Health Savings Accounts are a promising approach for managing health insurance

President Bush promoted health savings accounts during his State of the Union address last month and while I am not an expert on the economics of the nation’s health care system, I believe strongly that HSAs are making it possible for many companies to offer health insurance to their employees.

My company, NFR Communications, is small but has offered health insurance to its full-time employees for years. Currently that is only two people, but our staffing fluctuates and at one time, we had five full-time employees. Typically, the company paid 85 percent of the premium on a comprehensive health insurance plan that had small co-pays and very low deductibles. It was a Cadillac plan. Annually for the last several years, my insurance representative would show up at our office and inform me that the premium was “only” going up this year by 14 percent or some such figure. I know this has been happening at companies all over America. Nobody with health insurance can claim that their wages have been frozen for the last several years because the increase in health insurance premiums represents a substantial increase in wages to anyone who is getting that benefit.

The price increases were causing a real issue for NFR Communications, so about a year ago we took a good hard look at HSAs. I wasn’t real optimistic, having previously considered medical savings accounts only to discover that they wouldn’t work very well for us. Here’s what I discovered. My insurance company offered a high-deductible health insurance plan with a premium that was substantially lower than what we were paying for that Cadillac plan. The company could pay 100 percent of the premium and still save money. The employees no longer had to pay their 15 percent portion of the cost and they could choose to deposit some or all of that money in their own individual health savings accounts. This would give them the opportunity to use this money -– pre-tax -– to pay those additional deductibles. Any money in those accounts they don't use remains their money. Once they reach retirement, they can use that money for anything they want. And they will never have to pay taxes on that money -– neither as income nor on the interest that the principle accrues. For employees who don’t have a lot of medical expenses, the company health insurance plan becomes partly a retirement plan.

So in 2005, we went to HSAs. The company benefits because we are now spending less on health insurance; the employee benefits because he or she gets a lot more choices about their health care and they have the potential to add to their retirement savings.

HSAs do put more responsibility on employees. There are going to be situations where they will have to make a decision about whether to go ahead with a particular medical procedure. In the past, when everything was covered by insurance, employees were incented to accept every medical procedure offered. But now, since the first dollars come out of the HSA -– money that the employee could keep if he or she doesn’t use it –- the employee really has to think whether the medical procedure is necessary. The employee might actually ask the doctor or the clinic about the cost of the procedure. This makes the medical personnel think a little bit too. The insurance approach that automatically covers everything requires no accountability on the part of the medical world nor the patient. Some obligation on the part of the patient engages everyone in the process more, and that is a good thing.

So I am very high on HSAs. I know after the State of the Union address I heard a lot of media commentary about the shortcomings of HSAs. Some people view them as an insult to people who now get comprehensive health insurance plans from their employers. Of course, if you give someone an option of being given everything they want, or of being given only some of what they want and then the means to decide whether you really need any more, they are going to choose the former. It is so much easier. There is so much less thinking. But it is impractical. And it is unsustainable. It certainly was at NFR Communications, and our company is no different than any other company.

Ultimately, health insurance has to go back to being insurance; that is, it should be there to cover unexpected disasters. Over the years, health insurance has evolved from a true insurance system to a comprehensive pre-pay system. It is not really insurance when you use a system to pay for doctor visits you know you are going to need or that may be optional. It’s kind of like using home-owners insurance to pay for routine maintenance like painting and re-roofing instead of only for rebuilding in the event of a fire or other unanticipated disaster.

Insurance that requires nothing of patients is not good for the nation’s health care system either. Doctors and medical personnel at clinics end up spending a lot of time on marginally necessary, if not entirely unnecessary, medical procedures and exams. It’s good if the patient has some financial stake in the services being offered if those services aren’t absolutely necessary.

Right now, some of the big companies offer HSAs as one of many health insurance options for employees. But my guess is in a few years, it will be the only option offered employees. There will be a lot of whining and complaining about it in some circles as some people make comparisons and conclude they are getting a less attractive deal. But those will be entirely self-centered analyses. If you look at your own individual situation and factor in the impact of HSAs on the viability of the company providing your employment and the strength of the nation’s health insurance system, HSAs emerge as the obvious way to go.