In 2008, one out of every ten patients consumed 63.6% of total health care expenditures. The other nine would benefit from a Health Savings Accounts (HSA). An HSA is one of many accounts used in comprehensive wealth management for tax optimization and planning.
An HSA is a tax-free savings account both for contributions and withdrawals, but the money can only be used for qualified health-care-related expenses. Examples of qualified expenses are numerous and include dental treatment, eyeglasses, contact lens, out-of-pocket expenses, and prescription medicine. Like any other bank account, HSAs come complete with debit cards and/or checks.
To qualify for an HSA, you must be enrolled in a high deductible health plan. Not every HSA qualified expense will necessarily count towards your deductible, though many might.
The Affordable Healthcare Act (also known as Obamacare) has ruined the incentives to hold down healthcare costs. Healthcare premiums have skyrocketed, costing the country first billions and then trillions. The failure of this program confirms everything we predicted when the legislation was first passed.
In spite of Obamacare, there is still some incentive for those with healthy lifestyles to use an HSA to hold their own healthcare costs down. Furthermore, utilizing Health Savings Accounts could be a small step towards fixing our healthcare system by giving patients skin in the game again.
However, there are nine unfortunate facts about health savings accounts which if addressed, would make them a more attractive vehicle for healthcare reform.
1. The government requires you to have a high deductible health insurance policy before you can have an HSA. This has multiple ramifications. First, you cannot use an HSA to self-insure, because to qualify for one you need to have purchased insurance. Second, there is very little variability between high deductible plans, making your options extremely limited. Third, for any two relatively comparable plans, the one that is HSA qualified will cost slightly more per month for no apparent reason. Fourth, many insurance products, like those designed for the under 30, do not qualify for an HSA even though they have a high deductible.
Without this high deductible requirement, anyone who wanted could pair any insurance (or no insurance) with an HSA, giving the patient a responsible means to save for their own healthcare.
2. The limit on annual HSA contributions is lower than the high deductible. For an individual plan, the HSA contribution limit in 2016 is $3,350 for those under 55. Over age 55, the limit is $4,350. Meanwhile, in 2016, even the government’s HSA-qualified high deductible healthcare plan has the out-of-pocket maximum at $6,550. Furthermore, HSAs allow more qualified medical expenses than counts toward your deductible. For example, even if you don’t have dental or eye coverage, dental and eye treatment are HSA qualified expenses. This means the expenditures from your HSA could be higher than your deductible without technically meeting your high deductible.
This means that it will take several years of low healthcare costs before you will have saved enough to cover your deductible. This hampers responsible saving.
3. Government regulations make it unprofitable for custodians to support HSAs. Although any IRA custodian could be an HSA custodian, there is little money for establishments to support this less popular account type. Limitations on the amount you can contribute and frequent expenditures mean many HSA owners will have much of their assets in cash. This means the custodians will not make much money on transactions fees and expense ratios of securities. Furthermore, they will be required to comply with the IRS reporting and custodial agreements associated with HSAs, incurring additional administrative costs.
This make them less attractive for custodians to offer. As a result, few custodians do. Most of the big brokerage houses like Charles Schwab and Vanguard do not offer Health Savings Accounts.
4. The custodians that do offer the HSA account type charge annual or monthly service fees and/or have minimum account balances. This is just to make the accounts profitable.
Account balances in excess of these minimums are allowed to be invested. This is normally done by having an investing side of the account and a checking side of the account. The investment choices are often limited and have higher than normal fees and expenses, again to produce revenue.
5. Custodians do not provide easy transfer services from an HSA’s investing side to the checking side. This requires either keeping a large cash balance or else anticipating future medical expenses and moving money from investing to your checking account for upcoming payments.
6. Custodians also don’t make it easy to set an asset allocation and do not offer automatic rebalance. This is simply because these features cost money to design and support and HSAs require cutting as many costs as possible to be profitable.
7. The government makes it difficult to know what is and is not allowed to be purchased out of your HSA. Over the counter prescriptions were once allowed. Now, they are disallowed unless prescribed by a physician. Many forms of homeopathic or alternative treatment are disallowed, but some, like acupuncture, are allowed.
Simply stated, the healthcare services and options that can afford lobbyists are more likely to be included. Other services or options which have a much greater effect on your health are not included simply because they don’t have a political spokesperson.
8. The government does not allow all or part of a family HSA account to be transferred among family members. So long as you are on a family plan, one HSA can be spent on all plan members. However, children older than 26 years old can no longer remain on their parent’s family plan. As a result, when children turn 26, the family HSA can no longer pay for their medical care.
This means, if you have one child with more healthcare needs than the rest of the family, your HSA can only help them until they are age 26. After that point, any money you contributed for their future care can no longer be used for that purpose.
9. The government requires non-spouses who inherit an HSA to immediately liquidate the account and pay tax on the balance. This further penalizes the family health care plan and prevents one generation from aiding in healthcare for the next.
Incentives matter, and until government changes the financial incentives of healthcare, costs will continue to spiral out of control. We must remove the disincentives or else like rubber-bands they will snap any well-intentioned efforts back to the current misguided state of affairs.
Photo used here under Flickr Creative Commons.