Are health savings accounts an answer to higher costs?

Herve Riel, a Manchester accountant, found out his health insurance premiums were about to rise some 35 percent, to nearly $1,000 a month. No surprises there. Since he is in his 60s, and is in the smallest group possible (one), traditional insurers consider him at high risk, even though he usually only sees his doctor at his annual physical.

But when the state switched to a traditional insurance rating system, Riel got walloped when the new rates went into effect.

But Riel didn’t get angry at the change in the insurance system, which came about with the passage last year of Senate Bill 110. He walked away from it and is one of the first small businesses to sign up for a new health-insurance product — a high-deductible policy with a tax-exempt health savings account, or HSA.

Riel is covered by John Alden, a newcomer to the New Hampshire health-insurance market, but the two biggest health insurers in the state are planning to introduce their own versions of an HSA soon — Anthem sometime this year, and Cigna by 2005.

HSAs are one of the few things that health-care providers and independent insurance agents seem to agree on.

“Small business is going to love them,” said Thomas Murtagh, general manager of Atlantic Plans, an independent insurance agency in Milton.

“They are fabulous,” echoed Dr. Georgia Tuttle, a dermatologist in Lebanon and the New Hampshire delegate to the American Medical Association. “They allow more patient choice, and it is our belief that most people will make the right choice. It is wonderful to finally empower the patients.”

The question is whether such policies win over the real decision-makers when it comes to health insurance: small-business owners and human resources managers, and whether they are the solution to skyrocketing rate increases in the wake of the return of traditional underwriting to the state — or will they mostly help healthy individuals who need coverage least?

“They are an important new tool,” said the state’s deputy insurance commissioner, Alex Feldvebel. “But I don’t think you’ll hear anyone saying this is the complete and final answer to affordable health coverage.”

‘It’s my money’

HSAs do seem be an answer for Riel.

Riel may be on the hook to pay as much as $5,000 in out-of-pocket health expenses, but considering his premiums are a third of the $10,000-a-year he would have paid, he would even make out in the worst case scenario, saving more than $1,000 a year.

“I don’t see any down side,” said Riel.

If he doesn’t use that $5,000 it will stay in his HSA, which is similar to an IRA for medical expenses. The money could be invested in a savings account or a no-load mutual fund, though of course, that could put the principal at risk. Contributions are tax-free, as are earnings. Withdrawals are not taxed either, as long as it is spent on medical expenses – as defined by the IRS, not the insurance companies. (Non-medical spending also draws a 10 percent penalty.)

Medical expenses may include experimental treatments, alternative medicine, prescription drugs, eyeglasses, transportation to the doctor, even premiums for disability insurance.

The account also can follow Riel. If his company goes out of business, or if he takes a job elsewhere, he could roll it over to an individual HSA, or to an HSA from his new employer. If he should lose that job, the HSA could be used for COBRA premiums. It could be cashed out for retirement as well, though those payouts would be taxable (but not subject to a penalty.) And if Riel dies, the funds would go to a beneficiary.

“It’s my money, and I would much rather be paying it into my own account that I can use as necessary, rather than to insurance premiums that I may never take advantage of,” he said.

But HSAs aren’t for everyone.

For one, Riel can only contribute to an HSA if it is attached to a high-deductible policy. The federal law requires a minimum of $1,000 deductible for an individual and a maximum of $5,000 of out-of-pocket expenses. But many businesses, especially larger businesses, are hesitant to offer such a policy.

“The initial reaction is pretty cool,” said Mary Huttlinger, manager of tax and benefits policy for the Society for Human Resource Managers in Washington, D.C.

First, the law, passed last year as part of the federal Medicare reforms, is so new that many of the rules have not yet been formulated.

Second, many larger businesses are somewhat paternalistic when it comes to their employees, Huttlinger said, “and this is a huge switch. Employers have had such a responsibility, and the question is: Are employees ready to manager health care, to be the consumers? No one has the answer.”

Better than MSAs?

Andy Dillman, vice president of the Sadler Insurance Agency in Nashua, is a strong proponent of HSAs, but he also has seen the same resistance. He remembers at a meeting last year of human resources managers that such policies were “very poorly received. HR mangers don’t like the high deductibles. Everyone hates them.”

And while HSAs are new, the concept behind them isn’t. The federal government had instituted medical savings accounts, or MSAs, but such plans were more restrictive, and very few businesses took advantage of them.

MSAs could only be offered to small businesses, but an HSA can be offered by any business, no matter the size. Both an employer and an employee can contribute to an HSA, while in an MSA it has to be one or the other. MSAs can only be used for medical bills, while an HSA can be used for all sorts of things, with more liberal withdrawal and rollover options. Finally HSA are permanent and portable, whereas MSAs were a limited-term program

HSAs may gain acceptance because they resemble the pre-tax cafeteria plan that many companies already offer, an offer that employees often decline. The problem with such plans has been the “use it or lose it” rule. Under a cafeteria plan, if you expected to spend $1,000 in health-care expenses and you end up spending $200, you can kiss that money good-bye. With an HSA, you can take it with you.

Even if HSAs do gain acceptance among small businesses, they may be right for only healthy and perhaps wealthy individuals. Thus far, HSAs have had more success when marketed to individuals, particularly in New Hampshire, said Scott Krienke, vice president of Assurant Health (formally Fortis Health), of which John Alden is a subsidiary.

Alden, which has sold some 10,000 policies nationwide since the new HSA law went into affect, has no figures from New Hampshire as yet.

Krienke said the premium breaks are much higher on the individual side, because insurers like Alden don’t have to take every individual, lowering the prices dramatically for healthy individuals by 50 to 70 percent.

“The group side is not as strong,” said Alden. There the premium reductions are 20 to 50 percent. And if the business picks up some of the cost, those savings seem even less dramatic, perhaps not enough to give up the security of first-dollar coverage.

Besides, healthy groups already get a break, thanks to the elimination of community rating for small businesses. Under SB 110, an insurer can take such factors as people’s health conditions, geographical location, occupation and age into consideration in determining premiums. And, under SB 110, guaranteed issue survived for small businesses.

Thus for many small groups, the differentiation in premiums is not worth the risk, said Dillman of Sadler Insurance.

That’s why, said Tom Harte, president of Landmark Benefits in Hampstead, HSAs are “mainly for the healthy group that is very young.”

But Krienke disagreed, and argued that almost anybody who can get an HSA policy can benefit from it.

“You are still going to get a better value, even if you are a sick group,” he said. There may be one or two individuals who will spend their entire deductible, but they will be practically breaking even, he said. The others in the group would be able to put enough away in their HSA that they would benefit from the premium break, even if the premium discount isn’t as large as it would be for a healthy group or individual.

“My view is that very will be a very few people who would not be able to benefit by this,” he said.

More information

The question may not be whether Krienke is correct or not, but whether insurance agents, businesses and human resources believe it.

And that won’t really be put to the test until Cigna and Anthem start offering their own HSAs to their customers around the state.

Anthem apparently will be first, but details are sketchy. Anthem expects its offering,, called Anthem By Design, to begin later this year.

The program will be a PPO, and will feature several levels, ranging from a $1,000 minimum deductible to the $5,000 maximum for individuals, but that was all that spokesperson Karen Brown could say about the plan.

Part of the hold-up, she said, was that the company was waiting for federal government to finalize its rules.

At the beginning of next year, Cigna will introduce CIGNA Choice Fund, as part of Cignature, which includes a number of other options, such as how big a network you are willing to pay for and whether you are willing to have a primary care doctor be your gatekeeper.

The Choice Fund includes Health Reimbursement Accounts as well as HSAs. Only employers can contribute to an HRA, but unlike employer contributions to an HSA the money won’t follow the employee (though they can roll over to the following year), and the tax benefits accrue to the business, not the employee. The employer also has more control, setting up different funds for different categories of medical expenses, such as prescription drugs or preventive care.

And an HRA can work with a traditional low-deductible plan.

Despite these advantages, the HSA has one that may trump them all: When the money really does follow the employee, the hope is that employees will be more cost-conscious, and therefore help lower health-care cost.

Will workers become penny wise and pound foolish, skipping preventive care that might avoid huge medical costs down the line? That hasn’t happened with medical savings accounts, said Tuttle.

“I haven’t noticed that people were squirreling the money and not spending it,” he said.

But Feldvebel voiced concern that people might go for the lowest cost in the short run.

“If they are going to be have more responsibility, its important that they have decent information on cost and quality.”

Both Cigna and Anthem apparently agree, and will offer various Web-based tools so consumers will be able to evaluate the quality of various medical providers.

Cigna’s is called myCigna.com and Anthem’s is Healthcare Advisor.

Still nobody knows how well HSAs will sell.

“The market is evolving,” said Jake Biscoglio, assistant vice president of product development at Cigna. “It’s a consumer-driven product. It’s too early to tell how it will affect rates. It will be just one more option among many available in the marketplace.”