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Health savings accounts after the 2004 election

by Tony Novak, CPA, MBA, MT
, revised 11/21/11

With the presidential election now behind us it might be possible to write about Health Savings Accounts without the spin that made us dizzy and confused over the past several months.

 Much of what we read about HSAs in the last half of the election campaign was so confusing – even downright silly – that the publication date of this press release was delayed until November 3 into what we hope is a more logical and discerning public ear. There are still at least seven major issues nagging Health Savings Accounts as we know them today:

1) Part of the three-pronged approach

President Bush promoted health savings accounts during his campaign as part of the administration’s three-pronged approach (or four-pronged approach, depending on which stump speech you heard) to reform the U.S. health care system. In theory it sounds great. Critics argue that all of the prongs are equally unrealistic and unattainable but the administration’s position remains undeterred. Does this mean that we will see more legislation in the near future to expand and promote Health Savings Accounts? More information on this topic will surely follow in coming weeks. For now, it is clear to say that Health Savings Accounts are no more than a drop in the bucket of possible solutions to our national health care crisis.

2) A tax shelter for the rich

Prominent Democrats including Wisconsin Governor Jim Doyle are calling health savings a “tax shelter for the rich”. A few years ago Business Week magazine called medical savings accounts “almost too good to be true” referring to the surprisingly generous tax advantages. (Medical Savings Accounts were the predecessor to Health Savings Accounts). While it is certainly true that the early adapters of health savings accounts have been well informed and generally more affluent crowd, the promotion to the masses has not even begun. It may simply be too early to issue a mass condemnation of the strategy.

3) The health savings plan you can’t get

The Wall Street Journal (11/3/04) article headline about health savings accounts “The health Savings Plan You Can’t Get: Why Employers Are Slow to Try HSAs”. The fact is that the vast majority of Americans do not qualify for a health savings account. The reasons are not discussed in this article but are available in detail in several other articles on the author’s Web site at www.TonyNovak.com.

4) Still too expensive

Freedom Benefits Association has handled thousands of inquiries for health savings accounts this year. Most of these inquiries came from people who were looking for lower cost alternatives to traditional health plans and then abandoned the quest for a Health Savings Account when they saw the cost of the underlying insurance. The basic problem is this: if you cannot afford and old-style traditional health plan then you are not likely to be in a position to consider a health savings account plan either. Health Savings Accounts do save money and improve the health care system over the long term, but they don’t make health care suddenly affordable to people who cannot afford it now. If lowering cost immediately is the highest priority, health savings accounts are usually not the best option. Plans with limited coverage like “Core Health Insurance” at www.corehealthinsurance.net and short term medical coverage like those at Freedom Benefits offer much greater cost savings than Health Savings Accounts.

5) Wrestling for legal control

State laws govern health insurance. Federal law governs income taxes. The success of health savings accounts requires a coordination of state and federal law. This just is not happening in yet in many states. Federal law of promoting cheap high deductible insurance is in direct opposition to the underlying intent of most state health insurance laws that have focused on adding mandatory coverage to health insurance. This underlying philosophical battle may need to be resolved before HSAs really catch on. It might even be feasible to have federal law pre-empt state insurance laws where Health Savings Accounts are at issue, copying the legal approach used to control the legal disparities in pension plans.

6) Quiet disinterest

Banks and financial institutions are smart enough to realize that they can’t make any money offering health savings accounts to their customers. There just are not enough HSA accounts and the average account balance is too low (something less than $1000) as compared with IRAs and other financial products. The market is already saturated by the handful of firms competing to offer independent health savings accounts. This is not likely to change much, even over the next few years. Data gathered by firms like Fortis and Golden Rule from their participation in the medical savings account pilot program from 1996 through 2003 gave some disheartening information to other financial companies who were considering jumping into the HSA market. The clearest message was that there is little money to be made competing to offer no-fee, no-load health savings accounts. Some independent financial firms that charge fees for HSA accounts are already facing customer resistance. One prominent Health Savings Account administrator made significant changes last month to cut costs and hopefully improve marketability of their HSA products. As a result, most financial firms are in no rush to offer health savings accounts.

Likewise, the nation’s largest managed care health insurance companies recognize that Health Savings Accounts are in direct philosophical conflict with their own business model for controlling health care costs. You can not have a patient control all of their health care under $5,000 through the HSA, for example, and then suddenly step in and apply a managed care approach to the catastrophic charges above $5,000. It just will not work from a practical perspective. Managed care companies argue that their own internal cost controls are more effective than those built into today’s health savings account plans. This argument will remain valid until an effective method of integrating the two approaches is available – but do not expect this type of wholehearted co-operation anytime soon, according to some industry sources. Since these types of managed care health plans provide care for the majority of Americans, change might be slower than we would like to think.

7) Treasury procedures

To our knowledge, the Internal Revenue Service has still not determined how to verify eligibility for Health Savings Account deductions. The available audit procedure information points to the possibility of ugly surprises for taxpayers who honestly believed they had their HSA plan in order. (See the tax section of the Frequently Asked Questions at www.healthsavingsaccount-hsa.com for more information on tax treatment and potential problems).

Health Savings Accounts are a great concept and really produce great benefits for the few who have them, but HSA accounts as we know them today are far from a significant part of the solution to our national health care crisis.

Status: obsolete but still accurate; may be of historical interest

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