HSAs Can Generate Big Savings

September 24, 2004
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KENTWOOD — He’d had enough — two years ago.

So Ken Wierenga started looking for lower-cost options to provide health coverage to his employees at West Michigan Piano Co. He was unable to find an insurance carrier who would sell him his preferred option, a medical savings account.

Two years later, Wierenga finally found a new, much more affordable health plan that worked for him and for his employees.

Since switching from Blue Cross Blue Shield in April to health savings accounts with a high-deductible commercial insurance policy, Wierenga has cut his company’s monthly health premiums by more than half, from $2,661 to $1,206.

And he has not experienced any problems among his four full-time employees who are enrolled in the company’s health plan that uses HSAs. His agent helped him work through the change with employees and a new software package has made the transition a relatively smooth process administratively, he said.

Wierenga would not hesitate to recommend HSAs to a fellow small businessman.

“It seems to work fine for me,” said Wierenga, whose company had seen monthly health premiums double over what they were five years ago. “I would unequivocally recommend it. I don’t see any downside to it,” he said.

That kind of experience with HSAs and enthusiasm from a business owner is exactly what Congress hoped to generate when creating the new style of health benefit late last year.

Parties who advocate the use of HSAs, however, say employers who buy them need to take the time needed to properly prepare themselves and their employees for the transition.

Employers who shift to HSAs but don’t effectively articulate the reasons behind the change and make the commitment needed to work with employees will likely experience problems, said Jeff Rubleski, sales manager in West Michigan for Blue Cross Blue Shield of Michigan.

“If you don’t communicate this pro-actively and up front, you’ve got a disaster,” Rubleski said. “The communication to make this work is critical.”

Blue Cross Blue Shield plans to begin selling a trio of HSA products next month for Jan. 1 renewals. Grand Rapids-based Priority Health has committed to rolling out an HSA product during the first quarter of 2005.

Together, the Blues and Priority Health hold large market shares in West Michigan, making their movement into the HSA market a significant step up in the products’ availability.

HSAs, created under the Medicare Reform Act that President Bush signed into law in December, are combined with a lower-cost, high-deductible health plan. They work similarly to IRAs or 401(k) retirement plans in that they permit employees and employers to make pre-tax contributions to a tax-free individual health savings account.

Participants can use the money in their health savings account to pay medical expenses such as doctor and dentist visits, prescription and over-the-counter medications, medical products, or to buy long-term care insurance. One also can use HSA funds to defray the deductibles or co-pays of a health plan, and to continue coverage under COBRA when leaving a job.

Under the federal law, anyone under 65 years old and covered under a high-deductible health plan or insurance policy — with a minimum $1,000 deductible for individuals, or $2,000 deductible for families — is eligible for a health savings account.

Employees or their employers, or both, can contribute up to the amount of the health plan’s deductible, to a maximum $2,600 a year for individuals or $5,150 annually for families, into the account. A “catch-up” clause allows people between 55 and 64 years old to make additional annual contributions of $500, an amount that will increase by $100 a year through 2009.

Account balances roll over from year to year and the accounts are portable, meaning an employee can take it with them if they switch jobs.

HSAs are seen as a potential solution for employers frustrated with rising health-care costs and the double-digit annual premium increases of recent years.

HSAs play into the emergence of consumer-driven health plans that place greater responsibility on employees for their own health-care decisions. Many observers of the industry hope the resulting financial implications will ultimately affect burgeoning utilization rates that are said to drive up the cost of health coverage.

Paul Brand, a principal in Innovative Solutions Agency Inc. in Grandville which began selling HSAs as soon as the Medicare reform law took effect Jan. 1., said HSAs are designed as a way to get runaway costs under control.

He said he believes HSAs provide financial incentives for people, first, to make better decisions on how they access care; second, to follow healthier lifestyles; and, third, to manage chronic medical conditions.

Brand said that when people begin seeing the real cost of a doctor’s visit or of prescription drugs, they start acting more like consumers — by making better use, for instance, of lower-cost generic medications or taking better care of themselves.

“Here’s a new pocketbook reason to do that. There weren’t pocketbook reasons to do that before,” Brand said.

While the cost savings employers can realize through HSAs is the obvious benefit, the consumerism component is essential for long-term success, said Ed Ozark, a senior consultant with Varnum Consulting in Grand Rapids

Employers need to mount an intensive effort to make sure employees fully understand how HSAs work and help them become better consumers of health care so they can spend their money wisely, Ozark said.

“At the end of the day, if this is only going to be about cost-shifting, it isn’t going to work,” Ozark said at a recent seminar on HSAs.

“It’s about a lot more than shifting costs to the employees. It’s all about making the employee a consumer of health care,” he said.

“As you give your employees more and more responsibility, you owe it to them to show you’re bringing them something that is reasonable.”

HSAs and consumer-driven health plans are essentially bringing employer-sponsored health benefits in America back to what they once were decades ago: providing coverage against major medical claims that could ruin a person financially, while giving that person the added ability to fund out-of-pocket expenses with pre-tax contributions that can come from the lower premiums.

In the case of West Michigan Piano, participating employees have been able to adequately fund their HSAs through the premiums savings and still incur an annualized savings of some $300 over what they previous paid in health premiums under the company’s prior health plan, Wierenga said.

West Michigan Piano’s monthly premium for a family policy has gone from $1,020 to $546.

“It’s two old concepts delivered in a new and different way and combined in a money-saving way,” said Gabrielle Warner, a benefit consultant with Innovative Solutions Agency who represents several insurance carriers that offer HSAs.

“The coverage is still there. It’s just being divvied up a little differently,” Warner said.

The interest in HSAs locally is growing, particularly among small businesses that have struggled to cope with escalating health premiums, Warner said.

Critics of HSAs contend they are nothing more than a way for employers to steer more of the burden for health coverage onto employees.

But advocates counter that research data consistently shows cost shifting is here to stay, at least until the present cost trends subside.

They also say more employers are going to move to high-deductible health plans that once were the norm — before the days of managed care and $25 co-pays for doctor visits and prescriptions — that shielded people from the true costs of their health care.

Through HSAs, employers can implement a cost-control measure, maintain benefit levels and introduce consumerism into the mix, HSA advocates say.

“Benefits are going to be changed. More and more responsibility is going to be given to the employee one way or the other,” Ozark said.    

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