Doctors looking at details as interest in HSAs grows

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By Katherine Vogtcovered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06. Posted Dec. 20, 2004.

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At a retreat for physicians earlier this year in Georgia, attorney Glen A. Reed had a hard time making it through his presentation on last year's Medicare reform legislation. His audience kept cutting him off to ask about a provision of the law that created health savings accounts, or HSAs, a new tax-advantaged way for consumers to set aside money for health care costs.

"They interrupted us with their questions because they immediately latched onto the tax issues," said Reed, a health law attorney with King & Spalding, LLP in Atlanta. "They were very interested in this." He said the physicians were interested in not only what HSAs could do for themselves and their families, but also how they might benefit their employees.

Those doctors are not alone. Interest in HSAs has begun to surge since they were established at the start of the year, and experts say the accounts are poised to become more widespread in the next two years.

According to a survey of 3,020 employers by the consulting firm Mercer, about 1% of all covered employees were in consumer-directed health plans, including HSAs, in 2004. But 14% of large employers said they were likely to offer a consumer-directed health plan in 2005, and 26% of all employers were likely to offer one by 2006. Most of those employers planned to offer HSAs.

Additionally, in recent weeks, the insurance giant Humana Inc. rolled out a health plan to be coupled with HSAs, UnitedHealth Group bought an HSA company called Definity Health, and the BlueCross BlueShield Assn. announced that it would offer HSA-compatible products nationwide by 2006.

The move toward the accounts is largely due to their ability to generate tax savings. But critics say they are not right for everybody because of the qualification requirements. To decide whether they are the right fit, physicians should first understand how they work.

HSAs allow people with high-deductible health insurance plans to contribute to an account that can be used to pay for a broad variety of qualified medical expenses ranging from hospital inpatient stays to over-the-counter drugs, said Chip Kerby, an attorney with McDermott, Will & Emery, in Washington, D.C.

The money goes into the account tax-free, it grows tax-free and it can be taken out tax-free as long as it is used for qualified medical expenses, Kerby said. If the money is used to pay for nonmedical expenses, it will be taxed upon withdrawal, and users younger than 65 will be assessed an additional 10% penalty.

To qualify for an HSA, participants must be covered by a high-deductible health plan as defined by the Internal Revenue Service, Kerby said. In 2004 that meant an individual had to have a minimum annual deductible of $1,000, and policies for more than one person had to have a minimum deductible of $2,000.

Additionally, Kerby said HSA users could not be covered by any low-deductible health plans, meaning that some people with coverage through a spouse's plan could be disqualified.

Unlike other consumer-directed plans, HSAs are available to self-employed people, which might make them attractive to physicians.

Kerby said the maximum amount that could be contributed to the accounts in 2004 was the lesser of two numbers: the amount of the deductible under the high-deductible plan or $2,600 for individuals and $5,150 for more than one person. To adjust for inflation, the limits in 2005 will be $2,650 for individuals and $5,250 for family coverage, according to the U.S. Treasury Dept.

The tax savings could be significant for some. Kerby said a person with a tax rate of 40% who puts $5,000 into an HSA could save roughly $2,000 in taxes.

Physicians who own their practices and offer HSAs to their employees also could save taxes in their roles as employers. And Reed said physician employers could benefit from savings on premiums just as employees would.

The money left over in an HSA can be carried over year to year, giving it time to grow, Kerby said. How much it grows depends on the HSA. Some might track simple interest rates and others might be invested in stocks or money market funds.

"The investment options are like any IRA; it depends on where your HSA is opened," said Matt Cowan, president of the employee benefits broker Cowan Benefit Services of Franklin, Tenn.

The accounts typically have a set-up fee ranging from about $10 to $25 and a monthzly administrative fee of about $2 to $5, said Rob Butler, executive vice president of the employee benefits software company MBI, based in Waltham, Mass. There also could be fees for things such as checkbooks or debit cards that are offered with some accounts.

HSAs are part of a movement toward consumer-directed health care supported by President Bush. The AMA also has supported the use of HSAs as another option for health care consumers. The AMA Insurance Agency offers HSAs to physicians.

Critics have complained that HSAs might be abused by wealthy people looking for tax breaks. But Cowan doesn't see that happening, because the plans are available to everyone regardless of income. Besides, Kerby said, the plans are limited by how much can be contributed to them.

Butler said it's too early to predict whether HSAs will be abused, even though they have been on the market for nearly a year. "These are brand-new. This is the first year enrollment will occur when people will use them. I think you've got to wait and see how they are used," he said.

Katherine Vogt covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06.

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