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Running head: HIGHS DEDUCTIBLE HEALTHCARE SPENDING ACCOUNTS (HSAs)

High Deductible Healthcare Spending Accounts (HSAs)

Topher Matthews

Troy University

MGT 6684

Dr. Jessie Tucker III

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Abstract

In 2006 healthcare, in the United States, represents sixteen percent of the United States

Gross Domestic Product equivalent to one point eight trillion dollars (Moorty & Jani, 2006)

With Baby Boomers aging and requiring an ever increasing percentage of healthcare in the

United States, Nobel laureate Robert W. Fogel predicts that number will grow to twenty five

percent of the Gross Domestic Product and will be “the driving force in the economy” by 2030

(Milton, 2006) HealthCare Spending Accounts, or HSAs, are thought by some to be one way to

fight the ever increasing cost of healthcare by making consumers aware of the cost and providing

tax incentives to encourage the users of healthcare to monitor their usage of healthcare dollars

and reward them for the judicious use of healthcare.

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Highs Deductible Healthcare Spending Accounts (HSAs)

Health insurance, as a concept, was first brought forth in 1694 by Hugh the Elder

Chamberlen from the Peter Chamberlen family. This concept, which was originally confined to

catastrophic injury, evolved and by the late nineteenth century it had become known as disability

insurance. The purpose of this insurance was meant to cover only emergent care for injuries

which could lead to permanent disability (Wikipedia, 2006).

As late as the early twentieth century this model continued to exist. Patients were

expected to pay all costs of medical care out of their own pockets, with the exception of

catastrophic care, on a fee-for-service basis. This continued into the middle to late part of the

twentieth century until it evolved again into the modern health insurance programs seen today

(Wikipedia, 2006).

As this evolution of healthcare progressed, an economical construct emerged. It was not

a free market economy but rather it was, and continues to be, an artificially created market

economy. Healthcare costs continued to rise without regard to traditional economical restraints

which led to growing concerns about healthcare and its future.

The spiralling cost of healthcare led to the creation of Health Maintenance Organizations

as a way to contain cost and manage healthcare utilization. These organizations could offer

services to patients while attempting to cap costs by sharing resources and employing physicians

or contracting with outside physicians at a specific and negotiated fee-for-service which helped

contain the costs of healthcare.

Traditional healthcare insurance and Health Maintenance Organizations ran parallel paths

with each one having supporters and detractors who felt the strengths and weaknesses of the

other posed concerns to the future of healthcare in the United States.

The next development in the attempt to control the cost of healthcare was flexible
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spending accounts. These accounts allowed people to put pre-tax monies into a flexible account

which could be accessed for healthcare needs during the year in which they were deposited. This

had the advantage of allowing people to pay for some healthcare needs, such as prescriptions, co-

payments, and other expenses with pre-tax dollars.

The down side to this program was that if people over-invested into the flexible account

and did not spend the monies, they lost those funds at the end of the year. This program required

people to be vigilant to expected costs during the year and many people were unable to find a

balance in this type of investing (Fuchs & James, 2005).

During the late 1990’s and early 2000’s, the United States Congress changed the federal

tax policy and extended the same tax benefits to high-deductible insurance plans that

comprehensive employer health plans had enjoyed. These medical savings accounts were

included in the Health Insurance Portability and Accountability Act of 1996 (HIPPA) and were

available to both Medicare beneficiaries and active workers alike (Fuchs & James, 2005).

In spite of the proposed savings afforded from participation in these medical savings

accounts, participation in them was much less than anticipated and the double digit increase in

health insurance premiums created further concern about the health and viability of healthcare in

the United States (Fuchs & James, 2005).

Health Savings Account – History

On December 8th 2003 the 108th Congress passed the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003, Public Law 108-173. President George W. Bush

signed the law on December 8th 2003. Title XII-Tax Incentives For Health And Retirement

Security, a part of the law is detailed below directly quoted from the law passed, is included as

retrieved from the Congressional Record Volume 149, 2003, from the United States Government

website (2003).
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• section 223,

o sub-section 2-High Deductible Health Plan,

 A

• (i)-which has an annual deductible which is not less than;

o (I) $1,000 for self-only coverage, and

o (II) twice the dollar amount in subclause (I) for family

coverage, and

• (ii)- the sum of the annual deductible and the other annual out-of-

pocket expenses required to be paid under the plan (other than for

premiums) for covered benefits does not exceed-

o (I) $5,000 for self-only coverage, and

o (II) Twice the dollar amount in subclause (I) for family

coverage.

The major thrust of this law is to combat the ever increasing cost of healthcare by inviting

participants to play a more active role in the self-determination of their healthcare. The law

provides for pre-tax contributions into the Health Savings Account and it also provides tax free

withdrawals from the account for covered healthcare expenses.

According to the United States Department of the Treasury Fact Sheet there were

438,000 individuals who participated in HSAs by November of 2004 and this number grew to

three point two million between November 2004 and December 2005 representing a one billion

dollar investment in HSAs by participants. These numbers are expected to continue to rise

enrolling fourteen to twenty-one million individuals in these plans by 2010 (U.S.Government).

Traditional thought has been that the American public will utilize healthcare to the direct

proportion that it is available. As long as the premium has been paid and any co-payments or
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deductibles are deemed reasonable, people will continue to seek medical care for any health

concerns without regard to cost or necessity. Health Savings Accounts with High Deductibles

are seen as a way to entice the American public to re-examine their utilization of healthcare by

providing specific tax advantages when they do so.

The introduction of Health Savings Accounts with High Deductibles is an attempt to

balance the Economies of Scale, that is, getting healthcare costs to flex up with increased

utilization and to flex down with a decrease in that usage. This, it is hoped, will lead to a balance

of labor, supply, and productivity.

In the current market supply and demand are the main determinants of healthcare costs.

The more in demand healthcare is, the higher the premiums that can be charged. In this model

that means that specific cost continues to escalate without regard to ability to pay. In the case of

those who have health insurance, this is not always of great concern. The insurance carriers

negotiate a fee-for-service with providers of healthcare which is a fraction of the actual billable

amount for the service provided. Plan participants are generally protected from billing by the

provider for any amount over what the insurance companies have negotiated by a no-balance-

billing clause except covered costs such as co-payments under the plan (Kongstvedt, 2003, p.

719)

Medicare and Medicaid set the reimbursement levels that the government will pay for

these services. Other insurance providers take their lead from the federal government when

determining pricing strategies in negotiations with providers.

Health Savings Accounts are not meant to be a quick fix for an ailing healthcare system

but rather, an attempt to get Americans involved in finding a long-term solution for the

increasing cost and utilization of that healthcare.

HSAs are also not meant to be a complete replacement for traditional insurance, but they
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are hoped to assist in returning insurance to the idea of a “Catastrophic” occurrence supplement

and not a right. By giving Americans the opportunity to reduce taxes by investing in HSAs, the

government hopes to wake Americans to the very real cost of providing healthcare to the public

while providing incentives to those who choose to manage their own health in a more conscious

and calculated manner.

Healthcare Spending Accounts have the potential to put competition back into the

healthcare market and to create a real economic basis for healthcare rather than the artificial

construct it has been from the beginning.

As more and more Americans take control of their own healthcare decisions and

spending the concept of competition and comparison shopping will have the opportunity to root

and grow. While no specific numbers have been put forth, it has been postulated that Americans

will begin to look for the best value for the dollar when using funds from their Healthcare

Savings Accounts.

This process may entail adaptations of other free market economy methodologies. For

uncomplicated surgery or procedures consumers might be willing to obtain quotes from two or

three hospitals or other providers as part of their determination of where and by whom to obtain

that care. Obviously, reputation and quality of care will come into play, but the economic value

will be weighed against the cost of the care.

Another example of potential changes is in prescription medications. Currently, those

with traditional healthcare might be willing to get prescriptions from their providers since the co-

pay of those medications is far less than the cost of over the counter alternatives.

• Naproxen, a long lasting (12 hour) non-steroidal-anti-inflammatory drug (NSAID), as a

prescription might cost twenty-eight dollars at a pharmacy, but with insurance the co-pay

might be ten dollars. Over the counter name brand Aleve might cost seventeen dollars
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for the same medication, but there is no reduction in cost. Even the generic Naproxen

over the counter medication weighs in at eleven dollars and fifty cents. This leads the

consumer to choose from ten dollars, seventeen dollars, or eleven dollars and fifty cents

(all costs are approximate). If the consumer had a Health Savings Account they might

opt for the generic version of the drug since the cost to them would be twenty eight

dollars, versus seventeen dollars, versus eleven dollars and fifty cents.

As the number of people who open Healthcare Savings Accounts increased, the economic

clout of these accounts grows in power. The potential for economic shift will increase with that

power.

• Twenty million people (according to the U.S. Treasury in 2010) each putting away two

thousand dollars a year for ten years will generate four hundred Billion healthcare dollars

(without inflation or interest calculations) that are available for their healthcare and they

would be responsible for the decisions about how it was spent. This shift in economic

power to the public will help create a more viable healthcare economy because the public

will be deciding when, where, and by whom to obtain the best care for the most leveraged

out of pocket expense.

Advantages of Healthcare Savings Accounts according to the U.S. Department of Treasury in

their Fact Sheet

Security – HSAs provide you with protection from high or unexpected medical bills since once

the maximum high deductible for the insurance is reached, no further expense is born by the

individual (Government).

Affordability – In many cases the higher deductible leads to a lower monthly premium for the

health insurance (ibid).

Flexibility – This allows individuals the option of using the funds in the HSA for current
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healthcare expenses, including ones insurance may not cover, or leaving the monies there for

future needs such as:

• Medical expenses or health insurance during periods of unemployment.

• Post retirement medical expenses before Medicare kicks in

• Once covered by Medicare, out of pocket expenses could be reimbursed

• Expenses associated with long term care and insurance (ibid)

Savings – The money in the account can be invested and left to grow through interest earnings to

be used tax free for future medical expenses (ibid).

Control – Decisions regarding the account are made by the individual. These include:

• The amount to be placed in the account up to the maximum allowable by law

• The decision to pay current healthcare costs or to save the funds and pay out of pocket

now.

• Which expenses get paid from the account

• The financial institution which will hold the funds

• To invest the funds in traditional savings mode or to opt for investment portfolios which

are riskier and provide higher returns (ibid).

Portability – Individuals maintain their HSAs during periods of unemployment, when changing

jobs, changing medical coverage, moving from state to state, and when changing marital status

(ibid).

Ownership – It is not a use it or lose it account like flexible savings accounts, but rather the funds

remain in the account in the same manner as an Individual Retirement Account from year to year

(ibid).

One final purported advantage to having an HSA, according to the U.S. Department of

the Treasury in their Fact Sheet is that it is transferable to a spouse upon the death of the other
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spouse and the surviving spouse can use the account as an HSA account for medical expenses as

well. If the individual is single the account passes on to the beneficiary or becomes a part of the

estate (ibid).

Other Advantages

Individuals who participate in a High Deductible Health Savings Account have the luxury

of having pre-tax dollars put into the account and this reduces their tax burden by reducing their

taxable income.

The younger the investor, the longer they have to contribute to the HSA and the more

interest they can receive. This is compounded by the fact that HSAs have the unique ability to

be invested in savings accounts, market accounts, and higher risk and yield investment accounts.

Investors who take advantage of HSAs also benefit from no penalty interest. That is, all

of the interest that is accrued on the account from investing is tax free provided it is used for

current or future medical expenses. Examples of future medical expenses include medical

insurance premiums during retirement, Consolidated Omnibus Budget Reconciliation Act

(COBRA) payments when unemployed, gap insurance between Medicare and Medicaid, and for

supplemental medical expenses not otherwise covered by insurance.

In examining Healthcare Savings Accounts it has to be determined who will benefit from

these accounts. It has been the subject of many articles and debate that while the tax advantages

are significant and have the potential to create greater consumer awareness and involvement in

personal decisions regarding healthcare, these same accounts do not provide the same advantages

for the underinsured or uninsured (Eastman, 2004, p. 67(24)).

The nature of high deductible HSAs provides that the individual must be insured with a

minimum deductible of one thousand dollars. It has been argued that this is an unfair process

and denies the less fortunate the chance to participate in the program (Eastman, 2004, p. 67(24)).
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According to a White House Press Release dated April 5, 2006 the opposite is true. The

press release states that “HSAs are a more affordable choice for those previously uninsured.

HSA-qualified insurance plans coupled with HSAs often have lower premiums, which make

these accounts an attractive option for those previously uninsured. More than one-third of those

who purchased individual HSA policies were previously uninsured” (Whitehouse, 2006, p. 1)

Another myth addressed in the White House Press Release revolves around the

assumption that HSAs are just for the young and healthy. Their report showed that HSAs are

helping all participants regardless of age or health. The HSA-qualified insurance plan pays

larger medical bills than traditional plans and the tax free savings accounts can cover other

medically necessary out-of-pocket expenses (Whitehouse, 2006, p. 1).

For healthier participants, Health Savings Accounts allow for no deductible preventative

care which does not require that funds be taken from the HSA before the insurance portion starts.

This may be of great significance to those who are health but lack the resources to otherwise

afford preventative under more traditional plans (Utz, 2006, p. 38)

While it may be advantageous for some middle-class participants, the majority of the

benefit would seem to fall to those who can best afford to leave the high deductible assets in the

HSA and pay a further deductible from out-of-pocket funds not associated with the account.

This allows the HSA to function as a tradition style IRA which can be used for future medical

expenses by allowing the funds to grow on an ongoing basis.

Those who put funds into the account but are forced to use them annually may see a

yearly tax break in health costs, but they are not likely to see the benefits of a growing asset

which can assist them in their retirement years.

Another concern is the trade off of future benefits from the HSA account when weighed

against the cost to an individual’s current life style and any changes this investment causes to
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that life style. For those with lower incomes this poses a vast concern as they weigh the cost of

insurance against the cost of everyday living.

It can be argued that HSAs provide yet another tax break for those who are more affluent

because they can afford to put funds into HSA accounts and still afford out-of-pocket expenses

for medical care. This allows them to take full advantage of the tax savings as well as the tax

free interest these accounts earn.

Another concern is that HSAs are not as simple as people think and that only a minority

of clients would benefit positively from these HSAs rather than traditional plans. How HSAs

will influence the delivery of care in the United States is currently a heated debate for many

parties. Some feel it will lead consumers to become better informed and educated in the delivery

of health care and therefore make better decisions regarding when to access that care. Others

feel that it may lead consumers to reduce their access to preventative care which has the overall

effect of increasing healthcare since these people will be sicker and further along the disease

process cycle before getting care (Opiela, 2005, p. 38).

It is unlikely that a consensus will be reached anytime in the foreseeable future but

government, insurance companies, and healthcare providers continue to find ways to bring the

spiralling cost of healthcare under control. Unfortunately insurance carriers and healthcare

provider appear to move in opposite directions with opposing agendas when it comes to planning

this reduction in cost.

Each year insurance carriers negotiate to stay the course or reduce the case cost they pay

providers so they can keep premiums at optimal levels while providing profit to investors and

remaining viable as business entities.

At the same time healthcare providers negotiate to increase their reimbursement in order

that they can continue to provide care while maintaining viability themselves. The net result of
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these tactics is that healthcare providers increase what they charge almost proportionate to the

decrease that the insurance carrier negotiates many times creating a net zero effect for both

parties. The only people truly affected are those who have minimal to no health insurance and

therefore when they require care they are hit with a crippling bill from the provider which they

cannot afford to pay.

Future economic benefit may be seen by the general public as the number of people

investing in HSAs creates an economy where healthcare purchasers have a greater effect on the

cost of healthcare and create an atmosphere where costs can be contained and perhaps regulated.

HSAs and other plans may be instruments of change in the healthcare market but it will

not be a quick fix and it will require time, examination, and courage on the part of the consumers

of healthcare to see this daunting task through to obtain a beneficial economic climate which can

provide all Americans with more affordable healthcare.

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References

Fuchs, B., & James, J. (2005, April 11). Health Savings Accounts: The Fundamentals. Retrieved

September 14, 2006, from The George Washington University Web site:

http://www.GWU.edu

Government, U. (n.d.). Fact Sheet: Dramatic Growth of Health Savings Accounts (HSAs).

Retrieved September 9th 2006, from Department of the treasury Web site:

http://http://www.whitehouse.gov/news/releases/2003/12/20031222-1.html

Government, U. (2003, December 8). Public Law 108-173. Retrieved September 14, 2006, from

United States Senate Web site:

http://http://www.senate.gov/general/search/search_cfm.cfm?q=public+law+108-

Kongstvedt, P. R. (2003). Legal Issues in Provider Contracting. In Essentials of Managed Health

Care (4th ed., p. 719). Sudsbury Massachusetts: Jones.

Milton, M. (2006, August 25). Dominant Role of Health Care in GDP to Grow Even Larger.

Retrieved September 18, 2006, from Health Care Policy Roundtable Web site:

http://www.hcpr.ort/news/news_story.asp?ID=2689

Moorty, N., & Jani, S. (2006). 16% of GDP, The Healthcare Industry is Still Growing. The

Monroe Street Journal, 1(12). Retrieved September 18, 2006, from

http://www.themsj.com/home/index.cfm?

event=displayarticleprinterfriendly&uStory_id=8519d9...

Eastman, A. D. (2004, winter). Health Saving Accounts: Beneficial Reform or Tax Break for the

Wealthy? Journal of Insurance Regulation, 23(2), 67(24). Retrieved from

http://library.troy.edu:2055/pqdweb?

index=54&sid=2&srchmode=1&inst=PROD&fmt=4&startp...
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Whitehouse. (2006, April 5). Fact Sheet: Health Savings Accounts: Myth Vs. Fact. White House

Press Releases, 1. Retrieved September 18, 2006, from

http://library.troy.edu:2115/universe/document?

_m=6afaa275cdd558369d318a6be33ca6f3&_docn...

Utz, J. L. (2006, fall). Health Savings Accounts. Journal of Pension Planning and Compliance,

32(3), 38. Retrieved from http://library.troy.edu:2055/pqdweb?

index=0&sid=1&srchmode=1&inst=PROD7fmt=3&startpa...

Opiela, N. (2005). Health Savings Accounts: Financial Elixir? Journal of Financial Planning,

18(6), 38. Retrieved September 18, 2006, from http://library.troy.edu:2055/pqdweb?

index=27&sid=4&srchmode=1&inst=PROD&fmt=4&startp...

Wikipedia. (2006, September 14). Health Insurance. Retrieved September 14, 2006, from

Wikipedia Foundation, Inc. Web site: http://en.wikipedia.org/wiki/Health_insurance