New Medicare Health Savings Accounts*

By Ronald L. Scott

Health Savings Accounts (HSAs), a new form of medical savings accounts, are now available to qualified individuals under the Medicare Prescription Drug, Improvement and Modernization Act signed into law by President Bush on December 8, 2003.   Depending on how the health insurance industry structures qualifying health plans, the newly-created HSAs may encourage physicians, hospitals and other health care providers to reconsider the way in which they bill patients for non-covered services.

Under prior law, medical savings accounts were available only to self-employed individuals and employees of participating small employers.  Medical savings accounts were created as part of an effort to empower health care consumers by allowing an alternative means to pay for health care.  However, demand for the earlier versions of medical savings accounts was less than anticipated.

HSAs are tax-free accounts set up to pay for routine medical expenses.  Contributions to HSAs are tax-deductible and withdrawals from HSAs for qualifying medical expenses are not taxed.  HSA balances carry over from year to year and may earn interest that is also tax-free provided it is used only for qualified medical expenses or remains in the account until the holder is age 65 or disabled.

Ideally, HSAs will make patients conscientious shoppers.  Proponents of HSAs argue that they give patients the power to choose when, how, and who will treat them or their family members.  The definition of qualified medical expenses also allows HSA owners to pursue alternative methods of healing that might not be covered under standard health plans.

Opponents fear that HSA owners may put off preventative or even necessary medical care, which will result in a greater expense overall.  They argue that HSAs are tailored to meet the needs of healthy, employed individuals who will benefit from employer contributions while the unemployed population and others who cannot afford to establish or contribute to their HSAs will bear the burden of higher health care costs. Critics suggest that HSAs might crush the system of managed care by reintroducing unconstrained consumer choice. Critics note that health care costs for the average individual may include a significant percentage of the account limit while the money spent may not necessarily be credited toward the deductible.  The purchase of eyeglasses, for example, might not count toward meeting the annual deductible. This creates risk for individuals who cannot afford to make up the difference between the costs not included in the deductible and the maximum deductible amount in the case of illness.

HSAs are only available to individuals with high-deductible health insurance.  To qualify, the deductible must be at least $1000 per person or $2,000 per family.  Policies may be offered with higher deductibles, since the new law allows contributions of up to $2,600 annually for individuals and $5150 annually for families.  Although health insurance policies may offer coverage for preventative services with lower deductibles, some policies may simply not provide any coverage until the deductible is met.  Patients enrolled in these plans may not benefit from the negotiated rates health care providers offer to insurance plans.  Also, one the key reasons some policymakers support HSAs is to increase the choices available to patients.  However, patients may be disgruntled if they are charged substantially more by health care providers than the discounted rates offered to health plans.  If HSAs are to be successful, physicians and other health care providers need to consider offering favorable rates to patients using these new accounts.

*  This article was originally published in Internal Medicine World Report (Feb. 2004) and is reprinted with permission.