The concept of Medical Savings Accounts began in the 1990s, because many attributed escalating health care premiums were a primary cause for medical inflation. Having health insurance does not mean one has access to health care. For many, their insurance product does not cover the hospital or physician of their choice. For those who pursue alternative health care options, health insurance is often useless.
Since implementation of Obama Care, the middle class has realized significant premium increases. For those who do not pay taxes, or those who qualify for insurance products from the Health Exchanges, they do not appreciate the distorted premium increases. Taxpayer subsidies make up the difference between what the Health Exchange Premium and the Insurance Premium.
A ‘risk corridor’ is part of the Obama Care that guarantees that Insurance carriers who participate in the Health Exchanges will not lose money. Despite this promise, many insurance carriers are pulling out of the Health Exchanges. This will cause more premium increases, because of the lack of competition and the lack of healthy members to dilute the risk pool.
As Congress debates what can be done, I have a few thoughts for small businesses and self-employed to consider. It is important to understand the difference between the different medical savings accounts. I will briefly describe each account with brief comments about The Good, The Bad, and The Ugly of each account.
Health Savings Accounts (HSA)
Money is deposited into the employee’s account and is not taxed. This money may be used for qualified medical expenses, as determined by the IRS (Section 213(d), IRS Code). A portion of the unspent money in these accounts may accumulate yearly. This must be tied to a qualified insurance product.
It is possible to get a high deductible policy and put enough money into the account to cover the deductible. When employees know they may keep a portion of the unspent money, they are more likely to use this money wisely. Money may be monitored with a medical debit card that can only be used for qualified medical expenses (it will not work when trying to purchase alcohol or cigarettes). Some plans may be set up so that their product travels with them to a new employer. The employer may choose to pick up a portion of the insurance plan as part of the employee’s benefit package.
The Bad Since these accounts began, insurance companies have inflated the premiums for these accounts disproportionately to medical inflation. Medical inflation is based upon the actual costs for hospitals, doctors, medications, and medical supplies. Medical inflation has been approximately 2-4% for decades. It parallels the consumer price index (CPI). During this same time insurance inflation has consistently doubled and tripled medical inflation.
Insurance companies and hospitals control access to their actual costs. As a result, it is challenging for those who use their HSA card to access the same prices afforded insurance carriers. For example, I am able to get an MRI for cash price of $450. But if the location has a contract with the insurance carrier, they have to charge the ‘retail price’ that is often $3,500! For those with an HSA, I recommend that you pay cash for the imaging and not submit the bill to your insurance carrier.
Health Reimbursement Arrangement (HRA)
Money is credited into the employee’s account and may be used for qualified medical expenses. Unlike the HSA, this account does not have to be connected to a qualified insurance product.
The Good May give their employees a monthly amount that may be used for qualified medical expenses. This is not an insurance product. Employees may purchase insurance with this money. A major benefit is for employees who have insurance with their spouse. They may use this money to cover expenses below their deductible. Employers have control of this money and may use this to ‘vest’ good employees. For example, they may allow employees to have access to the unspent money if they remain with the company for a certain amount of time. The money credited to these accounts may accumulate.
Because the money is ‘credited’ rather than deposited, an unstable company may not have the funds to support the accounts in the future. Similar to employee benefit packages for retirement accounts, improper accounting may cause a future disaster.
Employees may not understand how to use these accounts. They may think they have an insurance product.
Flexible Spending Accounts (FSA)
These are accounts that may be used for qualified medical expenses. They must be tied to a qualified insurance product. Money in these accounts cannot accumulate.
For those who have predictable medical expenses (medications, eye glasses, etc), they may be used to cover these expenses. In addition, this money may be used to pay for your dependent health care needs (child care, disabled spouse, and elderly parent).
Money in these accounts cannot accumulate.
Most will spend whatever is their account at the end of the year. Similar to the government practices of ‘end of year spending,’ people will drain these accounts, because they will not have access to unspent dollars. These plans do not encourage savings.
What should you do?
If you are small company or self-employed, consider setting up a Health Reimbursement Arrangement (HRA) and a separate insurance product. This may help you control your escalating premium costs, while giving you the ability to keep unspent, pre-tax health care dollars. The new administration may change the tax penalties for not purchasing insurance.
For those who qualify for the medical sharing plans (outlined on my website), you may benefit by taking money you are currently spending on insurance and set up an HRA and become a member of one of four medical cost sharing programs referred to on my website.
Contact Kelly Nesbit (Kelly.Nesbit@tasconline.com) to explore options for setting up an HRA or HSA.