A Closer Look at Health Savings Accounts On Jan. 31, President Bush outlined his proposal for “consumer-driven health care”-a new approach to providing health coverage to Americans-in his fifth State of the Union address to Congress. This proposal, which shifts greater responsibility and costs to individuals for their health care coverage in order to cut health care ... Policy Analysis
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Policy Analysis  |   February 01, 2006
A Closer Look at Health Savings Accounts
Author Notes
  • Steven White, is director of health care economics and advocacy. For more information, e-mail him at swhite@asha.org if you have any questions about this article.
    Steven White, is director of health care economics and advocacy. For more information, e-mail him at swhite@asha.org if you have any questions about this article.×
Article Information
Regulatory, Legislative & Advocacy / Policy Analysis
Policy Analysis   |   February 01, 2006
A Closer Look at Health Savings Accounts
The ASHA Leader, February 2006, Vol. 11, 1-27. doi:10.1044/leader.PA.11032006.1
The ASHA Leader, February 2006, Vol. 11, 1-27. doi:10.1044/leader.PA.11032006.1
On Jan. 31, President Bush outlined his proposal for “consumer-driven health care”-a new approach to providing health coverage to Americans-in his fifth State of the Union address to Congress. This proposal, which shifts greater responsibility and costs to individuals for their health care coverage in order to cut health care expenditures, includes the expansion of Health Savings Accounts (HSAs).
Bush told Congress and his television audience that he would strengthen HSAs “by making sure individuals and small-business employees can buy insurance with the same advantages that people working for big businesses now get.”
HSAs are savings accounts into which individuals deposit money and then withdraw it tax-free for eligible medical expenses. These accounts were implemented in 2004 through a change in the Internal Revenue Code to allow an individual to deduct HSA contributions. HSAs are linked with high-deductible health plans (HDHPs)-plans with annual deductibles in 2006 of at least $1,050 for an individual, $2,100 for a family, and out-of pocket limits of $5,000 for an individual and $10,000 for a family. HDHPs offer low premiums for “catastrophic” coverage in exchange for high deductibles. The theory is that consumers who have to spend their own money for health insurance coverage are more likely to keep costs down than if they use employer-paid health coverage. Individuals are responsible for researching health coverage options and keeping careful track of their financial and medical records.
HSA funds can be used for a wide range of medical services-routine doctors’ appointments and prescriptions, over-the-counter medicines, weight-loss programs, smoking cessation programs, and chiropractic care, for example. (See IRS publication 502 [PDF, 1MB] for a partial list of eligible expenses.)
HSAs and Clinical Services
Audiologists and speech-language pathologists should be interested in following developments in HSAs because they allow the consumer to determine how their funds are spent. Covered expenditures include medical costs that may not be included in some standard health insurance contracts but are considered tax deductible medical expenses by the Internal Revenue Service (IRS). According to IRS publication 502, Medical and Dental Expenses, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.” The IRS has specifically deemed the following expenses to be included in their definition:
  • Hearing aids and hearing aid batteries

  • Medical services provided by physicians, surgeons, specialists, or other medical practitioners

  • Therapy received as a medical treatment

  • Special education expenses paid on a doctor’s recommendation for a child’s tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments

The HSA for America Web site has a list that includes other items of interest. It lists hearing aid animal care (IRS Publication 907, Tax Highlights for Persons with Disabilities, states that “cost of a guide dog or other animal aiding a person with a physical disability” is a medical expense), lip reading expenses, modified telephone, and dyslexia language training as expenses deemed qualified by the IRS or federal courts.
But some HDHPs may limit coverage under the deductible-and may not cover expenses for services like speech-language pathology and hearing aids. According to the Kaiser Family Foundation, a January 2005 Wall Street Journal report found that some HDHPs may not cover preventive care, “prescription drugs, rehabilitation, physical therapy, and mental health services.” The high deductible of the HDHP may be harder to reach if the enrollee uses speech-language pathology or audiology services that may not be covered. That exclusion may make spending HSA dollars on our services less attractive than an initial review of the IRS list would suggest.
Readers may be familiar with Flexible Spending Accounts or Arrangements (FSAs) that are employer-established benefit plans that reimburse employees for specified medical expenses as they are incurred. In an FSA the employee contributes pre-tax funds to the account through a salary reduction agreement and is able to withdraw the funds set aside to pay for medical bills that are consistent with the IRS medical expense list. There is no drawback to paying for speech-language pathology and audiology services using FSA funds except to maintain the money for other health care purposes. HSAs are different than FSAs in that they replace health insurance and the funds can be carried over from year to year.
Debate Heats Up
The White House and many congressional Republicans have embraced HSAs because of their cost savings. Benefits may accrue to people with high health-insurance costs because of the tax break, and to healthy people with low health-insurance costs. Money invested each year can be rolled over, which could benefit healthy, younger workers, who have time to see their investment grow.
Employers favor HSAs because the HDHP premiums are considerably less than those for a standard health plan. It remains to be seen how the HDHP premiums increase over the next five years. One can expect that they will not escalate in the same fashion as standard health plans such as preferred provider organizations. Some employers are also enamored with HSAs because their contributions are voluntary.
According to America’s Health Insurance Plans (AHIP), a health insurance industry lobbying group, HSA membership is growing rapidly, noting that HDHPs linked with HSAs now cover more than 3 million people, a steep increase from the 438,000 reported by the AHIP in September 2004. In a Jan. 26 press release, AHIP says, “according to the (new) study, enrollment in the new insurance policies eligible for HSAs has roughly tripled since last March when a similar AHIP survey found that approximately 1 million people were covered by HSA-compatible insurance policies. The data come from 99 member plans that represent nearly all the health plans currently offering HDHPs.
Critics of HSAs, including many Democrats, cite the burden on consumers, who will make all buying decisions-even if they’re ill-and who may cut back on needed services for financial reasons. Good research and bookkeeping will be important-once all of a person’s HSA funds are expended, individuals may need to submit all receipts to the insurer to prove the deductible has been met. Another concern is that consumers receive the coverage information they need in order to make wise decisions, which may prove difficult given the labyrinthine nature of health coverage options. Many seniors, for example, are struggling to make choices about the new Medicare Part D drug benefit.
In January 2005, the Kaiser Family Foundation reported a relative ignorance in the USA about HSAs:
When asked about the term “health savings account,” three in 10 U.S. adults (30%) say they have heard the term and know what it means, while another 17% have heard the term and don’t know what it means, and more than half (53%) say they have not heard the term. Four percent of the public overall say they are currently enrolled in a health savings account.
What are the disadvantages of HSAs? According to Vanessa Fuhrmans of the Wall Street Journal (June 14, 2005), price and quality information are hard to find when one is under a HSA. One of the motivations behind the HSA movement was to get the consumer involved with their care so that competition would help control costs. Now, according to Fuhrmans, 85% of those employees surveyed by McKinsey & Company said they needed more information and tools to make good decisions about their health care. Moreover, only 44% of plan members were as satisfied with their new plan as when they had their previous one.
Democratic commentator Jeffrey Feldman suggested that the conservative movement is supporting HSAs because they see an unhealthy market rather than an unhealthy citizenry. He foresees getting phone calls during dinnertime with offers of $100 cash back for switching your health care plan. Feldman maintains that we need a community care frame and not HSAs that will become like credit card companies.
Glen Fest of Bank Technology News (January 2006) says that HSAs are not yet popular with consumers. In mid-January Washington Post reporter Steven Pearlstine wrote, “Health savings accounts combined with higher-deductible catastrophic insurance-the centerpiece of the Bush consumer-driven health care push-are already gaining traction in the marketplace and show some real promise.” But Pearlstein goes on to say, “there can be no credible reform without extending health insurance for every American.”
Edward Park and Robert Greenstein of The Center on Budget and Policy Priorities provide both the positives and negatives associated with HSAs. The principal concerns are that HSAs:
  • Are likely to weaken the comprehensive employer-based health insurance system with the healthier workers shifting to HSAs and workers in poorer health seeking to remain in comprehensive coverage.

  • Will be used by healthy, affluent individuals as tax shelters.

Conversely, Park and Greenstein say that HSA advocates conclude:
  • Current data show that HSAs are not primarily attracting healthy individuals and thus do not risk adverse selection.

  • Enrollment data show that HSA participants are not primarily higher-income individuals taking advantage of the tax shelter benefits of HSAs.

  • Many HSA users are people who previously were uninsured, and thus HSAs can be an important tool for expanding coverage.

A joint study by the Employee Benefit Research Institute and the Commonwealth Fund published in December 2005 provide the most current information about satisfaction with consumer-driven health care. According to the study, there is lower satisfaction with consumer-driven plans than comprehensive health plans (42% versus 63%). In addition study results show that HDHPs have higher out-of-pocket costs, more missed health care, more cost-conscious consumers, and a lack of information about cost and quality for enrollees.
HSAs are relatively new, so the impact on speech-language pathology and audiology coverage is not yet known. The IRS list for coverage is potentially positive, but the risk of having our services excluded from the health plan’s list of deductibles raises cause for concern.
One last thought about HSAs: Blue Cross and Blue Shield (BCBS) Association of America apparently believes they will grow in popularity-it’s chartering a bank to handle HSA funds.
How Health Savings Accounts Work

Here are some of the features of HSAs:

  • HSAs must be paired with a high-deductible health plan (HDHP)

  • IRS defines HDHP-deductible of at least $1,000 single and $2,000 family and out-of-pocket limits of $5,000 single, $10,000 family

  • HSA maximum contributions are set by law-$2,600 annually for singles and $5,150 for families

  • HSA contributions can be made by the employer or the employee’s family members

  • Employer contributions to HSAs are voluntary

  • Ownership of the HSA may transfer to the spouse upon death of the employee

  • HSAs allow rollover of unused funds from year to year

For a complete description of rules, see IRS Publication 969.

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February 2006
Volume 11, Issue 3