As millions of working Americans open their employer’s health care packets this month, many will be encountering a new option: high-deductible plans linked to health savings accounts that come loaded with tax benefits.
They’re attracting workers who want lower premiums and a tax-free way to save for retirement. But they’re not for everyone, which is why some consumer groups are alarmed by their growing presence in the health care market.
In the past six years, the number of workers covered by these health savings account plans has quadrupled, from 5 percent in 2007 to 20 percent this year, according to a 2013 Kaiser Family Foundation survey.
“More companies are offering them as a choice, and in some cases, they’re the only choice,” said Paul Fronstin, director of health research and education for the Employee Benefit Research Institute in Washington, D.C.
Experts say the reason is simple: Employers are trying to cut expenses after years of inflating health care costs that only recently started to ease. And some are motivated by a looming “Cadillac tax” under the federal Affordable Care Act, which in 2018 will start penalizing companies offering health plans that are considered too generous.
In return for lower premiums, consumers who sign up for these plans agree to pay much more out of their own pockets before their insurance coverage kicks in. In 2014, the minimum deductible for a qualifying HSA plan is $1,250 for an individual, and $2,500 for a family. Maximum out-of-pocket costs are $6,350 for a single person and $12,700 for a family.
Other than high deductibles, the most notable feature of the new plans are the so-called health savings accounts, or HSAs, which were authorized by Congress in 2003 as part of a massive Medicare overhaul. Similar to a 401(k), the HSA is a take-it-with-you, tax-free savings account that’s used to cover your out-of-pocket medical expenses. To make HSAs especially appealing, the plans offer multiple tax advantages for contributions and withdrawals. The money can even be rolled over for retirement.
“There’s clearly an incentive on the part of employers to offer these,” said Maribeth Shannon, program director with the California Healthcare Foundation. “Some of it’s financial. Some of it’s philosophical. There are a lot of employers who feel employees should have a little skin in the game, a little more responsibility for the health care costs they consume.”
It’s part of sweeping trend toward “consumer-driven” health care, an approach that government and employers are embracing as a way to tamp down health care costs by encouraging individuals to be more in control of their health care behaviors and choices.
Some companies, for instance, are instituting new wellness programs with beefed-up rewards or even penalties based on whether employees do or don’t quit smoking, lose weight or lower their cholesterol. Kaiser Permanente recently announced a wellness program that will pay its workers up to $500 apiece if a majority of employees meet certain health goals. Others, like grocery chain Kroger, pay only a set amount for certain drugs or procedures, encouraging employees to shop around for the best price.
The growth of HSAs has prompted concern among some consumer advocates who worry such plans will cause people to forgo needed medical care because they can’t afford the high deductibles.
“We’ve actively opposed them and regret they’re in federal law,” said Beth Capell, a lobbyist for Health Access, a consumer advocacy group based in Sacramento, Calif.
Capell and other critics say HSAs are financially risky for low-income consumers and are primarily beneficial for healthy, wealthier people.
“They work best for those who need health care the least or those with higher incomes,” said Capell. “They work less well if you’re sick and if you’re poor. If you make $25,000 a year and your out-of-pocket limit is $6,000, that’s a lot of money to pay in cash. If something bad happens, do you have the money in the bank to pay for your health care?”
In a 2006 study, the Kaiser Family Foundation said that many low-income families would not benefit from HSAs, primarily because they wouldn’t be able to utilize the tax benefits and couldn’t absorb the higher out-of-pocket costs. Earlier this month, a study released in the New England Journal of Medicine found a “startling” lack of research on how high-deductible health plans affect health outcomes, such as diabetes control, cancer survival, heart conditions and mortality.
“The shift toward (these plans) increases the urgency of determining the benefits and unintended consequences of high cost sharing,” the authors concluded.
Others say high-deductible health plans, when combined with HSAs, offer a viable way for employers to hold down health care costs by giving consumers an incentive to use health care services judiciously.
One employer “very seriously” contemplating a high-deductible HSA plan for its employees is the Sacramento Metro Chamber, which has a staff of 25. “As an employer, it’s a way of providing health benefits that gives the employee more flexibility and control over costs … and doesn’t cost the employer any extra money,” said Roger Niello, chamber president and CEO. He’s considering adding a high-deductible plan as another choice for his staff, along with traditional health plans offered through Kaiser and Western Health Advantage.
Under a high-deductible plan, both employees and employers pay somewhat lower premiums, according to a recent Kaiser Family Foundation study. In 2013, it said, the average annual premium for an individual under a high-deductible plan was $887, compared with $1,081 through an HMO. The company’s share of the premium was $4,419 for the high-deductible plan, compared with $4,948 for the HMO.
Both employee and employer can deposit money into a health savings account, but neither is required to do so.
Not all workers looking at HSAs are convinced they are worth it. “It’s good because it’s tax-deferred, but I don’t much care for the idea,” said Elizabeth Martinez, 50, a patient coordinator for hospital surgery services at the University of California-Davis medical campus in Sacramento. “I don’t want to keep track of all those receipts (for medical bills),” she said, noting that her current Kaiser plan makes paying for medical care simple.
“It’s absolutely a sea change in how consumers see their health care,” said Shannon, of the California Healthcare Foundation. For employees accustomed to HMO-type plans, “There’s still a little employee backlash because it does put more of the burden on employees. They’re not used to getting bills or thinking about price shopping.”
The carrot, though, is a savings account with considerable tax advantages.
“From a tax perspective, it’s the best thing out there for retirement savings. It’s the only triple-tax retirement vehicle available,” said Fronstin of the Employee Benefit Research Institute, noting that contributions are 100 percent tax deductible, the accounts grow tax-free, and any withdrawals, when used for medical expenses, are not taxed. (In retirement, the funds can be withdrawn tax-free if used for medical expenses; they’re treated as regular, taxable income if not used for health care.)
So who is best suited for a high-deductible HSA plan?
Generally, it’s individuals or families who do not make frequent doctor’s visits, have no chronic illnesses, and are looking to set aside additional dollars in tax savings.
“For someone looking to get that additional tax write-off, it’s a really good option. That money continues to build,” said Carrie McLean, consumer specialist with eHealthInsurance.com in Burlingame, Calif.
HEALTH SAVINGS ACCOUNTS AT A GLANCE:
—What is an HSA? It’s a tax-free health savings account that’s paired with a high-deductible, low-premium health plan. All money fed into an HSA — whether your own contributions or from your employer — can be used to pay for most medical expenses, from doctor’s visits to prescription drugs to dental and vision care.
—How they work: By law, you can’t have an HSA without being enrolled in a high-deductible health plan. Consumers set up their HSAs at a financial institution, either on their own or through their employer. Funds are withdrawn from an HSA debit card or checks. As part of a company’s health care benefits package, some employers contribute to employee accounts.
—Advantages: Lower monthly premiums. Unlike a flexible spending account, which is a use-it-or-lose-it account, HSA accounts roll over from year to year. HSAs are “portable,” meaning you can take them with you when you leave a job or retire.
—Risks: The higher deductible means consumers must pay more out of pocket for regular medical expenses before insurance coverage kicks in. If funds are withdrawn for non-medical expenses before age 65, there’s a 20percent tax penalty. After age 65, non-medical withdrawals are treated as regular taxable income.
—Tax benefits: Under IRS rules, HSAs offer triple benefits. Every dollar contributed goes in, grows and is withdrawn tax-free, as long as the money is used for qualified medical expenses.
—Annual contributions : In 2013, singles can contribute up to $3,250 tax-free to an HSA; for families, up to $6,450. Those over age 55 can make an extra $1,000 catch-up contribution.
—Annual deductibles: In 2013 , the minimum is $1,250 for individuals or $2,500 for families, but can go up to $10,000 in some cases.
—Annual out-of-pocket caps: In 2013, the amount you pay before insurance kicks in is $6,250 for individuals or $12,500 for a family.
Source: MCT Information Services