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The Seattle Times

Health savings accounts: Can they cure insurance blues?

High deductibles, Tax breaks, lower premiums may tempt workers, employers alike

by Kyung M. Song; Seattle Times staff reporter
August 16, 2004

Dr. William Portuese, a Seattle facial plastic surgeon, recently trimmed thousands from his family's health-insurance premiums by switching to a plan with a $3,400 deductible.

But the payoff doesn't stop there. He also can shelter an amount equal to his deductible in a tax-free health savings account (HSA) to cover those expenses his insurance doesn't, reaping an additional $1,000 or more annually in tax savings.

Portuese is one of the Puget Sound area's earliest converts to a new type of health-care plan created by Congress last year, one proponents say could reduce the ranks of the uninsured and help drive down health-care costs by putting consumers in charge of their medical spending.

Health savings accounts are part of the landmark Medicare prescription-drug coverage bill President Bush signed in December. They are enticing employers and individuals with the most generous tax breaks yet for a variety of health-care purchases, from visits to a doctor to laser eye surgery to drugstore medicines.

And, because the savings accounts must be coupled with a high-deductible insurance plan, you pay a lot less in medical premiums each year. The idea is to tap the health savings account for routine health expenses and deductibles, while relying on insurance for major medical bills.

Today, Seattle's Regence BlueShield will begin selling health savings account-qualified insurance plans, which by law must have deductibles of at least $1,000 for individuals and $2,000 for family coverage. Premera Blue Cross, Washington's largest health insurer, and its for-profit subsidiary, LifeWise Health Plan, already offer the plans to individuals and employers.

Health savings accounts represent the federal government's most ambitious push so far for consumer-driven health care, a move toward giving individuals more financial control over and responsibility for their medical spending. The thinking is that consumers will try to stay healthier and seek medical care more judiciously when the money they spend is their own.

But skeptics warn that health savings accounts potentially could cleave the pool of insured people into two camps: the affluent who can afford to sock away pre-tax dollars and healthy people who can risk reduced coverage in one camp, and poorer and sicker people in the other.

That phenomenon, called adverse selection in the industry, would segregate sick patients into higher-cost insurance plans by siphoning away healthy individuals whose premium dollars traditionally subsidize those who need a lot of medical care. "Sicker people will have to pay the full freight for their care," said Judith Hibbard, professor of health policy in the department of planning, public policy and management at the University of Oregon. "That could unravel the whole system" of spreading the risk.

What's more, no studies have conclusively shown whether consumer-driven health care is more cost-effective, said Hibbard, who is examining that issue.

Earlier research found that increasing the share of health-care costs borne by employees curbs their use of medical services. What's unclear is whether those behavioral changes carry hidden long-term costs, such as when a person skips visiting a doctor for a minor condition that later becomes serious, Hibbard said.

Most benefits experts think consumers inevitably will be forced to assume more responsibility for their health-care spending as employers embrace ways to share the growing financial pinch.

In a survey of nearly 1,000 employers nationwide by Mercer Human Resource Consulting released in April, 19 percent of the companies said they very likely will offer high-deductible health plans by 2006. An additional 54 percent said they were somewhat likely to do so.

Not all workers who switch from a traditional low-deductible plan (typically $200 or $500 a year) to a high-deductible plan will be doing it out of choice. Insurers, in an attempt to prevent adverse selection, are forcing small employers that want to offer a health savings account-qualified plan to make that the sole insurance option. Premera, for instance, is limiting businesses with fewer than 20 workers to one health plan, while Regence is mulling a similar cap for groups with fewer than 25 people.

The city of Kent, which has 750 employees, is considering whether to offer health savings accounts and high-deductible plans. Sue Viseth, Kent's employee-services director, said the health-care budget for the city, which is self-insured, has jumped 75 percent in the past six years. Last year, five city employees filed medical claims exceeding $100,000 each.

Kent employees pay no deductibles and modest copayments for physician visits and prescription drugs. The city could save money by enrolling some its workers in the cheaper, high-deductible plans. Viseth said the city then may need to reduce benefits for those remaining under the zero-deductible plans to equalize benefits for all employees.

Granted, Kent instead could even out the plans by boosting benefits to the high-deductible group, such as contributing to their health savings accounts. But Viseth argued that would defeat the purpose of offering the accounts in the first place: to rein in the city's health-care costs.

Jerry Flanagan, consumer advocate with The Foundation for Taxpayer & Consumer Rights in Santa Monica, Calif., thinks health savings accounts and their accompanying high-deductible plans could erode, not enhance, benefits for some workers. "I don't think this will encourage employers who don't offer coverage to start offering coverage," Flanagan said. "But it will make companies that offer coverage to switch to catastrophic coverage."

Still, insurance executives say health savings accounts are drawing big interest, particularly from higher-income professionals such as physicians, accountants, business owners and technology workers.

The Washington Alliance for Healthcare Insurance Trust, which brokers group insurance on behalf of more than 1,700 small businesses throughout the state, will offer health savings accounts to member firms starting Oct. 1. And WSA, formerly the Washington Software Alliance, is considering doing the same early next year.

Health savings accounts are "a sleeper that we hope catches on," said Margaret Lane, vice president of products for Regence.

Portuese, the facial plastic surgeon, said the advantages of health savings accounts are obvious. Employers and employees can chip in money to the accounts, which can be invested in stock funds, money-market funds and other places.

The individual contributions and the investment earnings are exempt from federal income tax. And if an employee adds to an account through payroll deduction, she or he can also save on withholding for Social Security and Medicare.

For many middle-class couples, putting $2,500 into a health savings account would shave $816 off their tax bill. That's the equivalent of getting 33 percent off everything they buy with the $2,500.

Account holders can withdraw money for most medical-related expenses. The unemployed can tap the account to buy their own health insurance, and seniors can use it to pay Medicare premiums.

Perhaps most importantly, health savings accounts do not have a use-it-or-lose-it rule, allowing people to roll over any unused balances from year to year.

Portuese pays $330 a month for his high-deductible plan from LifeWise, a big drop from the $800 he used to pay. He says he can afford the hefty deductible and likes the control and tax breaks he gets from managing his health-care spending.

"I don't need health insurance for a $20 prescription for antibiotics. I need it for the catastrophic things like cancer or appendicitis," he said. "That's what health insurance started out to be."

Health savings account Q&A;:

What are they? Special savings accounts combined with a high-deductible health-insurance plan to set aside money for qualified medical expenses. Most account holders won't pay taxes on contributions, and the accounts can grow tax-free. Employers can contribute to employees' accounts.

Who qualifies? Anyone covered under a high-deductible health plan and who is not enrolled in Medicare. The health plan must have annual deductibles of at least $1,000 and out-of-pocket expense limits of $5,000 for individual coverage and $2,000 in deductibles and $10,000 in expense limits for family coverage.

Where can you open an account? Insurers, banks and other financial institutions offer the accounts. You don't have to open the account with the same health insurer that sells the high-deductible plan. Premera Blue Cross and its for-profit subsidiary, LifeWise Health Plan, offer HSA-qualified plans. Regence BlueShield is rolling out plans for groups and individuals this week.

How much can you set aside? You can contribute the lesser of your deductible amount or $2,600 for an individual and $5,150 for a family. The money can come from you or your employer or both. Contributions from employers aren't taxable to employees. In addition, those between 55 and 65 can make annual catch-up contributions to save for retirement medical expenses.

What can you spend the money on? Most health-care related items. You can pay deductibles, insurance premiums while you're unemployed or on leave from your job, and for medical services not covered by your health plan and prescription and over-the-counter drugs. Ineligible expenses include health-club dues, cosmetic surgery and vitamins.

What's the penalty for ineligible purchases? If you withdraw the money or spend it on unapproved medical expenses, you'll owe all income taxes on the amount and a 10 percent penalty.

What happens to unused balances at the end of the year? Any leftover money rolls over to the next year. At age 65, you can use the money for medical expenses, including Medicare premiums, or for any other expenses. Money withdrawn for nonmedical expenses, however, is taxable.

Source: U.S. Treasury Department

What's covered?

Most medical expenses can be paid out of health savings accounts, including
copayments, insurance deductibles and Medicare premiums. Here's a sample of what
you can and can't pay for with an HSA.

Eligible expenses:
-  Doctor visits
- Dentures
-  Acupuncture
-  Braces
- Contact lenses
- Medically necessary weight-loss programs
- Hearing aids and batteries
- Laser eye surgery
- Prescription and over-the-counter drugs
- Psychotherapy
- Ineligible expenses
- Cosmetic surgery
- Maternity clothes
- Vitamins and supplements
- Health-club memberships
- Hygiene products
- Life- and disability-insurance premiums

Source: Internal Revenue Service
Contact the author Kyung Song: 206-464-2423 or