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HSA's Are the Right Medicine at the Right Time

By Sally Pipes

President Bush has put reforming health care at the center of his domestic agenda. Unlike previous presidents, he’s prescribing policies, such as Health Savings Accounts, that rely on freeing up individuals and markets, expanding tax savings, and providing more health care options, rather than expanding government.

Health Saving Accounts, first allowed in 2004, combine high deductible medical insurance with a side fund that provides a tax deduction for contributions, tax-deferred investment growth, and tax free ultimate dispersal, provided funds are spent on qualified medical expenses. In 2006, an individual is responsible for the first $1,050 to $2,700 of expenditures ($2,100 to $5,450 for families). Routine care is paid for out of pocket, albeit in a tax advantaged way.

Just as car and homeowners insurance doesn’t pay for maintenance and minor repairs, health insurance kicks in only when true catastrophe strikes. Once a deductible is met, however, a generous insurance package, often 100 percent of covered expenses, takes over the burden. Money that isn’t spent in one year rolls over into the next, earning compound interest.

In short, Health Savings Accounts put the insurance back into health insurance, provide Americans with a triple tax free means to save for future expenses, and deliver a strong incentive to economize on the use of health care.

Like any change to the status quo, HSAs have powerful and vocal enemies. Liberal activists groups, policy analysts, and members of the media are attacking HSAs, claiming that only young, healthy, and well heeled Americans will find the innovative arrangements attractive. “You’re giving them peanuts,” gripes Columbia University professor Sherry Glied who authored an anti-HSA study for the Commonwealth Fund. “Very few people will gain insurance coverage because of tax preferences for health savings accounts.”

The evidence so far contradicts the critics. Health Savings Accounts have proven popular with both individuals and employers. Although a significant change from traditional medical insurance, more than three million Americans are now covered by HSAs.

HSAs are expanding health insurance. According to a study by America’s Health Insurance Plans, an industry organization for health insurers, among small businesses, 27 percent of companies purchasing policies previously offered no health insurance. The same study found that 37 percent of individuals purchasing HSAs were previously uninsured. By allowing people to retain and roll over money not spent on health care, HSAs transform health coverage from a use it or lose it insurance option into a wealth accumulation vehicle, similar to 401k retirement plans.

A wide range of Americans find HSAs attractive. Far from being only for the wealthy, one in two new purchasers in the individual market earn less than $50,000 each year, according to a study by eHealthInsurance, an online brokerage serving the individual market.

And it hasn’t just been the young. Old dogs, it seems can learn new tricks. The eHealthInsurance study found that 45 percent of purchasers were over 40, with 19 percent age 50 or older. A study by Assurant Health, which serves small businesses, individuals, and families, found that 73 percent of its HSA customers were families with children and that 57 percent contained individuals over the age of 40.

HSAs show that economic incentives matter. The consulting firm McKinsey surveyed employees who had HSA-style accounts for an entire year. The good news: employees were more attentive to their health, being 30 percent more likely to get an annual physical and 25 percent more likely to engage in healthy behaviors, and 20 percent more likely to comply with treatment programs recommended by doctors than their colleagues in traditional health plans.

The bad news: Only 44 percent of study respondents were more satisfied with their new plans than their former plans. A major source of dissatisfaction is the lack of information on price and quality differences among providers. Eight in ten respondents reported not having enough information on fees doctors charge.

Although disappointing, the satisfaction numbers are hardly surprising, given that most of the U.S. health care infrastructure is designed to shield patients from ever knowing the true costs of care. As thousands more Americans elect HSAs, health care providers will surely produce consumer oriented information. Aetna, for example, recently made available the prices its members will pay specific doctors for their 25 most commonly performed procedures on its website.

Health Savings Accounts are not a cure all pill for all that ails health care in America. But they are the right medicine at the right time.

Pipes is president and CEO of the Pacific Research Institute and author of "Miracle Cure: How to Solve America's Health Care Crisis and Why Canada Isn't the Answer." E-mail: spipes@pacificresearch.org.

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