Health Savings Accounts Aren't Immune to Risk

Despite a good deal of pre-State of the Union huffing and puffing, the Bush administration apparently plans to seek fairly modest changes in the law covering health savings accounts (HSAs) and other "consumer-driven" types of medical insurance.

Even without the better tax breaks Bush is talking about, though, the popularity of these plans is growing -- at least with employers. Two of the reasons are that, so far, surveys indicate that HSAs are cheaper for companies than traditional insurance and that employers' costs for these plans are rising less rapidly.

That, of course, is what backers of these plans have long said would happen. Set up as a combination of a high-deductible insurance policy to cover serious illnesses and a tax-preferred savings/investment account for routine expenses, HSAs are supposed to curb health care costs by discouraging unnecessary use of medical services while encouraging careful shopping for those that are necessary.

The mechanism is the savings/investment account, whose contributions can be kept and perhaps used for other purposes if they are not needed for medical care. In other words, the less you spend, the more you get to keep.

The account may be funded by the insured person or family, by the employer or shared between them.

(There is an alternative, known as a health reimbursement arrangement, or HRA, which is similar to an HSA but with somewhat different rules, including a requirement that the employer, and only the employer, fund the account.)

But while costs to employers may be restrained, it remains to be seen whether the plans truly curb overall costs. That is because they have another, less obvious feature: risk shifting.

In traditional health insurance, the insurer -- or the employer, which is actually the insurer in the case of most large companies -- picks up most of the costs after a typically modest initial deductible is satisfied.

In an HSA, that deductible is large -- $1,000 for a single person, $2,000 for a family -- and the total annual out-of-pocket expenses, not counting premiums, can be as much as $5,100 for a single person or $10,200 for a family. Out-of-pocket expenses include co-pays and other fees as well as the deductible.

Now, taking on more risk yourself can make plenty of sense in many contexts. Opting for a higher deductible on your car insurance is a good way to save on premiums if you are confident you would have the money to fix $500 or $1,000 worth of damage if you had to.

And you might assume that a well-funded savings/investment account would put you in much the same spot -- able to save on premiums by "self insuring" for the deductible.

But you need to be careful: Unlike car accidents (one hopes), illness can be an ongoing thing. A person with a chronic illness might deplete his account year after year, never accumulating a cushion and being compelled to dig into his own pocket for uncovered costs up to the out-of-pocket limit.