Basics:

Health Savings Accounts (HSAs) were created by the Medicare bill signed by President Bush on December 8, 2003 and are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.  HSAs are used in conjunction with a High-Deductible Health Plan (HDHP).  HDHPs are plans with a minimum deductible of $1,100 for Self and $2,200 for Self and Family coverage. The maximum amount out-of-pocket limits for HDHPs is $5,500 for self and $11,000 for Self and Family enrollment. These are the 2007 amounts and are adjusted for inflation annually.  Contributions may be made by an individual, an employer, or both, and are not taxed.  The maximum amount that could be contributed (in total) in 2007 is $2,850 ($5,650 for family).  Tax-free withdrawals can be used for the owner’s medical expenses, those of dependents, and over-the-counter medication, but not for non-medical expenses or to buy other insurance, such as vision or dental insurance, unless the individual is of retirement age. 

Size:

• Individual enrollment rose from 855,000 in January 2006 to 1.1 million in January 2007.
• Twenty-seven (27) percent of new individual enrollees were previously uninsured.
• Forty-six (46) percent of individual enrollees — including dependents covered under family plans —are aged 40 or older.
• Overall, group enrollment rose to almost 3.4 million in January 2007 from 1.4 million in January 2006.¹

¹ http://www.ahipresearch.org/PDFs/FINAL%20AHIP_HSAReport.pdf

Earns 5.12% APY.  No set up fee.  $1 monthly fee waved for first year.  (Other financial institutions charge up to $18 in setup fees and $3 in monthly fees.)

Eligible members enjoy the following advantages:

• Annual contributions are deductible from federal taxes up to the maximum allowable amount.
• Dividends earned are free from federal taxes.
• Qualified withdrawals are free from federal income tax.
• Some states allow tax deductibility and do not tax dividends earned.

The Wells Fargo HSA offers both an FDIC-insured interest bearing deposit account plus the option to direct funds into pre-selected investments once you have reached the minimum deposit account balance of $2,000. You may pre-select investment options for contributions exceeding the minimum deposit account balance requirement. The investment options available consist of six Wells Fargo Advantage Funds® designed to help you meet your investment objectives.  The FDIC-insured feature rewards you with graduating rates of interest as the balance in your deposit account grows.  Earns 1% on deposits up to $1,000.  Earns maximum of 3.25% on deposits over $10,000.

Business model: Anybody with a High Deductible Health Plans (and no other coverage) is eligible to have an HSA.  Employers (or individuals) pay a lower premium for health plans with HSAs because consumers must pay for routine medical expenses out-of-pocket.  Financial institutions that offer HSAs increase their assets under management, and can invest the principal however they like while offering between one and five percent interest to the consumer.  Insurance companies use HDHPs to align their interests with consumer interests by making consumers responsible for paying routine medical expenses out of pocket.  These plans also lower insurance companies’ costs, though they do not necessarily do much to lower overall risk (unless they are increasing the percentage of young, healthy people in the insurance company’s client base, which is not definitively the case).

Assumptions:

1. HSAs will reduce medical spending by making consumers more sensitive to the costs of care.  But HSAs actually create a decrease in cost sharing for those at the very low end and the high end of healthcare spending.¹  And a Blue Cross Blue Shield study found not only that HSA customers are just as satisfied with their insurance as others, but also that “across the board, individuals enrolled in HSAs or traditional insurance were just as likely to request generic drugs, decide not to go to a doctor, delay seeing a doctor or a medical procedure, delay or not fill a prescription, or take a lower than recommended dose of a prescribed drug.”²
2. HSAs will increase access to healthcare and insurance.  But one study found those with HDHPs are less satisfied with health coverage than those with comprehensive coverage and that those with HDHPs spend more of their income on healthcare than those with comprehensive coverage.³  And the Commonwealth Fund argues that HSAs are unlikely to help uninsured, as more than one-half of all uninsured pay no income taxes.  Suggestions for improving HSAs to increase access for lower-income individuals include:⁴
1. Permit employers to lower deductibles for low-wage workers; qualify plans with deductibles less than a certain percentage of income (2%, for example).
2. Exempt primary as well as preventive care from deductible so they can be covered in full.
3. Ensure that workers covered by employer plans have a choice of a comprehensive health plan.
4. Permit greater flexibility in benefit design.
5. Set an income ceiling on HSAs to reduce subsidies for higher-income individuals.

HSAs will empower consumers to have more say in their healthcare.  Some online tools sponsored by insurance or financial companies calculate likely costs for consumers or compare drug (or maybe hospital) pricing.⁵

¹ http://www.commonwealthfund.org/publications/publications_show.htm?doc_id=382001

² http://www.4hsausers.com/10-05_1.shtml

³ http://www.ebri.org/pdf/briefspdf/EBRI_IB_12-2005.pdf

⁴ http://www.commonwealthfund.org/newsroom/newsroom_show.htm?doc_id=274016

⁵ http://www.firsthorizonmsaver.com/destinationrx-comparison/

Anticipation of Out of Pocket Revenue and Expenses for Providers and Consumers

• If people have sufficient time and income to save enough money before medical treatment is needed, HSAs are a good tool for handling otherwise unanticipated medical expenses.  It is very possible, however, that individuals with high deductible plans will not save enough due to lack of time, income, or will, and will thus see their expenses increase without a concurrent increase in assets available to deal with them.

Smoothing the vicissitudes of  individual financial context in the face of the cost of healthcare events

• HSAs provide a tax-incentivized way to encourage people to smooth the peaks and troughs of changes in income and assets over their lifetime.

Visible gaps between what insurance covers and the hard costs of healthcare

• Some HDHPs associated with HSAs make this gap more visible by saying up front that consumers will have to pay for all costs up to a certain point (with no copays after the deductible is met).  Others function more like comprehensive plans that charge copays after the deductible is met until the maximum out-of-pocket payment is reached.

Balance of sharing risk at micro level while managing risk at macro level

• HSAs possibly remove healthy individuals from the risk-sharing pool of comprehensive plans, increasing the risk of those who remain in traditional insurance plans.