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Health Savings Accounts

Pay for Routine Medical Costs or Save Afor Retirement

BY JOE BRISBEN

President Bush’s State of the Union address renewed political interest in health savings accounts (HSAs) and has again raised the question of whether or not they are a suitable way to reduce the number of medically uninsured citizens in this country. That number is estimated to be 46.6 million and growing.

HSAs are similar to 401(k) retirement accounts in that they are tax-free savings set aside by employees and workers. Money in an HSA is limited to being spent on health care costs at least until the employee retires and Medicare and Medicaid begin.

HSAs must be linked to health insurance policies with annual deductibles of at least $1,100 for individual coverage and $2,200 for family coverage. Many policies have deductibles higher than that, but by law the maximum for out-of-pocket expenses is $5,500 for individuals and $11,000 for families.

That is a huge potential expense for most people to bear before insurance coverage kicks in. Lower monthly premiums offset the risk of expense if a person becomes ill, and HSAs have the additional benefit of being tax-free and reducing one’s taxable income. Those features can be attractive to people who do not expect much in medical expense.

Employers and their workers can both put money into the accounts annually, $2,850 for individuals and $5,650 for family plans, so people with HSAs can build up money over time. However, banks that offer the accounts have only modest interest rates on them now.

Even so, people with HSAs consider them a secondary retirement investment vehicle, so much so that they pay their family’s routine medical expenses out of their own pockets so the HSA can build.
The impact of HSAs on the health industry is difficult to gauge. The U.S. Treasury Department discovered that in 2005, the first full year in existence for HSAs, 31 percent of the 3.2 million people covered by them were individuals buying insurance on their own who had previously been uninsured.

The department also reported that another 33 percent were started by small business that had not previously offered health insurance to their employees. It projected that between 25 and 30 million people would be covered by HSA plans by 2010.

While HSAs have been catching on, the number of uninsured continues to grow. Gary Claxton, Vice President of the Kaiser Family Foundation, told the Wall Street Journal that HSAs are still too few to evaluate whether they are having an impact on the nation’s health care problems.

In addition, HSAs have little benefit for lower income workers. The tax breaks that help compensate for high deductibles are largely absent for employees with lower incomes.

Under current rules, the Treasury Department estimates a family earning $120,000 a year could experience $620 in tax benefits by contributing $2,000 to an HSA, but for a household earning $20,000, there is no tax benefit.

A survey by the Kaiser Foundation of those using HSAs shows them more likely to be white, healthy, and less likely to need a physician than the average person in a traditional plan. People in HSAs also shop harder when they need health care.

HSA backers point to that factor as an example of how encouraging consumer choice and provider competition could slow the rising costs of health care. They argue that some inflation in health care costs is caused by plans that disguise the true cost of care and deter patients from shopping for the best value.

Another argument is that the growth of HSAs not only will drive down costs but will also enable a larger pool of small companies to offer health benefits to their employees.

Nevertheless, much of that growth in the near future depends on Congress and President Bush’s ability to approve legislation that solves this number-one problem for small business owners.

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