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HSAs expand coverage options

"An easy way to think of it is that with traditional insurance plans, with low deductibles and even co-pays for certain expenses, you are front-loading the expenses by paying in advance for services that you may end up needing throughout the year. With the HSA plan, you are back-loading expenses, meaning that you only pay for those expenses if they are incurred. In the meantime, you stash some cash in a special account just in case you do incur those expenses. And here's the best part: The government gives you a tax deduction for saving that money."

Here's exactly how you save. With an HSA, if a family has a $3,000 deductible and saves $3,000 in their savings account, they are fully covered for yearly medical expenses with the money in their HSA, and their insurance picks up 100 percent of the cost once the deductible is reached. If they do not incur any medical expenses, they get to keep the full $3,000 contribution (and interest earned), plus take a 100 percent deduction of the contribution amount off their income tax.

With a traditional policy, if the family had purchased a $500 deductible and paid $3,000 extra in premiums, they would be $3,000 in the red if they had no expenses whatsoever. Plus they would have no tax deduction.

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Tax shelter for the rich and healthy?
Opponents of the Health Savings Account argue that only the healthy and wealthy benefit from HSAs.

"The only people who are likely to benefit from them are people who never get sick and never have to use the coverage," says Trudy Lieberman, director of the Center for Consumer Health Choices at Consumers Union. "The people who are least likely to benefit from them are the people who have chronic illness and need to go to the doctor a lot. They're not really a good option for people like that."

Lieberman also fears that some HSA policyholders may put off needed health procedures if they have to pay out-of-pocket for them.

"Certainly these will be a deterrent to preventive care. For example, if you have to have a colonoscopy that costs $2,500, you're going to think about that if it's going to come right out of your pocket. Supporters of these plans say that's your choice. Well, is it really your choice when the people who are covered under employer plans may get that as a benefit?"

And there are fears that those high-deductible HSA policies will ultimately result in higher premiums for those with traditional health care coverage.

"They're going to skim off a layer of people who are really very healthy who aren't likely to use the coverage, and for them, they might be a very good deal. But that's not going to solve the problem for people who can't get health coverage," Lieberman says.

But Utsey says fears that HSAs will suddenly cause rates to skyrocket are entirely unfounded.

"The risk pool that you have with insurance is the same, regardless of whether everybody has high deductibles, nobody has a high deductible, or there's a mix; you still have the same people who are covered," he says. "Nobody is leaving the risk pool; it's just a question of how much the carrier is paying. It would be like saying that in auto insurance, the people with $5,000 deductibles shouldn't have $5,000 deductibles, they should have $250 deductibles so that they can be subsidizing everybody else who has $250 deductibles. It's just nonsense."

In fact, Utsey says it's been the healthy who have been footing the bill for the ailing under the traditional health insurance system for years.

"If you're a healthy person and don't go to the doctor every time little Johnny has a minor case of the sniffles, you are getting hosed under the old program. You're paying for everybody else who is not controlling their utilization."

It's actually the traditional co-pay system that's broken, says Utsey, resulting in the widespread waste, over-billing and growing dysfunction of the American health care system.

He predicts that once businesses understand the many advantages of switching to a lower-premium HSA program and putting some of that money back into their employees' pockets, the more options consumers will have in health coverage.

"What HSAs do is engage the consumer. The big problem with health insurance has been that it doesn't matter to an individual how much they spend on medical care; they go to the doctor, whip out their ID card, give them $5 and they're done. Anything we can do to get people to pay attention to their medical expenditures is a good thing, and that's what HSAs are designed to do."

Jay MacDonald is a contributing editor based in Mississippi



-- Posted: Jan. 10, 2005
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See Also
More companies explore high-deductible health plans
FSAs can take a bite out of your tax bill
Maximizing your medical deductions
Insurance glossary
More insurance stories

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