Health Savings Plans Let Firms Shift More Costs to Workers
Businesses are increasing the use of high-deductible health insurance plans paired with savings accounts to shift more costs to American workers.
The number of people using high-deductible health insurance with a savings account option rose to more than 11.4 million as of January, compared with 10 million a year earlier, a 14 percent increase, according to a June report by America’s Health Insurance Plans in Washington. Use of these plans with so-called HSAs, which generally require consumers to pay more out of pocket and let them save for medical expenses in their own accounts, has jumped about 87 percent since 2008, said AHIP, a trade group representing insurers.
The shift in health care is similar to the move by employers to 401(k)-type retirement plans from traditional company-funded pensions, said David Tyrie, head of personal retirement solutions for Bank of America Corp. (BAC)’s brokerage unit. Bank of America, based in Charlotte, North Carolina, administers health-care accounts, including HSAs, for about 600,000 customers.
“What you’re seeing is employers say we’re going to offer a high-deductible plan and allow employees the ability to put money away and make their own choices,” Tyrie said.
Banks and mutual funds firms including JPMorgan Chase & Co. (JPM), Bank of America, Wells Fargo & Co. (WFC) and Fidelity Investments who administer HSAs see the savings accounts as an opportunity because more people may invest funds as balances rise.
More large employers are offering high-deductible plans with HSAs or making that coverage the only choice for workers as a way to control costs and prepare for changes in health-care law, said Helen Darling, president and chief executive officer of the National Business Group on Health in Washington.
Faster Than Inflation
U.S. employers estimate their health-care costs will increase at more than twice the rate of inflation in 2012, or an average of 7.2 percent, according to an August survey by the NBGH, which represents big firms, including 66 of Fortune 100 companies. Employers are attracted to the high-deductible plans because premiums generally are lower and consumers pay more attention to how much care costs, Darling said.
The average annual premium for family coverage through a high-deductible plan and HSA was about $10,248 as of January, AHIP data show. That compares with an average premium for all health plans of $13,770, according to a 2010 study by the Henry J. Kaiser Family Foundation. Employers paid about 70 percent on average of total premiums for family coverage, Kaiser data show.
Companies also want to avoid the so-called Cadillac tax beginning in 2018, Darling said. The Affordable Care Act signed by President Barack Obama in March 2010 applies a 40 percent levy on employer health-care benefits above $10,200 for individuals and $27,500 for families.
Health Savings Accounts are tax-exempt accounts owned by individuals that Congress created in 2003. To contribute, consumers must be enrolled in a high-deductible health plan. This year, that means a minimum annual deductible of $1,200 for single coverage and $2,400 for a family, according to the Internal Revenue Service. The monthly premiums generally are lower than traditional coverage and families generally pay bills, except for some preventive care, up to the deductible before insurance covers treatments.
Cash or Invested
Money deposited in HSAs by individuals or their employers generally isn’t taxed and may be kept in cash or invested. Contributions can be made with pre-tax dollars and are capped at $3,050 for an individual and $6,150 for families in 2011, according to IRS rules. Funds in HSAs may be rolled over from year to year and accounts are portable if workers change jobs.
Earnings and withdrawals are tax-free if used for qualified medical expenses, otherwise there’s a 20 percent penalty. A provision in the health-care overhaul law passed in 2010 now requires that consumers have a prescription when purchasing over-the-counter drugs with money from an HSA.
After age 65 or becoming disabled, account holders may take money out of their HSAs for non-medical reasons without a penalty and pay ordinary income tax on withdrawals.
Consumers who choose high-deductible insurance and an HSA should be aware that if they need treatment, the bills before meeting the deductible “can really hit you hard,” said Mila Kofman, a research professor at Georgetown University and former superintendent of insurance in Maine.
Another concern is account fees. “There are all sorts of hidden fees, and not so hidden, that you need to be aware of,” Kofman said. “All the fees add up, which may neutralize any tax advantage.”
Elda Di Re, 49, who leads the personal financial services practice for Ernst & Young in New York, said she opted for the first time this year to use a high-deductible plan with an HSA for her family’s coverage. She’s saving more than $300 a month on premiums compared with the traditional plan, gets a tax deduction for money deposited in the HSA, and funds in the account can be invested and increase tax free, Di Re said.
“I think of it like a retirement savings account,” she said. “I like this ability to grow this side fund for future medical expenses.”
Almost three quarters of companies surveyed by NBGH plan to offer an HSA-type plan next year, compared with 61 percent this year, and 17 percent will make it the only coverage available in 2012, the report said.
“We’re doing what we can to encourage them all to move to high-deductible plans,” said Kathy Johnson, senior director of employee benefits at RSM McGladrey, a tax and financial services consulting firm with 6,800 employees nationwide.
McGladrey offers employees two types of high-deductible health insurance plans with HSAs. About 54 percent of workers enrolled in the company’s health benefits have opted for the cheaper monthly premiums, Johnson said. The highest deductible is $5,400 for a family and the company will match up to $1,800 in contributions to HSAs through that plan in 2012, Johnson said.
While most HSA account holders keep their savings in cash, the number of people investing will increase as balances rise, said Will Applegate, vice president of HSA business development at Fidelity. About 15 percent of accounts with more than $2,500 at Fidelity have invested in mutual funds or bought stock, said Applegate. The Boston-based mutual-fund firm administers about 80,000 HSA accounts and generally requires participants to have at least $2,500 to invest, he said.
Wells Fargo has leveraged its 401(k) division to design investment options for its HSAs, which have increased more than 300 percent in the past five years, said Elizabeth Ryan, head of Wells Fargo’s health benefit services. The San Francisco-based bank manages more than $600 million in HSA assets and serves 10,000 employers.
“This product has had tremendous growth,” Ryan said. “We plan to again double our assets over the next three years.”
New York-based JPMorgan, which has $1.1 billion in HSA assets, has seen average balances increase 7 percent to $1,494 as of December, compared with a year earlier, said Craig Vaream, managing director of J.P. Morgan Treasury Services division. The average balance of account holders who invest was $7,374, Vaream said.
UnitedHealth Group Inc. (UNH), an insurer, is also administrating HSAs. OptumHealth Bank, a UnitedHealth unit, administers health savings accounts that are coupled with high-deductible insurance plans sold by UnitedHealthcare, said Todd Berkley, the HSA business leader for OptumHealth.
Banks and insurers administering HSAs may charge fees for account maintenance, debit-card withdrawals and inactivity, which consumers should be aware of, said Kofman of Georgetown. Bank of America, for example, charges a $4.50 monthly fee and OptumHealth takes $1.50 for each withdrawal from an automated teller machine. At Wells Fargo, monthly service fees vary and employers often pay them on behalf of their employees, said Ryan.
Kathleen Stoll, director of health policy for the nonprofit consumer advocacy group Families USA, said she’s concerned that as employers shift costs, workers may delay getting care because they’ll have to pay more before insurance kicks in. That may cause an illness, such as a child’s ear infection, to become more severe and more costly to treat, Stoll said.
“In the end, we all grow older and sick and we may find we’ve shot ourselves in the foot,” with this shift to high deductibles and savings accounts, Stoll said.
Paul Fronstin, director of the health research program at the Employee Benefit Research Institute in Washington, expects employers will continue to phase-in high-deductible plans with HSAs as they did with 401(k) accounts.
“The number of employers offering them has nowhere to go but up,” he said.