Story at-a-glance
- HSAs pair with high-deductible health plans (HDHPs) to offer lower premiums and tax-advantaged savings for medical expenses.
- Contributions are tax-deductible, grow tax-deferred, and can be withdrawn tax-free for qualified medical expenses—even premiums.
- Unused funds roll over yearly, giving individuals long-term control over their health care dollars.
- Employers save on premiums while still offering competitive benefits, and employees gain flexibility and ownership over their care.
- By shifting decision-making to consumers, HSAs encourage cost-conscious choices and could help drive market-driven reductions in health care spending.
As the uncertainty of the economy and health care reform regulations washes over the business community, many are considering dropping their health care plans due to the increased cost. Some employers, however, are proactively searching for alternatives and are finding a very effective one with Health Savings Accounts (HSA). HSAs are a health plan alternative that provides individuals with a much more “consumer- oriented” approach to dictating how much they spend on health care thus lowering their overall health care expenditures. With the responsibility for determining which health care providers and services to use shifted to the individual, HSAs may very well be the secret to reducing health care costs for both employers and individuals.
What exactly is an HSA?
An HSA is an account, much like an IRA, which allows for tax deductible contributions. The funds are also allowed to accumulate on a tax deferred basis. Annual contributions of up to $2,600 may be made by individuals ($5,150 for families). The funds from an HSA can be used to pay for all eligible medical expenses including health insurance premiums. Unused HSA funds can be rolled over into the next year.
In order to qualify as an HSA under the tax code, it must be combined with a high deductible health insurance plan (HDHP) which, typically, carries a high deductible upwards of $5,000. Because of the high deductible, HDHP premiums are usually very low. The deductible expense can be paid from HSA funds as well.
HSAs established through employers are eligible to receive employer contributions. If an employee leaves an employer, the HSA can be go with him and used to cover medical expenses with or without an HDHP. If the funds are used for anything other than medical expenses, the withdrawals may be subject to a 10% IRS penalty.
Reducing Health Care Costs with HSAs
Most employers want to be able to provide a substantial health care benefit for their employees. They must do so to be competitive when attracting quality employees. HSAs are not only a viable alternative, they can serve to keep employer and individual health care costs down, they can empower individuals in the health care marketplace. With individuals being more conscious of costs – the less they can pay for health care, the more they can stretch their HSA funds – the more they can influence health care costs in the marketplace through competition. Also, they will be much more discerning with their use of medical services which is key to reducing health care costs.
People want more transparency in the health care industry, and, with rising health care costs forcing more and more people out of individual or employer-provided coverage, they are becoming more cost-conscious. Many experts believe that the main obstacle to reducing health care costs lies in the fact that consumers are too far removed from the actual costs because they’ve been paid by insurers. If consumers were more involved in the pricing of medical services, a market-driven supply/demand dynamic could put downward pressure on health care costs. This dynamic seems to work in every other industry. Maybe it’s time to let it work in the health care industry.
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