A Good Deal Made Better

Consumer-directed tax-deferred health-related savings accounts are certainly not new. But some of the features built into Health Savings Accounts (HSAs) provide more opportunity for growth than was available with earlier products.

American Health Insurance Plans, a Washington D.C.-based association representing health insurance benefit providers, says HSAs give consumers greater control over selecting their health care providers since there are no restrictions as to what providers they can use. Also based in Washington, the HSA Coalition, a group of companies supporting HSAs, believes the plans will lower the number of uninsured individuals by allowing consumers who previously had no health plan to set up their own HSAs on a tax-deferred basis. HSA Coalition also argues that consumers will benefit because the funds put into an account that is not used during a given year can be converted into a family's long-term savings plan.

Businesses, meanwhile, are expected to benefit from lower health care costs. Palatine, Ill.-based Benefits Age, a provider of employee benefits programs, reports that one of its Chicago-based clients reduced its health care costs by 42% when it introduced HSAs.

Because of this broad appeal to consumers and businesses alike, Cambridge, Mass.-based Forrester Research Inc. predicts that consumer-directed health care accounts will grow from the current level of 1.2 million, with $6.5 billion in funds, to 12 million with $87.8 billion by 2007. And while she does not break out the categories, which include HSAs, Medical Savings Accounts (MSAs), and Flexible Savings Accounts (FSAs), Forrester senior analyst Kathy Hendrickson says HSAs will lead that growth.

The precursor to the HSA was the MSA, which allowed small businesses and self-employed individuals to put funds in a tax-deferred account to pay for medical expenses. The drawback with MSAs, which were introduced as part of the Health Insurance Portability and Accountability Act of 1996, is that they were restricted to companies with fewer than 50 employees. Most MSAs are now being converted to HSAs.

FSAs, another product that has been around since the 1970s, were also limited in appeal because IRS regulations required that individuals spend all the money in their accounts during a given year — the so-called "use it or lose it" rule. As a result, many individuals under-funded their FSAs.

HSAs, by contrast, are available to a wide range of consumers, with no restrictions on rolling over funds from year to year. Many corporations and small businesses are looking to them to dramatically reduce their employee health care spending. Health care experts say that by offering employees a high-deductible health care plan and then funding all or part of an employee's HSA, most businesses will find the cost of funding the HSAs to be less than paying for low-deductible plans.

— Lauri Giesen