Of Sickness and of Wealth
Health Savings Accounts Make Sense if You're Physically and Fiscally Fit

By Susan Straight
Special to The Washington Post
Sunday, June 10, 2007

When Shannan Phillips's employer went out of business last year, she quickly found a new part-time job. But her new employer did not provide health insurance to part-time workers.

Phillips, dismayed at the cost of many health-insurance plans, turned to a relatively new approach to health care. She bought insurance with a high deductible but low monthly premiums, then put her upfront savings, tax-free, into a health savings account.

Her decision put her among the growing ranks of consumers and employers seeking alternatives to traditional insurance as health-care costs rise. While the number of employers offering health savings accounts is small and that of employees electing them smaller still, they have increased steadily in the past three years. And some recent changes to HSAs for 2007 make them more attractive, especially for enrollees getting started late in the year.

The plans may not work for all consumers, particularly people in poor health. But for Phillips, an HSA made sense.

"I'm fortunately very healthy," she said. She couldn't bear the idea of pouring money into insurance for medical treatment she didn't use. She thinks an HSA gives her more control over her funds, and so far, she's been much more satisfied than with a traditional self-insured plan that "offered less benefits with a higher premium."

Health savings accounts hit the market in 2004, after being created by Congress as a way to cope with double-digit increases in health-care costs. Lawmakers thought that shifting some of the burden for managing health-care dollars to individuals from employers and insurers would encourage consumers to be more frugal about medical expenditures.

To be eligible for a health savings account, consumers must first enroll in a high-deductible health-insurance plan. According to federal rules governing HSAs, the minimum deductible for a qualifying health plan this year is $1,100 for a single person or $2,200 for a family. Deductibles for traditional plans are typically much lower, including no deductible for in-network care.

Consumers can then open a health savings account and contribute up to a certain amount tax-free each year to pay for medical expenses. (For 2007, the contribution limits are $2,850 for an individual and $5,650 for a family.)

HSA funds accumulate indefinitely -- anything left in the account at year's end rolls over to the next year. That is different from a flexible spending account, another tax-advantaged way to pay for medical care that has a "use it or lose it" provision. As long as the HSA is used to pay for qualifying medical expenses, the fund remains tax-free. The IRS keeps a list of allowable expenses. They include standard medical fare as well as options that might not be covered by traditional plans, such as Lasik vision-correction surgery, weight-loss programs and fertility treatments.

The funds can be invested at the account holder's discretion. Investment options include stocks, bonds, mutual funds and certificates of deposit. If the consumer doesn't invest the money, it may sit in a low-interest checking or money market account. The accounts are portable, meaning consumers can keep them if they change jobs.

"They're essentially medical IRAs," said John Vellines, president of Health Savings Administrators, a Richmond company that manages health savings accounts for employers.

Using HSA funds for a non-medical purpose incurs taxes on the amount withdrawn as well as a 10 percent penalty (waived if you're over 65). After an account holder's death, a spouse automatically becomes the owner of the account. If there is no spouse, funds are rolled into the account holder's estate and taxed accordingly.

This year, for the first time, HSA holders can make one-time contributions to the account from an IRA, flexible spending or health reimbursement account. Also starting this year, contributions are not limited by your health plan deductible, and you can put money in any time, even if you sign up in December.

Vellines says many employees regard their HSAs as an eventual supplement to Medicare. "They're not sure Medicare will be very good. Some aren't sure it will be there at all. It's a hedge against future health-care costs," he said.

According to the Treasury Department, the number of people opening HSAs increased to 3.2 million from 678,000 in the first two years they were offered. That number is expected to grow as more businesses add HSAs as a benefits option. About 25 percent of employers offer HSAs, and as many as 40 percent will do so next year, according to Watson Wyatt, a benefits consulting firm in Arlington.

To encourage workers to sign up for the accounts, many employers contribute to them, thereby sharing in the savings from reduced employee premiums and offsetting the high deductibles employees must now assume.

Vellines says most of his company's 400 employer clients put money into their employees' accounts.

By using such consumer-driven health plans, employers find that they can slightly reduce their expenditures on employee health care. "Employers are shifting more and more of the expense as well as the customization of coverage onto the employee," said Tracey Baker, vice president of Cooper, Jones & McLeland, a financial-planning firm in Fairfax, and co-author of "Navigating Your Health Benefits for Dummies."

A few companies have dropped their traditional health-care coverage altogether and shifted to health savings accounts. Watson Wyatt discontinued traditional insurance at the end of last year.

"That concept is known as 'total replacement.' There are a small but growing number of companies moving in that direction," said Watson Wyatt spokesman Ed Emerman. Wendy's International, based in Ohio, was one of the early adopters, switching to HSAs in 2005.

For consumers, choosing between a traditional health plan and a health savings account is not as easy as it may seem. The high-deductible insurance required to open an HSA makes many people a little nervous. And the complexity of the paperwork and investment options plus calculating the costs and benefits can be overwhelming.

Rosemary Driscoll, a self-employed market research consultant in Natick, Mass., decided to set up an HSA last year. She and her husband, Bill Seymour, also self-employed, were facing a sharp increase in their insurance premium last year as he was about to turn 60 -- to $1,300 per month from $910. "Whoa, that's too much. Let's look at some other options," she recalled saying to her husband.

Driscoll thought she would try an HSA. She signed up for a high-deductible health plan for herself and her husband through Blue Cross, with a $950 monthly premium. She set up the health savings account through Wells Fargo and contributed a lump sum of $5,400 for 2007. She elected to leave all of the funds in the money-market option earning 4.67 percent. She pays no account-management fees.

But the fund has not turned out to be the wise financial choice she expected. What she never thought to check, but discovered the hard way, was that her asthma prescriptions can cost up to $600 per month. That alone -- not counting doctor's visits or any of her husband's potential medical expenses -- consumes all of the funds in their account. The high monthly drug expense had been masked by the lower co-payments offered by their previous traditional insurance plan.

"From a financial standpoint, there's no real benefit to us. There's just more paperwork," said Driscoll, who plans to drop the HSA by year's end. "I very quickly realized it just didn't make sense for our life."

Driscoll, who has done consulting work in the health industry, is chagrined that she hadn't been able to accurately calculate the investment ahead of time but says that the research involved in figuring it all out took too long. "I'm pretty well educated. I've also done work in the health insurance world. It's so ridiculously complicated, I don't know what [most people] do," she said.

Consumers looking into a health savings account should compare premiums on traditional insurance options with those for high-deductible plans and factor in how much their employer is willing to contribute to the HSA, said Tom Billet, a senior consultant in Watson Wyatt's health-care practice.

"If the HSA has lower premiums and substantial employer contribution, it might make sense," he said. A health savings account "is almost always a good idea," Billet said, for people who make more than $100,000 a year, have no retiree medical plan or chronic illnesses and have the ability to contribute the full amount each year.

Phillips fits that profile. She has had no ongoing health expenses and rarely needs to see a doctor. She had one inexpensive prescription, which she chose to pay out of pocket, and a mammogram that was covered under her insurance plan's wellness program. Since opening the account last spring, Phillips has yet to draw on her funds.

If your employer does not offer HSAs, it can be tricky to find one. Phillips started her search with her bank but soon realized it would not be easy.

"Finding a bank that handles HSA accounts is not easy. Many banks didn't know what I was talking about," she said.

Phillips said she asked a lot of questions and made the most of her network of personal and professional contacts -- especially peers who had turned or were also turning 50. "We're all going through this. Once you hit 50, you're in a new Zip code" in the eyes of insurance companies and life needs, she said.