[Editor's Note: This is a guest post from Jarred Draney, the owner of the website hsarates.com, and a guy who knows an awful lot about HSAs. We have no financial relationship.]
If you happen to be one of the 13 million or more people enrolled in a Health Savings Account (HSA), some changes may be headed your way. The new healthcare law does not currently prohibit HSA eligible plans; however, it does limit some of the HSA benefits and future bureaucracy could make these plans unworkable and inconvenient. As the the provisions of the Patient Protection and Affordable Care Act (PPACA) continue to be rolled out, there will be some adjustments to HSAs that participants should be informed about. The PPACA has already significantly reformed some key HSA provisions. For example, in 2011 health care reform significantly restricted use of tax detectible HSA funds for non-prescription over-the-counter medications and products. Also, additionally in 2011 a stipulation was added that boosts the penalty for HSA withdrawals for non-medical expenditures from 10% to 20%. Depending on account holders circumstances these two new rules potently had dramatic ramifications. The 2014 health care reform modifications that have gone into effect have had less direct influence over HSAs, but nonetheless the indirect consequences may have staggering effects on the viability and potency of this increasingly popular way to pay for health care.
The existing law encourages you to select a health insurance plan with a high-deductible that has restricted/limited benefits. These high deductible plans (or HDHP) typically offer lower premiums which potentially help consumers realize significant savings. HSA participants are then able to place these premium savings, as well as other funds, into an account that is theirs to control. The deposits into these accounts are not taxed. Any interest earned on the account or any gains realized from eligible investments also accumulate tax free. If money still remains at retirement age, the account is treated similarly to an IRA which allows taxed disbursements to fund retirement.
The new law decreases the permitted deductible for small-group plans to $2000 for singles and $4000 for families starting in 2014. This is approximately one-third the amount permitted under the existing HSA law. For those participating in a small-group plan this is likely to significantly reduce their ability to save on insurance premiums, possibly adversely affecting their ability to benefit from the structure of the HSA program.
In comparing the general advantage levels of various health plans, Congress is preparing to use a benchmark called the “actuarial value” which determines the amount of health care expenditures paid by insurance. Consumers pay the remainder in co-payments, deductibles, and other charges. If the lowest required coverage has an actuarial value of 70%, there is only 30% for any out-of-pocket expenditures, along with coinsurance, co-pays, and deductibles.
Many consumers are concerned that most of the HSA plans currently offered cannot match this standard due to the higher-deductibles incorporated into them. That means deductibles and additional expenses for coinsurance and co-pays will have to decrease, and premiums of HSA plans must go up. This is in addition to the possibility that premiums will already increase because of other requirements in the reform bill.
The Secretary of Health and Human-Services has the right to assess health plan benefits on a yearly basis and decide the fundamental benefits that should exist in every health plan, which could have significant consequences for HSAs. At present, HSA plans are only required to cover preventative-care benefits before the deductible. The concern is that legislation will oblige HSA plans to be responsible for additional benefits before reaching the deductible. Some of these benefits may be incompatible with the HSA structure. For example, if it is decided that all plans must cover some additional benefits this may increase the HDHP premiums to a point where HSAs may be inadvertently (or possibly purposefully) be rendered infeasible. Even if this never takes place, the risk of it happening may reduce the desirability of HSAs among consumers. This fear may reduce the demand for HSA compatible insurance products. This in turn might adversely affect quantity or cost of the HSA plans offered by insurers.
Additional Regulatory Risk
The Obama administration now imposes a regulative ruling that may successfully create an environment where HSA plans are not feasible within the individual-insurance market. The ruling deals with the MLR or “minimum medical loss ratio” demands that will reprimand insurers who fall short of spending 80% or 85%, depending on conditions, of their premium money on healthcare. The problem is that the administration wants to consider third-party expenditures on medical care but ignore deposits given to a HSA prior to the deductible being met. This type of regulation will make it nearly unworkable for HSA plans to endure within the new health insurance exchanges .
Other Incentives and Shifting Costs
After January 1, 2014 several other changes are going into effect which may or may not affect HSA viability and cost effectiveness for consumers. For example, insurance companies will not be allowed to refuse health coverage for pre-existing conditions. This is great news for those with pre-existing conditions, however, this means insurers will be forced to increase the cost of premiums across the board to cover these new costs. Newly abolished yearly and lifetime restrictions on benefits also will increase premium costs for everyone. Increased costs may make HSA programs less advantageous and traditional health insurance options more appealing.
Possible Positive Impacts
Its not all gloom and doom for HSAs. A few of the changes going into effect might have positive effects on HSA. As of January 1, 2014 state-supported health insurance exchanges are supposed to be made available which may make it easier for individuals to access and enroll in HSA plans. This may increase demand and help reduce costs for HSA participants. Also, starting in 2014 everyone will be obligated to have health insurance or pay a tax-penalty (the penalty will be $695 annually with the highest amount of $2,085 per-family or 2.5% of household earnings. The penalty will be slowly phased in over three-years, beginning with $95 in 2014). This penalty may incentivize the uninsured to seek the low cost health insurance options provided by the HSA structure which once again may increase demand, help reduce HSA costs, and help ensure legislation that will protect the HSA program.
The Future of the HSA
Despite everything, the future still looks bright for HSAs. Many participants are concerned with the current reform and so are some politicians. Legislation has been proposed to help ensure the future of HSAs and possibly even to expand and strengthen the HSA program (for example: Family and Retirement Health Investment Act). Even if the proposed legislation is not passed and all the changes discussed in this article remain in effect, HSAs have survived the current health care reform and can still be a very viable option for cost conscious consumers. Some changes may be in store, but given the growing popularity of the program it appears that, in the long run, HSAs are here to stay. The list of financial institutions offering HSA compatible products continues to grow. Current and future HSA participants, if they are willing to wade through all of the hiccups, will likely be able to benefit from the many advantages HSAs provide for many years to come.
[Editor's Note: I am interested in the factors outlined above that could affect the availability of HSAs in the future not because I am such a huge fan of HDHPs and HSAs as typically used, but because I use my HSA as a triple tax free retirement “Stealth IRA.” Many other types of tax-advantaged health care and education accounts have disappeared in the past, and it could happen to HSAs in the future. Do you use an HSA? Why or why not? Comment below!]