Risks and Benefits: Health on Account

Health-savings accounts, yoked to high-deductible insurance policies, are being touted as the next big thing in cost containment. But employees might think twice before taking on so much financial risk when it comes to their health care.

If employees pay substantiallly for their care, goes the theory, they’ll spend less than if they’re using the insurers’ or employers’ dollars. In turn, says Perrin, doctors will start to offer discounts — and ultimately post their prices — in order to compete for business. What’s more, providers would happily charge less in exchange for the luxury of not scurrying after insurance companies for payment. In the future — under pressure from HSA-wielding patients — increasing numbers of doctors will convert to what he calls a “plumber model” of billing: “I fixed your sink; please pay me.”

Still, how much the new plans take hold — not to mention their effect on the future of health care — is at best unclear. One barrier is that they’re a tough sell, particular for employers offering a range of other options. After all, an employer is asking employees to switch to coverage that includes a deductible of at least a $1,000 for individual coverage or $2,000 for a family; the cap on an employee’s yearly out-of-pocket expenses, including co-payments and deductibles, would be $5,000 for an individual and $10,000 for a family. And those amounts are indexed for inflation.

But the blow of having to pay out so much can be softened considerably — or completely — by contributions to an HSA. In 2005, an employer or an employee, or both, can contribute up to $2,650 for individual coverage or $5,250 for family coverage in an account, or the amount of the deductible if that figure is lower.

There are also alluring tax advantages. Employer contributions to the accounts, which can be used to pay for current and future medical outlays, don’t count toward employees’ taxable income; employee contributions can reduce that taxable income.

Indeed, for healthy employees it’s an appealing prospect to have extra, pre-tax cash on hand in an HSA to make tax-free payments for such things as long-term-care insurance or over-the-counter drugs. But a high-deductible plan can leave sizable bills for even the most robust person to pay. Perrin acknowledges that employees can take on a big risk in the early stages of a plan.

Even an employer that provides hefty HSA funding tends to do so in equal increments over the course of a year. If an employee had a $5,000 deductible, for example, and even in the unusual case in which her employer fully funded that deductible over the course of a year, the employee would have only about $417 in the account in the first month. If the employee suffered an accident and needed to spend many days in the hospital, for example, her part of the charges could be as much $4,583.

That’s a hefty exposure, even for employees who are comfortable taking on a little risk. To mitigate some of the peril — and to help sell the plan to workers who are more risk-averse — Perrin recommends that employers attach a hospital indemnity rider to the HDHP. In a typical arrangement, the rider adds 15 months of hospital coverage to the policy.

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