A Primer on Health Savings Accounts HSAs

1
A Primer on Health Savings Accounts (HSAs)

• John P. Garven, CLU, RHU
• Benico, Ltd. john.garven_at_benico.com
• [phone], ext. 202

2
Dealing with Rising Costs

• Many health policy analysts believe making
  consumers aware of the actual cost of health
  services will change the relationship between the
  consumer (i.e., patient) and the physician.
• Once consumers control payment for most services,
  they will become more inclined to shop for
  services and inquire about the cost and quality
  of that care, which in turn should lead to
  improved quality and increased patient
  satisfaction.
• The Medicare Modernization Act (MMA), signed by
  President Bush in December of 2003, created
  something known as Health Savings Accounts
  (HSAs), which we believe will help bring about
  more health care consumerism in our country.

3
Current Model for Health Care

• You pick a doctor.
• He tells you whats wrong with you.
• He admits you to the hospital he chooses.
• He decides what tests to run.
• He has no idea what his services cost.
• For the most part we dont care what it costs
  because of the current financial disconnect in
  traditional health plan design.

4
New Model for Health Care

• You pick a doctor based on outcomes.
• When he tells you whats wrong with you, you ask
  Why?
• He admits you to a hospital of your choice based
  on quality and cost.
• You decide together what tests to run and where
  they will be sent.
• The doctor may not know what the procedure costs,
  but you will.
• Since you will pay a greater portion of your
  costs, you will likely care a great deal about
  your costs.

5
Health Savings Accounts

• An idea for greater consumer awareness and savings

6
Health Savings Accounts (HSAs)

• First made available January 1, 2004
• Available to anyone who is covered by a qualified
  high deductible health plan (HDHP)
• The HDHP is paired with the actual account, the
  HSA, to cover qualified medical expenses not
  covered by the insurance policy.
• The HDHPs annual deductible must be at least
  1,050 for self-only coverage, or 2,100 for
  families (2006 deductible requirements)
• The deductible, plus ones share of covered
  expenses, cannot be greater than 5,250 with
  self-only coverage and 10,500 for family
  coverage (2006 limits).
• Preventive care services may be covered before
  one meets the deductible, but this is not
  required.

7
Contributions to an HSA

• Contributions may equal the amount of the HDHPs
  annual policy deductible, between 1,050 to a
  maximum of 2,700 for self-only coverage, and
  from 2,100 to 5,450 for a family (Note These
  are the 2006 limits.).
• Individuals between the ages of 55 and 65 may
  make extra contributions to their accounts. The
  amount allowed in 2006 is 700. In 2007 this
  catch-up contribution increases to 800.
• Contributions by an eligible individual or a
  covered family member are tax deductible by the
  eligible individual on an above the line basis.
  This means a person doesnt have to itemize
  deductions on his tax return in order to deduct
  the HSA contribution.
• Both employers and employees may contribute to an
  HSA.

8
Qualified Medical Expenses

• Eligible medical expenses are defined as those
  expenses paid for care as described in Section
  213(d) of the Internal Revenue Code.
• Generally, any expenses related to the diagnosis,
  cure, mitigation, treatment or prevention of
  disease
• Prescription drugs. Also, the IRS allows some
  over-the-counter drugs to qualify as eligible
  medical expenses.
• Doctors visits, lab, x-ray, and other diagnostic
  and treatment services
• Qualified long-term care services and long-term
  care insurance premiums

9
Qualified Medical Expenses

• COBRA premiums, and health insurance for those on
  unemployment compensation
• Medicare Part A and B premiums, Medicare HMO or
  Medicare Advantage premiums (but not Medigap)
• Retiree health expenses for individuals age 65
  and older (but retiree health plans would not
  have to meet the 1,050/2,100 minimum deductible
  requirements)
• Ensuring that expenses paid from the account are
  qualified medical expenses is the responsibility
  of the account holder (self-substantiation).
• The account holder must keep adequate records
  concerning the use of the HSA funds.

10
Account distributions

• Distributions made for any other purpose are
  subject to income tax and a 10 penalty.  The 10
  penalty is waived in the case of death or
  disability.  The 10 penalty is also waived for
  distributions made by individuals ages 65 or
  older.
• Treatment at Death - Upon death, HSA ownership
  may transfer to the spouse on a tax-free basis.

11
Establishing an HSA

• Many insurance companies are either planning or
  already selling a packaged HSA product that
  provides both the HDHP and management of the
  funds that are deposited into an HSA.
• Any HDHP may be used with a Health Savings
  Account. The HDHP and HSA do not need to be set
  up through the same provider.
• In fact anyone who already has a high deductible
  plan that meets the requirements of a qualified
  HDHP may open an HSA with any number of HSA
  custodians, including banks, mutual funds, and
  insurance companies.
• Note Go to http//www.hsainsider.com/buildhsa
  .aspx to find an HSA custodian in your area.

12
What kind of market impact is being felt with
HSAs?

• HSAs are already having a significant impact on
  the individual market. A large percentage of
  individual policies are currently sold with a
  high deductible anyways.
• In the group market employers facing rising costs
  institute plan changes as a means of better
  managing these costs, including imposing higher
  deductibles and other forms of cost-sharing.
  Many employer plans already have deductibles that
  meet the 2006 HDHP guidelines.
• HSAs will encourage employers to make needed
  changes while giving them flexibility to
  contribute to their employees HSAs to help them
  with the HDHPs higher out of pocket expenses.

13
What kind of market impact is being felt with
HSAs?

• If employees HSA contributions are done through
  Section 125, then FICA and federal and state
  income tax savings are realized with every
  payroll.
• As of January 1st of 2006 there are more than 3.2
  million HSAs in force, and these accounts have
  more than 1 billion invested in them.
• Treasury Department projects 14 million HSAs by
  2010 based on current law, and more than 21
  million HSAs (covering 40-45 million people) by
  2010 if President Bushs HSA expansion proposals
  are adopted.
• The average HSA established now will have a
  22,000 balance only ten years hence. Unspent
  balances in HSAs will help employees better plan
  for and afford health care in retirement.