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A Wait-and-See Approach to HSAs

December 3, 2004
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Call 2005 the year of great expectations. On January 1, early adopters will roll out health savings accounts for their employees while the rest of corporate America watches, waiting to learn from their successes and mistakes.

    For all the recent attention HSAs have received--research reports, articles in the consumer press, Web sites explaining how things work--companies will probably not quickly shift to high-gear adoption of the plans.

    It’s not for lack of expectation. HSAs and the high-deductible health plans attached to them are being held out by everyone from the newly re-elected President Bush on down. They’re seen as a way to curb runaway medical insurance costs while giving people more control over what they spend and where they spend it.

    HSAs can be thought of as medical IRAs: Employees pay for health-care expenses with pretax dollars kept in accounts they control, up to $2,600 annually for individuals and $5,150 for families. Funds in an HSA can be invested, rolled over from year to year and are portable, so if an employee leaves, they do too.

    The accounts are tied to insurance plans with minimum deductibles of $1,000 a year for individuals and $2,000 for families. For employers, the attraction lies in higher deductibles and lower insurance expenses. Employees who invest wisely build up a tax-free nest egg they can use for routine care, elective surgery or retirement--if the money lasts that long.

    But while the federal law that created HSAs is nearly a year old, companies remain cautious. Treasury Department guidelines outlining how the plans could be implemented weren’t completed until summer, and insurers spent the better part of the year putting together their offerings.

    That wasn’t enough time for all but the most progressive--or financially desperate--companies to offer HSAs this year or for 2005, according to insurers, financial institutions and others familiar with the plans. The first wave of organizations offering workers HSAs includes a smattering of Fortune 500 businesses such as Textron, Pitney Bowes and Guidant Corp., and hundreds of smaller companies. The U.S. government will offer an HSA through Aetna to about 4.5 million federal employees January 1. That’s half of the federal workforce.

    Industry watchers expect most businesses to spend the coming months evaluating what’s out there and, if they opt to offer HSAs, drafting education programs so employees are prepared for open enrollment for 2006 or 2007. Big companies "will watch the dust settle in 2005, then make their move," says Chris Delaney, vice president of marketing at Definity Health, a consumer-driven plan provider.

    While company executives do their homework, look for major insurers such as United Healthcare, Aetna and Cigna and consumer health-care specialists such as Definity Health and Lumenos to continue building awareness for their insurance and HSA products.

    Next year, expect to see investment options multiply as more banks, mutual fund companies and stockbrokers join the financial institutions that started offering HSA investment products this year including Mellon, Wells Fargo, Vanguard and JPMorgan Chase Bank. Many players will also add "smart" cards that work on MasterCard or Visa debit card readers and automatic account debits for monthly prescriptions and other regular expenses.

    If things fall into place as expected, by 2006, about 73 percent of U.S. employers are likely or somewhat likely to be offering HSAs, according to a survey by Mercer Human Resource Consulting.

    Some early adopters are seeking alternatives to traditional medical coverage to halt health-care spending that jumped 11.2 percent in 2004 alone, the fourth straight year of double-digit growth, according to a 2004 employer benefit survey from the Kaiser Family Foundation and the Health Research and Education Trust. In 2004, premiums for family coverage hit $9,950, with employers picking up about 72 percent of the tab, the Kaiser survey found.

    Other HSA pioneers will be white-collar businesses, "due to the education level of their workers" and the ability and willingness of those workers to sock money away, says Karli Dunkelberger, vice president of business development at Conexis, a benefits administrator in Orange, California.

    They’re also likely to be companies with a history of embracing innovation, says Andy Anderson, a benefits administrator attorney and HSA expert with Hewitt Associates. "For the experimenters, it’s an intellectual extension of what they’ve been doing with cafeteria plans for years," he says.

    In 2004, investment options for HSAs were limited mainly to savings-type accounts earning 1 percent to 4 percent interest. That will change in 2005 as more banks, brokers and mutual fund companies jump into the fray. One of the most aggressive is Mellon Bank, which has deals with Definity Health, Lumenos, North American Health Plans, an administrator for self-insured companies, and Great-West Healthcare.

    Vanguard, Wells Fargo and MSAver, a banking subsidiary of Lumenos, were the first to offer mutual funds for HSAs, but Fidelity Investments expects to enter the market by 2006, according to a recent Wall Street Journal report.


The re-election of President Bush, who made consumer "ownership" of retirement and health care a campaign watch word, could put HSAs on an even faster track.


    More investment options also means more risk. Employees who park idle HSA funds in mutual funds or stocks could end up losing money if they don’t invest wisely. And come tax time, it’s the responsibility of the employee--not the company--to prove that the money they spent was on legitimate health-care costs. "It’s not smart to take it out and buy a boat, but you could," Anderson says. "You’ll pay income taxes on it, and a 10 percent penalty, but there are people who think that way."

    Putting pretax dollars aside to pay for health care isn’t a new concept. Flexible spending accounts have let people do that since the early 1980s. But industry watchers believe HSAs will take off faster because employees can roll over funds they don’t use to the next year, whereas in traditional flexible spending accounts, they forfeit unused funds.

    Another reason for quicker adoption is an easier payment mechanism. Unlike FSAs, which typically require people to pay expenses out of pocket and submit receipts to be reimbursed from their accounts, most HSAs are linked to debit cards--or will be soon. Whether the cards are branded by the employer, insurance company or card maker, all work through either the MasterCard or Visa debit card networks.

    The latest-generation cards, including those offered by companies such as Motivano, can funnel what someone spends into up to 50 "buckets"--for the doctor, dentist, pharmacy, chiropractor, hospital, etc.--and can block unacceptable purchases. If someone tries to use his or her HSA card at the drugstore for a prescription, potato chips and a six-pack of Coke, the medicine would go through but not the rest, says Mark Keck, Motivano’s executive vice president. "We’re ordering hundreds of thousands of cards as administrators come to us," he says.

    The re-election of President Bush, who made consumer "ownership" of retirement and health care a campaign watch word, could put HSAs on an even faster track. Just days after the election, health industry analysts were predicting that the administration would work to make HSAs more compatible with FSAs and a third plan, the health reimbursement account. HRAs are like HSAs, but with a crucial difference: They’re not portable. The money belongs to the company and stays there when an employee leaves. Currently, companies with HRAs can’t transfer funds to newly created HSAs, but that could change during the second term of the Bush administration.

    The support for HSAs is good news for insurers, banks, debit card makers and other companies with a vested interest in making the plans work. But despite outside pressures to plunge in, industry experts counsel large and small employers to take their time determining what’s best for their situation and employee base. Says Anderson: "This is a beast the likes of which hasn’t been seen yet in the employee benefits community."

    As companies lay their plans, they could look to BASF Corp., the U.S. arm of the German chemical company, for some pointers.

    The company is set to launch its HSA on January 1 after a positive experience with an earlier consumer-driven health plan. In 2004, BASF Corp. began offering eligible employees a high-deductible insurance plan combined with an HRA through Definity Health. To promote the new plan, BASF contributed to workers’ HRAs--up to $2,250 for employees with family coverage. Even with the contribution, the HRA cost 8 percent to 11 percent less than traditional coverage, according to spokesman Jack Maurer. That was enough to persuade BASF managers to add an HSA. For the new HSA, BASF employees can put away up to $5,250 a year in their account through standard payroll deductions.

    To get people to sign up, management should follow BASF’s lead and share part of the savings that it will gain instituting the lower-cost plan by making contributions to employees’ accounts, says Dan Perrin, executive director of the HSA Coalition, a pro-HSA advocacy group in Washington, D.C. Employees understand that the higher deductible, the cheaper the cost to the company, and that they’d be leaving money on the table because if they picked another plan, their employer would pay more, Perrin says.

    That could be happening. About half the companies to which Aetna has sold policies are making some type of contribution to employees’ HSAs, says Betsy Sell, a spokeswoman for the insurer.

    From the CEO on down, management has to be committed, says Ed Pudlowski, with Ernst & Young’s human capital practice in Dallas. At companies with successful consumer-driven health-care initiatives, managers were involved in all phases.

    Where companies haven’t been successful, executives "haven’t been doing things to interact with (employees), like offering education programs," Pudlowski says.

    "That shows us there’s a gap in their ability to move forward and they might have to do some things before introducing consumer-driven health care."

    Education is critical to employee acceptance--and not just education about HSAs, experts say. Many carriers and third-party administrators have added online tools to their consumer Web sites so that people can compare their out-of-pocket expenses under HSAs with other plans.

    Other tools help consumers evaluate costs of different doctors and hospitals, and give out quality ratings. Cigna’s MyCignaPlans.com, for example, uses cost-comparison tools licensed from WedMD.

    While those accounts are being phased out, many insurers will still offer a high-deductible health plan to individuals and small businesses, either coupled with an HSA or unbundled, so individuals can choose their own HSA.

    The HSA Coalition also has a Web site called HSA Insider that businesses can use to compare plans and fees from dozens of insurance carriers and financial institutions.

Workforce Management, December 2004, pp. 72-75 -- Subscribe Now!

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