How Can Health Savings Accounts Help, Hinder Patients and Payers?

July 28, 2017 - Health savings accounts (HSAs) have been widely discussed as lawmakers consider policy reforms, at the federal level, and have become a fixture in conversations about healthcare spending among payers and patients alike.  

HSAs are consumer savings programs that are used solely for purchasing healthcare services. They are a tax-friendly way for consumers with high deductibles or complex health needs to save up money for ad-hoc healthcare purchases.

HSAs appeal to patients because they allow increased control of their own healthcare dollars.  And payers often see HSAs as a way to encourage beneficiaries to be active participants in the healthcare marketplace.

However, HSAs are not universally beneficial for consumers, and HSAs don’t always equate to an increase in healthcare access.  The accounts are not ideally suited to all consumers, and may not always be the best way to pay for care.

How can HSAs produce value for consumers, and what do payers, employers, and beneficiaries need to know in order to make them an effective payment option?

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HSAs are a tax-free way to pay for medical expenses

An HSA is an individually controlled savings account where deposits are untaxed, and funds taken out for healthcare expenses are also not taxable. The money an individual puts into an HSA can reduce their taxable income.

HSA balances also roll over from year to year and can earn interest, which provides an incentive to use the account over the long term.

Payers, employers, and related financial institutions do not have authority over how an individual spends his HSA funds, so beneficiaries have total control over their purchasing choices once they open an account.

An individual under 65 carrying a HDHP can open an HSA

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Anyone under the age of 65 can open an HSA via their employer or a bank.  

To qualify for an HSA, a person must carry a high-deductible health plan (HDHP). The beneficiary’s spouse or other dependents must also be enrolled in a HDHP if they are using family coverage.

It is important for payers to communicate to consumers that having dental, vision, disability, and long-term insurance doesn’t disqualify someone from opening an HSA.

However, people who have health coverage that helps pay for health-related services before a deductible is met are ineligible to open HSAs.

“[You cannot open an HSA] if you or your spouse has a flexible spending account (FSA) or health reimbursement arrangement (HRA), you also have Medicare or TRICARE, if someone else can claim you as a dependent, and if you have used Veterans Affairs hospital or medical services in the three months prior to opening your HSA, unless it was for a disability related to your military service,” explains Aetna.

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HSAs are much different than FSAs and HRAs

Beneficiaries may sometimes get an HSA confused with a flexible spending account (FSA), or a health reimbursement arrangement (HRA), which are not the same as a health savings account.  

An FSA is similar to an HSA because consumers put pre-tax dollars into an individual account. However, FSAs don’t require consumers to carry a HDHP, and the funds in an FSA expire at the end of each year.

HRAs are agreements in which an employee pays for healthcare coverage up front and is later reimbursed by their employer for eligible expenses.  The agreement to helps employees pay co-insurance, co-pays, and deductibles.

Employees also have a yearly spending cap on their HRA. If an employee spends all of dollars in their HRA, then they pay out of pocket for all subsequent costs.  Employers may choose to allow extra balances to roll over into the next year.

HRAs tend to result in lower premiums for employees, which make them an attractive option. However, unlike HSAs, HRAs are controlled by employers, which means that employers ultimately decide what healthcare services are eligible.

The pros and cons of opening an HSA

HSAs may have their downsides for certain segments of the population.  Since an HSA is based on saving money, consumers must decide if this strategy makes fiscal sense based on their health and lifestyle.

While some beneficiaries have the time and income to set aside money for a “rainy day” fund, other beneficiaries may not have the budget to do so.

Younger, healthier patients tend to have more opportunity to save for long-term expenses than older patients at risk for an adverse health condition, but may not have disposable income to use on savings accounts earlier in their careers.

“Like any health care option, HSAs have advantages and disadvantages. As you weigh your options, think about your budget and what health care you're likely to need in the next year,” the Mayo Clinic explains.

“If you're generally healthy and want to save for future health care expenses, an HSA may be an attractive choice. Or if you're near retirement, an HSA may make sense because the money can be used to offset costs of medical care after retirement.”

Basically, if a healthcare consumer has the ability to budget over time for healthcare expenses, then they’ll most likely benefit from the use of an HSA. HSAs are not beneficial to consumers who may end up withdrawing money from the account for other emergency expenses, since funds for non-medical expenses taken from an HSA are penalized.

Payers must understand the lifestyle, health conditions, and finances of their beneficiaries before recommending HSAs to specific individuals. Patients must also self-evaluate their ability to set aside dollars and gauge their likely future health needs before they can decide whether or not an HSA is right for them.  

HSAs can play an important part in the healthcare industry as long as payers can offer them to the appropriate consumers and beneficiaries understand their opportunities, limitations, and impact on their care decisions.