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HEALTH SAVINGS ACCOUNTS (HSA)

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Health Savings Accounts on the Rise

Insurers and employers are pushing health savings accounts -- the latest product in consumer-directed health care -- with an eye toward controlling health care costs.

"We think this is sort of where the momentum is going," said Paul Kulpa, program manager for consumer-directed health care products with BlueCross BlueShield of Tennessee.

The tax-free savings accounts must be used with high-deductible plans, which typically cost 50 percent less in monthly premiums than traditional plans with co-payments but do not pay for the first several thousand dollars of health care costs, known as a deductible.

The theory is that deductible costs can be offset using the funds in the health savings accounts, which are funded by employees, employers or both.

"The thought is you take all or part of that savings that you're saving on the premiums and put it in this tax-advantaged savings account," said Ellen Laden, director of public relations for Golden Rule Insurance Co. , a unit of UnitedHealth Group. (NYSE:UNH)

The Medicaid Modernization Act of 2003 created HSAs with an aim of lowering health care costs through consumer-directed health care.

Advocates say that when consumers must take on more of the cost of health care, they will avoid unnecessary or overpriced care and drive down health care costs. Critics maintain that the theory may work for healthy people, but consumer-directed care disproportionately will burden the chronically ill, low-income people, older Americans or families with small children.

About 8 percent of BlueCross' fully insured business is now in the form of health savings accounts, Mr. Kulpa said.

Nationally, about 6 percent of groups are offering HSAs to employees, said Russ Blakely, an employee benefit consultant in Chattanooga with United Benefit Advisors.

In Tennessee, 12 percent to 14 percent of groups offer HSAs, according to the company's annual survey of 10,000 employers nationwide.

Mr. Blakely attributes that to the competitiveness of United Healthcare's and BlueCross' premium discounts on HSAs. The discounts are about 10 percent to 15 percent greater than those offered in other markets.

Ms. Laden said that about 6 million Americans are covered by health savings account plans individually or through their employer. The U. S. Treasury Department expects that number to grow to 25 million to 30 million by 2010.

Hybrid approach

HSA funds accumulate interest tax-deferred and can be withdrawn tax-free as long as the money is spent for qualified medical expenses.

"It's kind of like an (Individual Retirement Account) for medical insurance," said Tripp Knox, an independent insurance broker in Chattanooga with Insurance Planning and Service Co. "With the rising cost in health insurance, it's a more cost-effective option. It gives the employer (OOTC:EPLI) an additional opportunity for some tax savings, as well as the employee. "

The money in an HSA account belongs to the employee and is portable even if he or she changes jobs or retires. If the money is removed for expenses not related to health care, normal income taxes apply.

Anesthesiologists Associated on McCallie Avenue began offering HSAs as one insurance option two years ago, Chief Executive Officer Steven McGraw said. Of the group's 110 employees, 47 opted for the HSA plan, which for individuals comes with a monthly premium that is about 35 percent less than the company's previous PPO plan, he said.

"It's probably more advantageous to those people who at this point in time may be younger or are not experiencing a lot of health care expenses, so they can save money for years down the road," he said. "Those that have chosen it, it's been a very positive response. We have not had any complaints. "

The Tennessee Aquarium began offering HSAs at the beginning of 2006, said Byron Mulligan, human resources manager there.

"It is saving us money because the company's premiums are lower," he said. "Our first year, to encourage employees to sign up, we took part of our savings and gave it back to them" in their health savings accounts.

Mr. Mulligan said "the verdict is still out" on whether this kind of consumer-directed health care will control health care costs, but "we're going in that direction because we think consumer-driven health care is going to be the wave of the future. "

The incentive to save for later in a tax-protected account encourages consumers to make cost-efficient health choices, such as using generic medicines and avoiding the emergency room for non-urgent situations, Mr. Kulpa said.

But consumers also are on their own when it comes to payments for prescriptions and doctor visits until they accumulate enough money in their accounts to cover those expenses or until they reach their deductible.

Critics of HSAs have said that the accounts, which shift the cost burden to the consumer, can encourage people to forgo necessary health care and ultimately benefit the wealthy and the healthy.

Consumers Union, the nonprofit publisher of Consumer Reports, said in a statement that HSAs don't address fundamental problems in the health care system.

"Increased cost-sharing means that the lower income in our society will go without," the statement said. "Congress should help address the underlying causes of runaway health costs. "

Mr. Knox said that in his East Tennessee coverage area, most people he has worked with, particularly those who are young and healthy, are choosing HSAs.

For small businesses that previously had not been able to offer any benefits to employees, HSAs are appealing, he said.

"Smaller groups are going strictly to HSA because the (health care) costs are getting so high they can't afford a regular PPO plan," Mr. Knox said.

The Internal Revenue Service sets the maximum HSA contribution, which can be made by an employer, employee or both. For 2008, the maximum annual HSA contribution for an individual is $2,900 and for a family is $5,800.