HSAs: Putting Patients Back in the Healthcare Driver’s Seat

America’s healthcare infrastructure desperately needs reform – both the Left and the Right can agree with this basic premise. However, their acquiescence tends to end there.  Last year, Congress passed the Patient Protection and Affordable Care Act (PPACA or Obamacare).  This intrusive legislation seeks to require all individuals to purchase a private commodity, health insurance, merely because they exist and breathe.  The government seeks to involve itself in decisions previously made by patient-consumers and their doctor-providers.

However, while Obamacare is certainly not the answer to solving our healthcare system, conservatives cannot simply complain about “Big Government” policies without offering their own viable alternatives.  One part of the solution could be expanding the role of health savings accounts (HSAs).

HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which became law in December 2003.  A health savings account allows individuals and employers to set aside funds into a savings account to pay for medical expenses – funds not subject to federal income tax.  Most healthcare services, such as medical, dental and eye care visits, lab fees and hospitalizations, are covered under HSAs along with prescription medications.  Due to new federal regulations, however, over-the-counter drugs are no longer covered unless prescribed by a doctor.

HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds.  Decisions are made strictly between individuals and their doctors.  Furthermore, contributions not spent roll over and accumulate year after year, unlike flexible spending accounts.  The 2011 statutory pre-tax contribution amount is $3,050 for individuals and $6,150 for family coverage.  HSA participants must also enroll in a High Deductible Health Plan (HDHP) to cover catastrophic medical events.  HDHPs are plans with a minimum deductible of at least $1,200 per year for individual coverage and $2,400 for family coverage. The annual out-of-pocket maximum for HDHPs is $5,950 for individual coverage and $11,900 for family coverage.

The number of people participating in HSAs has increased by 87 percent since 2008, covering more than 11.4 million people according to the insurers group America’s Health Insurance Plans (AHIP).  In addition, the National Business Group on Health found recently that three quarters of companies plan to offer an HSA plan in 2012, making them more accessible to employees.

Individuals like HSAs because they are consumer-driven, allowing patients to see doctors and receive care without the government or insurer “middle man.” They can make their own decisions about their healthcare and save for future healthcare expenses but still be protected in the case of a catastrophic medical emergency.  Because HSA participants are more directly aware of actual healthcare costs and because consumers can make their own care decisions, HSAs also promote a more streamlined and cost effective healthcare system.

HSAs have proven to offer low premiums and tax advantages.  The average annual premium for family coverage under a HSA/HDHP is roughly $10,000.  According to the Kaiser Family Foundation, HSA plans are 26 percent below the average for all health plans.  And not only are the contributions to an HSA account primarily made with pretax dollars, but the fact that the funds can be rolled over each year and are portable if an employee takes on a new job or becomes unemployed makes HSAs even more enticing.  After age 65 or becoming disabled, HSA participants may even use the funds on nonmedical reasons with no penalty, though income tax must be paid.

Perhaps the primary downside is that the deductibles are higher than some employer-based plans.  However, given the lower monthly premium rate, it normally doesn’t take very long to leverage the savings into the HSA savings account to cover the higher HDHP deductible payment.

Young, healthy adults may be some of the greatest beneficiaries of HSAs.  They can contribute to an insurance plan with a low premium and grow their health savings account to cover future medical expenses once they get older and face more health concerns.  They can participate as holders of responsible health coverage without going into major debt to cover those expenses and all with pre-tax money. And it is this demographic that makes up a substantial portion of the uninsured population. Bringing more young, healthy people into the risk pool will help drive down premium rates for all health insurance customers.

Finally, even if Obamacare is upheld as constitutional, HSAs may be the best option. By 2018, a 40 percent tax will be placed on “Cadillac” health plans, coverage with benefits above $27,500 for families.  HSAs may be an advantageous alternative to traditional insurance plans where employers can still offer affordable health coverage to their employees without massive tax consequences.

Assuming HSAs survive the final regulatory hammer of the Health and Human Services Department, HSAs are a positive and viable alternative to traditional health plans and put healthcare decisions back into the hands of individuals and their doctors.