Obamacare, Health Savings Accounts and Your Bank Balance
The Affordable Care Act has revealed a possible second career for financial planner David Marotta: screed writer.
Several of the Charlottesville, Virginia, planner's clients have seen premium increases of more than 60 percent for insurance policies linked to their health savings accounts (HSA) since the health-care law passed in 2010. Even Marotta's 25-year-old son, who will get his own HSA-linked policy when he turns 26, has seen the $50-a-month premium for a high-deductible policy he was considering jump to $150 on the new health-care exchanges. Hence his father's new sideline -- actually, just a series of passionate blog posts -- writing about the evils of Obamacare. While subsidies and other changes brought about by Obamacare are seen as a blessing by some with HSAs, to Marotta, 53, they're a curse.
Either way, it's vital to understand the ramifications of these much-misunderstood savings accounts. Some 15.5 million Americans are covered by HSA-eligible insurance plans, an increase of 50 percent since Obamacare passed, according to the trade group America’s Health Insurance Plans (AHIP). Because insurance is already so expensive and HSA-linked policies tend to have the lowest premiums, those numbers are expected to grow.
HSAs, created by the George W. Bush administration in December 2003, are investment accounts similar to an IRA or 401(k) in their tax-advantaged status. You or your employer can contribute money on a pre-tax basis, thus reducing your taxable income. Capital gains in the account are sheltered from taxes and withdrawals are tax-free so long as they're used for qualified medical expenses. The only other major difference is that accounts must be paired with a high-deductible health insurance policy to be valid. In 2013, the minimum deductible for a family is $2,500 and the maximum out-of-pocket cost can't exceed $12,500.
Alternative of Choice
John Young, CEO of Consumer Driven LLC, a consulting firm to employers seeking health plans, says HSAs will become the health-care alternative of choice to employers seeking to lower costs, much as 401(k)s became the alternative to defined-benefit pension plans. Some 70 percent of the the people enrolled in HSA plans in 2013 came from large companies, according to AHIP. The idea is to let employees take charge of their own health-care expenses so the company doesn't have to. Young calls it “consumer-driven health care.”
When a company decides that rather than pay $16,000 for a policy, it will pay $12,000 for a high-deductible plan and put $2,000 of the $4,000 savings in an HSA for the employee, everybody wins, says Eric Remjeske, founder of Devenir, a Minneapolis-based investment adviser to the HSA industry.
Obamacare opponents are cynical because of the anecdotal news of premium increases. “Young people like my son are subsidizing the baby boom generation,” Marotta says. It's true that starting in 2014 the law forbids insurers to charge senior citizens more than three times the premium for the same coverage as younger policyholders. To narrow the current 5-to-1 average spread between the highest-premium policies and the lowest, the cost of insuring young healthy people has to go up.
There are other Obamacare drawbacks for HSA users. The penalty for withdrawing assets from accounts for nonmedical purposes has doubled from 10 percent to 20 percent of the amount withdrawn. Also, in the past HSA funds could be used for over-the-counter medicine; now only prescription pharmaceuticals are allowed. “That really hurts,” Marotta says. “You want drugs to be over-the-counter so you don’t have to have a $125 doctor’s visit to get a $10 prescription.”
At the same time that Obamacare taketh away, it giveth. Marotta's son is just now looking to buy his own policy because the new law raised the age children could stay on their parents’ plans from 18 to 26. So instead of having to buy a separate, more costly policy for kids, parents get a cheaper group rate. Marotta's son will be eligible for a government subsidy to help defray the premium costs.
According to the Kaiser Family Foundation, half of all applicants for individual insurance will be eligible for subsidies covering on average of two-thirds of their insurance costs. Since subsidies are based on income and young people tend not to be high earners, they'll be prime candidates. That, plus the wide availability of high-deductible policies on the new health-care exchanges, will encourage HSA plan growth.
There are other areas where the impact of Obamacare on HSAs is open to more debate. The law requires there be no annual or lifetime coverage limits. Previously, HSA plans might top out at $1 million or $2 million in lifetime coverage. Getting rid of those limits drives up premiums as insurers try to price out the additional risk. But since the deductibles are so high for these plans, they have often been marketed as “catastrophic insurance.” To have had to pay a big deductible and then realize you weren't fully covered when catastrophe struck because of a coverage limit was like insult on injury.
The same logic applies to the new requirement that once you get sick your insurer can’t drop your coverage when it’s time for you to renew. That makes sense to those worried about catastrophic risk -- and drives premiums up.
While libertarians stew over rising costs, liberals fret about the lack of sufficient coverage in the policies often paired with HSAs. Wendell Potter, a former Cigna public relations executive and author of Deadly Spin, a health insurance expose, worries about the “401(k)-ization” of health care. His revulsion at having to sell high-deductible plans drove him out of the business, he says. “It was part of my job to persuade people that this trend was good for consumers when it’s really just good for insurers and employers.”
In reality, Potter says, most people don’t have enough additional income or savings to put money into their HSAs to cover their medical costs. He’s heard stories of people showing up at free medical clinics because they can’t afford the deductibles of their HSA-affiliated plans. If those stories are true, it's a victory for no one.
(Lewis Braham is a freelance writer based in Pittsburgh.)