updated 10/26/2004 7:36:02 AM ET 2004-10-26T11:36:02

For some, they're an innovative and necessary reform for the ailing health care industry. For others, they're potentially ruinous for Americans’ health care coverage. Like them or fear them, health savings accounts, or HSAs, are expected to become a key component of many Americans’ health plans if President Bush wins another four years in the White House.

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Introduced as part of last year’s Medicare Reform Bill, HSAs are intended to give Americans greater control over their health care choices. They are an alternative to conventional employer-sponsored health insurance, and the Bush administration has proposed expanding them to deal with a health care industry burdened by uncontrolled spending, rising premium costs and the swelling ranks of the uninsured.

Sometimes described as the medical equivalent of an individual retirement account, or IRA, HSAs have an insurance plan that provides coverage for catastrophic events, but also a high deductible, which means that individuals must pay for smaller costs themselves. Account holders are typically responsible for the first $1,000 in annual costs, with a family responsible for $2000, and then a portion of subsequent expenditures.

As companies begin open enrollment season for health insurance, some may be offering an HSA option with a catastrophic insurance plan. Data collected from 991 employers by Mercer Human Resource Consulting show well over half plan to offer employees the option by 2006.

But nonpartisan health experts worry that the accounts, which have not yet gained widespread acceptance, are too new and untested. They also fear the accounts will not be financially feasible for middle-income families and may have adverse ramifications for the health industry.

“No one I am talking to in my field is saying anything good about HSAs,” said Howard Berliner, a health policy professor at the New School University in New York City. “It’s important to remember that they are untested,” he said. “They might work, but I think there are some profoundly negative things that could occur.”

Schism in health care coverage
Individuals who don't have large annual health care costs can profit from switching to HSA accounts, says JoAnn Laing, author of the forthcoming book “The Consumer Guide to HSAs.”

Now, 73 percent of Americans spend $500 or less each year on health care, Laing said. If they funded HSAs up to the deductible, she said, these consumers would still have a sizeable portion to roll over to the following year. Unused funds build up from year to year, tax free, and may be used to pay for future health care needs.

HSAs also benefit companies, which are now seeing premiums for traditional health insurance plans rise by as much as 15 percent annually. Many are offering to use the money they expect to save to contribute to employees’ HSA accounts, Laing says.

“These accounts are owned and controlled by the individual, and they can take them from one employer to another, so they give people greater freedom,” she added.

However, Berliner and other health policy experts say HSAs could lead to a schism in company health care coverage, with younger, healthier individuals gravitating toward the tax incentives offered in HSAs, while sicker, older individuals that spend a significant portion of money each year on health care are left behind in traditional plans, where their premiums are likely to rise as the risk pool of employees is reduced.

Sicker individuals also would be more likely to use the funds in their accounts quickly and have little left to roll over to the next year, Berliner notes. “I think people might be less inclined to get primary and preventative care because they will want to hold on to the money in their accounts in case something serious happens to them, so HSAs disadvantage those already sick and older because they spend more money on health care,” he said.

Laing disagrees, saying that even a modest contribution to an HSA can reduce a family’s taxable income and pull them into a lower tax bracket. “And there are programs for the uninsured, and for employers to get contribution credits, so even if you are in a low-income household, or you have a history of health problems, you can make HSAs work for you — it’s a matter of education,” she said.

Consumers will be expected to be able to discuss procedures and costs with their doctors, Laing said.

“We are talking about a totally different mindset when it comes to the way Americans approach their health care — it’s like turning the Queen Mary,” she said. “Now the consumer is going to be informed about their health care coverage, and they’re going to participate in the decision making and control the costs.”

New health care philosophy
Behind HSAs lies a new approach to health care that, although unproved, is gaining recognition. “Consumer-driven health care” espouses the philosophy that if you have greater control over your health-care spending, and health-care providers and insurance companies have to compete for your business, a more market-oriented system will follow.

The thinking also goes that if consumers are spending their own money they will become more careful spenders, and will think twice before they book an appointment with a specialist because of a minor complaint.

“All the research shows that no matter what we do, the cost of health care is going to be a problem,” said John C. Goodman, president of the right-leaning National Center for Policy Analysis, a public policy research organization.

“Right now, if you go to physician and you are given a prescription for a drug, the physician has no idea how much it costs, and neither do you,” said Goodman, who is recognized as the person who developed HSAs. “But if you’re the one spending money on that drug you’d ask questions, and as more people ask questions, the doctor becomes both an economic agent and a medical agent for his patients, and pretty soon he will have to advise patients on getting good care for less money.”

Leif Wellington Haase, a health expert at the Century Foundation, a public policy research group, agrees that reforming the American health care system is necessary, and applauds experts like Goodman for pushing for serious change. But he says that HSAs and the notion that health care can be treated like a commodity need to be debated more fully.

Haase prefers a tiered system where consumers have a basic insurance plan but pay more for greater levels of insurance. The aim, he says, is to keep healthy individuals in the risk pools, so sicker and poorer consumers don’t lose out.

From a health policy point of view, Berliner thinks HSAs do not adequately address the most important health care problem now facing the country: the nearly 45 million Americans who do not have health insurance.

“The problem is not rich people spending too much on heath insurance and the need for costs to come down. The problem is poor people need health care,” Berliner said. “Health care is important and you want people to have access to it, but I don’t think these accounts are a way for that to happen. Philosophically, I think it is more important to get universal health care coverage to those that don’t have it, and then worry about the cost.”

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