Health Savings Accounts: A Way to Help Pay for Health Care Cost

INTRODUCTION Health insurance is the largest line item in our budget, with the exception of payroll. It is more than rent, computer equipment, utilities, errors and omissions insurance, liability insurance, or supplies. And, bear in mind, health care benefits are in addition to the costs of retirement contributions, sick leave, vacation, and other benefits. Our annual benefits package exceeds $10,000 for each employee. With twenty-five full-time employees, a quarter of a million dollars is committed to benefits before one cent is paid in salaries and overhead. For a small professional services firm, this is a breath taking amount. This report provides an overview of the costs and benefits of Health Savings Accounts. THE CASE FOR HEALTH SAVINGS ACCOUNTS Employees want health benefits and employers recognize that a benefits package, including health insurance, is key to hiring and retaining competent people. However, health care benefits have become increasingly expensive. Over the past five years, health insurance premiums for our employees increased on average more than twenty percent each year. 2008 was a better year than most: the projected increase is only eight percent. Therefore, the opportunity to reduce costs with the advent of Health Savings Accounts is well worth our consideration. The primary cost savings arise from substituting a traditional Low Deductible Health Plan for a High Deductible Plan, which is supplemented with a Health Savings Account. High Deductible Health Plans, however, have not been an option favored by employees. That may change with the availability of Health Savings Accounts and an understanding of its advantages. A Health Savings Account allows employees to set aside tax-deductible funds to pay for the insurance deductible as well as health care costs not typically covered by health insurance. Moreover, Health Savings Accounts provide incentives that encourage employees to conserve heath care resources. If patients pay some of their health benefits, they may monitor their own habits--eating more wisely, exercising, not smoking, drinking alcohol in moderation--and use health care resources more efficiently and effectively. Nevertheless, a concern remains. In the first years of a High Deductible Plan, the amount deposited in a Health Savings Account may be insufficient to cover the deductible. THE ACT The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act), [section] Section 1201, created Health Savings Accounts. Of course, there are conditions that must be met to participate. The Health Savings Accounts must accompany a High Deductible Health Plan. The deductible must be at least $1,100 for individuals or $2,200 for families and the annual out-of-pocket expenses cannot exceed $5,600 for an individual or $11,200 for a family. These amounts include the deductible and co-payments, but not premiums. Contributions to Health Savings Accounts are tax deductible, grow tax-free, and are immediately vested. Amounts not used for medical bills stay in the account and grow tax-free to cover future medical bills or, when the time comes, to supplement retirement benefits. Even after the owner of a Health Savings Account is no longer covered by a High Deductible Health Plan, money in the account continues to be tax-free as long as it is used for medical expenses. Although a major concern is the risk of self-insurance, high deductibles have a potential cost with established contractual limits. Major health problems and the accompanying losses are still covered by the High Deductible Health Plan. Therefore, given the benefits, employees and employers may be willing to accept the risk compared to alternatives, including employers either paying less of the premium for health insurance coverage or dropping coverage altogether. HOW HEALTH SAVINGS ACCOUNTS WORK Anyone under 65 who purchases a High Deductible Health Plan can open a Health Savings Account. …