Do you think health insurance is beyond your means? Think again. In 2003, Congress passed legislation to create health savings accounts. These policies are directly available to self-insured teachers or to studio owners, especially those not currently offering health coverage to their full- or part-time employees.
If you haven’t heard of HSAs, listen up. These plans were legislated specifically for small businesses that simply can’t afford to cover their employees. While the wave of marketing would have you believe that HSAs are the cure-all to your insurance problem, the decision to offer or alter your insurance coverage hangs on a number of issues. Read on for the pros and cons of this new approach to managing medical expenses.
An HSA is comprised of two parts: a savings account and an insurance policy administered by a traditional insurance company. To understand how HSAs work, it helps to think about IRAs or 401ks. HSAs are designed to do for health care spending what IRAs and 401ks do for retirement savings—relieve employers of some of their financial burden and provide individuals with a tax-advantaged incentive to assume more responsibility and control over how much money they save for future expenses—in this case, exactly how and when that money is spent during their lifetimes.
The first component is a tax-advantaged savings account similar to an IRA, to which pre-tax dollars may be contributed regardless of your earned income (during 2005, up to $2,650 may be contributed for individual accounts; $5,250 for family coverage). This money may be withdrawn tax-free as needed throughout the year to pay for medical expenses. The unspent amount is rolled into the following year. Because this account builds tax-free balances over one’s lifetime, there is an advantage to keeping medical expenses low in order to accumulate a nest egg for use later in life, when most medical expenses are incurred.
The second part of the HSA is the insurance policy itself. Basically, this is an insurance plan, and some HSAs are even HMOs or PPOs. The difference is HSAs have deductibles of at least $1,000 for single coverage and $2,000 for family coverage. This means the insured is responsible for paying the first $1,000 ($2,000 for a family policy) of medical expenses incurred each year before the insurance begins to pick up the tab.
These deductibles are substantially higher than what most people are used to. The Kaiser Family Foundation estimates the average deductible for a conventional employer-provided insurance plan at roughly $400 for individual coverage, $894 for families. So, if you are currently covered by a traditional policy through your or your spouse’s employer, shifting to an HSA can significantly raise out-of-pocket costs if you incur higher medical services needs—like a broken leg or pregnancy for example—in any given year. Keep in mind that many plans will cover all or most preventive services before the high deductible is met. These covered services may include annual exams, immunizations, screening tests and routine prenatal and well-child care.
For Studio Owners
If you’re a studio owner who offers traditional insurance and is considering the switch to HSAs, you may want to contribute an amount to your employees’ HSA to make the switch more palatable. This would help offset what your employees potentially face in the form of the higher deductible. Also, all of your contributions to the HSA are deductible and free of payroll taxes.
The downside is that this amount becomes your employees’ money. If they leave, they leave with the cash contribution. The insurance policy portion of the HSA may be extended, but the savings portion is entirely a personal asset.
Yet you will exchange added responsibility and potentially higher expenses for a drastically lower annual premium, or the actual cost of the insurance policy. According to Gary Oslowski, a vice president at Aetna Insurance, the studio owner can expect to cut premiums in half by offering HSAs. That low annual cost is an attention grabber for employers and the working uninsured because it makes offering or extending coverage to part-time employees more affordable.
How excited should you get? Evaluating HSA plans should be a relatively easy calculation for employers to make: you need to compare current costs, or available budget for a new policy, to an HSA plan’s projected costs. Then, consider the utilization rates, that is, how much employees actually use medical services—which are the other key component of an employer’s health insurance cost. By shifting more responsibility for the expense of health services to the consumers, these rates will drop, resulting in further cost savings for employers.
Under the HSA scenario, employees must pay the first $1,000 or so of bills. They are more likely to spend their dollars with greater care, because they have the incentive of seeing their savings account balances grow. So far, studies indicate, employees do spend less with HSAs. And to ensure that happens, firms like Aetna provide their clients with tools to help them comparison shop for their prescriptions and other medical services.
While switching to or instituting an HSA plan can make economic sense for employers, what about part-timers, independent contractors or anyone else who may want to self-insure?
If you are self-insured and have a high-deductible health care policy, you would gain access to the tax-advantaged savings plan and be able to use pre-tax dollars to pay for medical expenses and stash away extra dollars toward future expenses. If you are also self-insured, you will benefit from lower premiums.
If you are uninsured, this option has the potential to raise your out-of-pocket expenses, especially if you never spend money on health care. But if you do have medical expenses, you are always paying full price for services. By accessing an HSA, no matter where or how much you work, you will be covered by insurance and limit the amount you are responsible for in a single year. Having access to the savings portion of the HSA would also make it that much easier to pay future expenses.
The Bottom Line
The actual cost of an HSA is hard to predict. Despite the low premiums, there is the potential responsibility for co-payments and expenses incurred before the deductible is met. And each plan has a variety of features and is structured differently, so shop around before you commit.
The younger and healthier you are, the more attractive the HSA is—low premiums plus a low probability that you will spend much on your medical care makes it look like a good bet. It is certainly a better bet than remaining uninsured.
And though they are far from a panacea for what ails the U.S. health care system, HSAs may offer significant relief over other plans and make health care more affordable for both studio owners and teachers. DT
Gayle B. Ronan is a Chicago-based freelance writer of financial, investment, business management and tax-related articles. Her work has appeared in Bloomberg WealthManager, TICKER Magazine and on CNBC.com.