payment sources. There is no similar safeguard in Health Savings Accounts. Since there is no required claim co-ordination between the Health Savings Account and the health insurance plan, it is possible that both could pay the same medical bills. This shortsighted accounting problem might be addressed as health plans evolve to a higher level of sophistication with claims processing.

Health Savings Accounts are a great concept and really produce great benefits for the few who have them, but they are far from a significant part of the solution to our national health care crisis. More information on this topic will surely follow in coming weeks. For now, it is clear to say that Health Savings Accounts are no more than a drop in the bucket of possible solutions to our national health care crisis.

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