As providers of health care services, we have a critical eye when it comes to our own health care and health insurance. We have all been exposed in varying degrees to the problems with managed care and how decisions are made within that context. When it comes to health care decisions for our loved ones and ourselves, we hope to avoid some of the pitfalls to quality care we see on a daily basis in our work. This is precisely what led me to research Health Savings Accounts (HSAs) for my own healthcare. My hope was to have more control over how I spent my health care dollars and have more choice in my providers. I also wanted to know that my health care professional was going to be reimbursed a fair rate for the services performed. It is what I expect as a professional and it is what I want to give in return to my treating professionals. Although a HSA has some deficiencies, I am currently using it as my preferred way of managing health care insurance.

Background and Basics

Health Savings Accounts were established in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act. The savings accounts are paired with a High Deductible Health Plan (HDHP). The HDHP can be an HMO, PPO, or indemnity plan that meets government requirements. You cannot use this if you are on another health plan or if you are a recipient of Medicare. You are allowed to put pre-tax dollars into an interest bearing account and if the money is not used for health care, the dollars can roll over year after year. Theoretically, if you are healthy and use little of the money, you will accumulate a large sum to help with long-term care in the future. This differs from flex spending accounts where if you do not use the money in that calendar year, you forfeit the balance. The maximum a family of four can contribute annually to a HSA is $5,250. A single person can contribute up to $2,650. It is estimated that the family of four who earns $100,000 and contributes the maximum allowed amount, can save approximately $1,312 in annual taxes. The individual who makes $80,000 and contributes the maximum amount can save approximately $662 in annual taxes. For individuals age 55 and older, there is an allowable "catch up" period. In 2005, an individual may contribute an extra $600 and the amount gradually goes up to an additional $1,000 in 2009 and years thereafter. Premiums for Long Term Care Insurance can also be paid out of the HSA.

Advantages

There are no "use it or lose it" rules. All amounts are fully vested and the unspent balances can remain in the account until spent. Upon death, the account transfers to the spouse and still remains a HSA. HAS's encourage account owners to spend their funds more wisely on their medical care. They are in direct contact with the cost of services, instead of paying a co-pay and not knowing how much the service costs or how much the professional was paid. As a result, the account holder may shop around for the best value, taking into account dollar cost and quality of service. These accounts are not typical savings accounts but grow through investment earnings like IRA's. Qualified medical expenses can be taken not only for the person covered by the HDHP, but also for a spouse or dependent not covered by the HDHP.

Other advantages include the types of medical expenses you may deduct from the HSA. These include transportation to medical appointments, transportation to AA meetings, and over the counter medications. Alternative treatments such as acupuncture are included. Supplies such as bandages can be taken and capital expenditures to make a home wheelchair accessible are also included. It is interesting that you may also get reimbursed for legal fees you spend to authorize treatment for mental health conditions. For a complete list of all allowable medical expenses, go to www.irs.gov/publications/p502/ar02.html#d0e567.

Disadvantages

Under some business legal structures, you may not be considered an "employee" and therefore cannot take advantage of the "pretax" status, but you may take an above-the-line deduction for your HSA contributions on your personal income taxes. You are already able to deduct the full cost of your health insurance premiums. I am not clear on this, but this may be one of the regulations the government is examining, so I would advise keeping an eye out for the latest regulations regarding this.

Another drawback is the dreaded words "usual and customary". If a family of four has a $5000 deductible policy, then the maximum allowed HSA contribution is $5000. Any of the $5000 spent is applied towards the deductible but only in terms of UCR and what the HDHP considers a deductible expense. That leaves a gap between spending the $5000 in healthcare on qualified medical expenses and amounts above the UCR and when the HDHP policy starts. For example, I went to an after hours clinic and was charged $325 for the visit. It was paid for out of the HSA and submitted to be applied towards the deductible. The HDHP applied $75 toward the deductible, stating that was the usual and customary amount. This part we are all familiar with. What I don’t understand is how they will reconcile the expenses for things such as bandages, over the counter medications, wheelchair ramps, and travel expenses that the government considers to be qualified medical expenses and when the deductible is met. The HDHP policies vary greatly in what is considered a deductible expense and there appears to be an uninterpreted gap between these allowable expenses and meeting a deductible.

Conclusion

Until recently, few insurance companies offered a qualified HDHP, and offered plans were HMO's. Now all major insurance companies offer some type of HSA-HDHP combination. Given the difficulties regarding what qualified health care expenses can be applied towards a deductible and usual and customary rates, it is important to closely examine the HDHP. HMO's are not a good option if you value choice in health care professionals because you will always end up with a huge gap between your HSA and the allowable deductible. However, if you are using an indemnity plan, then the amount applied toward the deductible may be more predictable and the gap may be narrower. Since this is relatively new legislation and there are always unpredicted problems with programs such as this, I think it is a good opportunity to ask for legislation that might raise the allowable contribution to a HSA. For example, raise a family allowable contribution to approximately $8000 for a $5000 deductible policy. This will also bring public attention to the UCR problem within the insurance industry.

If you are at fairly low risk for having high medical expenses, an HSA definitely seems to be a good option. If you are in the position of rolling over money year after year, it is a great investment vehicle for future healthcare expenses. However, if you anticipate having significant medical expenses, then it would be important to factor in the premiums and benefits of various healthcare plans paired with the HSA to see which would be a better option. In most cases, a high deductible policy always carries a low enough premium that you may still come out ahead with an HSA even with a lot of medical expenses. Given the UCR component, an HSA does not automatically give you freedom to choose your health care professionals as the publicity around the legislation proposed. The stipulations of your HDHP is the determining factor as to how well a HSA will work for you if you think you will be spending all your HSA funds in a given year.

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