FIXING HEALTH SAVINGS ACCOUNTS: Making Them More Attractive for Lower Income Working People.
Health Savings Accounts (HSAs) were set up as a part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and are supposed to serve as a low-cost alternative to health insurance premiums for a large segment of the population, especially those considered high risk health problems for insurers, such as the elderly. These are accounts where you can deposit tax-deferred funds for the sole purpose of covering any medical expenses you may incur. You will only be taxed on any withdrawals if the money is used for anything other than medical needs covered under the law. This coverage is available to most people even if you already have a health insurance policy, provided that the deductible on that policy is not less than $1000.
This Medicare Prescription Drug legislation passed with full support from the Bush White House and the Republican majorities at the time. It struck me odd that as much as Republicans today have fought tooth and nail against any and all health care reform under the current Obama administration that they would create legislation that was intended to keep health care costs down. And though HSAs do serve this purpose, a closer look reveals that there is a hook that comes with them that might explain why Republicans (and many Democrats) were on board with this so easily.
By investing in these accounts as opposed to buying a standard health insurance policy, it was intended that people wouldn’t “needlessly” see their doctor if they are spending their own money. Employees whose employer provides health coverage benefits tend to see health care providers more frequently than those whose health care costs come completely out of their own pocket. HSA’s do allow individuals to negotiate prices with physicians, hospitals and other health care providers to keep costs low, just as the health insurance companies do, making HSAs seemingly a neat way to cut out the middleman – insurance companies.
But here’s where the hook comes in. Health Insurance companies appear to have managed to get a piece of this so-called lower cost alternative via a requirement in the legislation that mandates all HSA accounts must include a high-deductible health plan (HDHP), a form of catastrophic coverage that covers more serious health issues that could land you in the hospitals for days, weeks or months and as a result, could affect your employment status.
Unless you have a pre-existing condition many people are eligible for HDHP policies (The pre-existing condition is scheduled to go away in 2014 when the new reform legislation under the Patient Protection and Affordable Care Act kicks in). The premiums are reasonably low IF you are in good health but the plan will have deductibles no lower than $1,150 for individuals, $2,300 for families and not to exceed $2850 for individuals and $5650 for families. This arrangement doesn’t truly benefit most working families whose income is slightly above and below the national poverty level and whose health conditions may be less than stellar. When premiums are averaging around $300-$500 a month it is hard for low income families and individuals new to the workforce to pay into these HDHPs while also making significant contributions to their HSAs.
Considering that from time to time you will have to make withdrawals from an HSA when you or the kids need to make a doctor visit for minor illnesses or check-ups, what small amounts you are able to contribute monthly can be negated by such routine factors. One finding showed that “42 percent of HSA holders had under $500 in their accounts at the end of 2009” while some 31% had on average 4 times that much indicating that higher income groups are more apt to put money away in an HSA than lower income families. (BNET, Health Savings Accounts Are Becoming a Big Investment Business, By Ken Terry, 5/26/2010)
Insufficient funds in your HSA becomes a problem if you cannot reach your deductible amounts before a serious illness requires withdrawing it. Building up enough in a timely manner to cover deductibles is extremely difficult for people hovering around the poverty levels in this country as issues arise requiring periodic withdrawals for non-emergency medical problems and economic conditions that prevent them from making routine contributions each month. “Statistics show that on average most people withdraw half of what they put into their HSA each year.” (Generation X Finance, Health Savings Account (HSA) Basics, 6/15/2010)
There is a remedy for this however provided we can get our representatives in Congress to detach themselves enough from the health insurance industry to make it happen. As it stands now the health insurance industry profits considerably the way the law is written regarding HSAs. Even though this is your money being set aside for strictly medical expenses, you are still required to purchase a high-deductible health plan in order to qualify for these tax-deferred accounts.
The HDHP policy makes good sense because no one, except those in a select few upper incomes, can fully pay the expense of a catastrophic illness. However, most people make incomes that struggle to provide other essentials for them and their families and putting money into a health savings account AND pay a monthly premium on an HDHP policy may not be feasible. The practical realities of allowing people to open tax-deferred HSAs at their local bank without being required to pay monthly premiums for a high-deductible health plan not only allows a better choice that frees them from mandatory payments towards that HDHP but allows the transfer of a consumer’s money to institutions that are more familiar and friendly to them.
Eliminating these HDHPs will create fierce resistance from the health insurance lobby and their allies in Congress. But a suitable compromise that may persuade many of our representatives in such a fight to defend such a change would be the requirement that once an individual’s HSA account has reached a level equivalent to the standard deductible most health insurance companies require, then consumers could be required to purchase catastrophic coverage with an HDHP policy.
Older people would benefit better from this arrangement even though their premiums for HDHP policies will be higher than younger people. Usually though more mature, pre-retirement individuals have an income or source of revenue that could pay the higher premiums and meet most deductible limits quicker than younger men and women entering the job market out of high school or college.
The law as it stands now needs to be changed to remedy the disadvantages to certain segments of income earners. Eliminating the mandate to purchase catastrophic health coverage in order to open an HSA account until the consumer’s financial circumstances can better allow for it would make affordable health care more available to more Americans. Also, making it easy for such tax-deferred accounts to be available in all local banks would keep revenues local, adding an extra benefit to each community.
RESOURCES:
Workers’ Health Coverage Worse Off
Health Savings Accounts Are Becoming a Big Investment Business
Health Savings Account Answers
Wikipedia – High-deductible health plan