Note: This story was corrected Nov. 9, 2011 to clarify the tax treatment of HSA funds used for general expenses by people older than age 65.
It's open enrollment season for many employer-sponsored health plans. Employees look for the most cost-effective option that promises high quality health care, and employers attempt to control their costs. Meanwhile, those who seek insurance in the individual market are simply looking for affordable health coverage.
Health savings accounts, coupled with high deductible health plans, increasingly are on the list of choices. The insurance industry trade group America's Health Insurance Plans reports that the number of people with these plans "rose to more than 11.4 million in January 2011, up from 10 million in January 2010."
FAQs
See our collection of FAQs on health care terminology
Still, HSAs can be confusing, and, many people wonder if this approach to health insurance is good for them. Here are some answers to frequently asked questions:
What is a health savings account?
HSAs have two basic elements:
- A tax-preferred savings account where money is set aside by the consumer (employers can also contribute) to pay for medical expenses and prescription drugs.
- A high-deductible health insurance plan. In 2012, that deductible will be at least $1,200 for an individual and $2,400 for a family and as high as $6,050 and $12,100, respectively, according to the Treasury Department.
Any adult with a high-deductible health plan and no other form of health care coverage can establish one of these accounts.
How can consumers benefit from HSAs?
Consumers who participate in HSAs receive certain tax benefits. For instance, individual contributions are tax deductible, and employer contributions also are not counted as taxable income. Account withdrawals, when used to pay for qualified medical expenses, also are not taxed.
Meanwhile, the money inside the savings account belongs to the consumer and funds left over at the end of the year are rolled over to the next year. If he or she changes jobs, the HSA stays with that individual. And though not all high deductible plans work the same way, by law plans have the option to cover basic preventive care, such as vaccinations and annual physicals, even if the deductible has not been met.
When participants turn 65, any remaining funds can be used -- without tax penalities -- for general retirement expenses, but are subject to income tax.
What are the benefits for employers?
High-deductible health plans come with lower premiums than more comprehensive coverage, which many employers value as a way to manage the costs of employee benefits. "[They] are essentially the employers' answer to cost control," said Deborah Chollet, a senior fellow at Mathematica Policy Research Center in Washington.
What are some of the drawbacks?
Health care policy experts say that while HSAs give consumers control over their medical spending, they are problematic for low-income individuals, especially those with chronic conditions who use the health care system frequently.
As financially friendly as the HSA-high-dedutible plan combination may appear, Paul Fronstin, who directs the health research and education program of the Employee Benefit Research Institute in Washington, said there's a catch: They have a "straitjacket design" in which consumers are responsible for paying the full-dollar amount of their medical expenses until they meet their deductible. This can be particularly burdensome for people with chronic conditions, like diabetes, that requires ongoing care.
The IRS establishes financial and medical limits on this type of health care plan. There is a limit on the amount of money consumers can contribute to their savings accounts: In 2012, the maximum amount is $3,100 for an individual and $6,250 for a family.
The IRS also determines what medical expenses qualify. Recently, the IRS dropped over-the-counter medications from its list.
One of the biggest concerns expressed by some health policy experts is that this type of coverage could discourage certain types of medical care. Since patients will have to pay for all their medical care out-of-pocket, they may avoid the doctor's office. "The healthy employee tends to like high-deductible plans with low premium contributions," Chollet said, adding that consumers "tend to be young, healthy males who avoid the health care system" and only go to the doctor when it's necessary.
Why are HSAs growing in popularity?
HSA advocates say this approach is an ideal model of consumer-directed health care, because consumers will have "skin in the game" and become informed shoppers when it comes to their medical needs. A recent RAND study notes that "HSAs create a strong financial incentive for the employee to manage health care costs carefully, because the account balance is owned by the employee."
Because the concept of HSAs tracks so closely with Republican principles like consumer-directed care and market-driven reforms, they are a hot topic among this year's GOP presidential candidates. Most of the major candidates have expressed support for tax credits to encourage the use of HSAs and allow consumers more flexibility to contribute to these accounts.
But their market share will ultimately be determined by consumers.
"Every time a leading Republican refers to HSAs as an attractive means to buy health insurance, it's as good for the product as buying an ad in the national media," said Robert Laszewski, president of Health Policy and Strategy Associates, a Washington-based consulting firm. "But in the end, consumers carefully compare health plans … and select the one that gives them the best value."
