HSAs: An Affordable New Option for Businesses

A survey by America's Health Insurance Plans found that 27 percent of small businesses that have purchased HSA-qualifying insurance didn't previously offer insurance to their employees. Other studies show that many other businesses would have dropped their health insurance if it weren't for HSAs.

Health Savings Accounts were first made available in 2004 after Congress enacted a new law that allows individuals and companies to put a limited amount of money aside tax free to pay for routine health care expenses. What the account holder doesn't spend in one year rolls over to the next, and the earnings also grow tax free.

But the accounts are only available to those who purchase a health insurance policy with a relatively high annual deductible -- at least $1,050 for individuals and $2,100 for families in 2006. The insurance policies also can cover preventive care, including screenings and medicines, so these costs don't have to come out of the HSA.

These higher deductible policies generally are less expensive than traditional insurance and are a big reason that individuals and companies are finding this new arrangement attractive.

The real point of HSAs is to offer people a new incentive -- a tax-free carrot -- so they will purchase health insurance. Consumers can purchase health insurance that protects them against major medical expenses, and, if they choose, can put the savings from the lower premiums into their HSA for routine health expenses.

And it appears to be working: About three million people have purchased HSA-qualifying health insurance, and early studies showed about one-third of the individuals were previously uninsured.

Critics fear that HSAs will appeal only to the young, the healthy, and wealthy, but that doesn't appear to be the case. Forty percent of HSA purchasers make less than $50,000 a year, about half are over age 40, and the biggest share of purchasers are middle-aged families with children.

Blue Cross Blue Shield found that those with HSAs follow the same bell curve in age and health status as those with traditional coverage: As many HSA-holders are young and healthy in both types of plans as are older and sicker. Early evidence also shows that HSA-users are more likely to use preventive services and to comply with medical treatments.

And HSAs are helping to solve one of the biggest problems in the health sector: high costs. One survey by Deloitte's Center for Health Solutions found that the cost of consumer-directed health plans increased by only 2.8 percent last year among the 152 major companies it surveyed.

Unless more people and businesses find ways to cut health costs, there will be a further deterioration in the number of people with health coverage. But HSAs and their accompanying higher deductible health coverage can keep individuals and small businesses in the game.

It's clear this is a new option for people who had been shut out of the system. By attracting more people to get insurance, HSAs can help to stabilize, not destabilize, our health insurance system.

Some say that consumer-directed health care shifts more of the cost burden onto consumers. In fact, it makes the costs that consumers already are paying indirectly, through taxes or lower pay, more visible.

Consumers are demanding more control over their health care choices, and they can find a wealth of medical information over the Internet that once was available only to professionals. But they still need better and more easily accessible information about prices, quality, and outcomes to help make them smarter consumers. That will only come when more consumers have a financial incentive to demand that information.

Companies that have instituted Health Savings Accounts have found that they were most successful if they also implemented an active communications program with their employees to educate them about HSAs.

For example, employees need to know that most health insurance companies give account holders access to the discounts the companies have negotiated with providers, both when they are using their HSA for routine expenses and after they move into insurance coverage after they have reached the deductible.

HSAs are not a silver bullet, but they are one tool in giving individuals and companies a new, more affordable option to keep their health insurance coverage.

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Grace-Marie Turner is president of the Galen Institute, a non-profit research organization in Alexandria, VA, that focuses on free-market ideas for health reform. Grace-Marie serves on the Medicaid Commission, the HHS national advisory board on Health Care Research and Quality, and is a nationally recognized expert on consumer-directed health care. She can be reached at galen@galen.org or P.O. Box 19080, Alexandria, VA 22320.