See what people around the country are saying about health care premium

Christina, from Madison, NJ writes:
How much money will I have to put into my Health Savings Account every year, and when will I have to use the money by, in order to keep my account active?

Doug Badger
Lots of people are asking about health savings accounts (HSAs), a new, more affordable health insurance product that became available this past January 1 as part of the Medicare bill that the President signed into law last December.

Here’s how HSAs work. Let’s say that your employer provides you with a policy that covers most of your routine medical expenses. That policy might cost about $6,000 per year for a typical family. Your employer will send $5,000 off to the insurance company and will deduct $1,000 from your paycheck over the course of the year.

With a new Health Savings Account, your employer will buy you a policy that covers major medical expenses – like a hospitalization, a pregnancy or an operation – but does not cover routine medical costs. A policy like this might require you to pay the first $2,000 in medical expenses every year.

The premium for this kind of coverage will be much less than for the policy that you now have. Instead of $6,000, the policy might cost only $4,000. So you and your employer will save money on your coverage. But what happens to these savings?

Instead of sending that money off to an insurance company, the money that you and your employer save can go into your Health Savings Account. That account is yours to keep. It doesn’t belong to the insurance company or your employer. It belongs to you. It’s there to help you pay for doctor visits, medicines and other routine health care needs that your new insurance policy won’t cover.

Since your policy will require you to pay for the first $2,000 of your annual medical expenses, you will use the account to pay for these services. Once you’ve spent that $2,000 in any year, your insurance coverage will pay for your additional medical bills.

Basically, your health savings account will pay for your routine health expenses – like doctor visits and prescriptions -- and your insurance will cover any medical bills above your deductible.

But what if you don’t spend that $2,000? In that case, the money remains in your account. It’s yours to keep. It does not expire at the end of the year. The interest you earn on that money is tax-free. The following year, you and your employer can put another $2,000 into the account.

You will not pay taxes on any money that you or your employer put into your Health Savings Account. So long as you use the account to pay for your family’s medical care, you will not pay taxes on any withdrawals. And interest that you earn on money that is in the account also is tax-free.

Your Health Savings Accounts is fully portable, just like a 401(k) retirement account. It belongs to you, not to your employer or to an insurance company. When you change jobs, you take your account with you. And if you have a period of time between jobs, you can use your account to pay your medical bills.

There are limits on how much you and your employer can put into your account in any year. Together you can deposit the full amount of your insurance policy’s deductible up to $2,600 for an individual or $5,150 for a family.

But there is no limit on how big your account can grow. The money you keep in the account will grow over the years tax-free. You can save it for future medical needs, including your medical needs after you retire, like long-term care costs. You can also use your account to pay for things that your insurance doesn’t cover, like contact lenses, over-the-counter medicines and braces for your children.

Health Savings Accounts aren’t for everybody. Many people are happy with the coverage they now have and want to keep it. But for millions of Americans who are struggling to keep up with rising health costs, HSAs might be the right prescription.

Jay, from Washington, DC writes:
Would you please explain why corporations might be interested in providing health savings accounts to their employees? Also, how would an individual not covered under a corporate insurance policy participate in HSAs?

Thank you.

Doug Badger
One reason that corporations might be interested in offering HSAs to their employees is that health insurance premiums have become so expensive. One reason is that most employer-sponsored plans cover lots of routine medical expenses. A trip to the doctor might cost you $15. A month’s supply of medicine your doctor prescribed might cost you $10.

Everybody knows that their doctor is getting paid more than $15 for an office visit and that their pharmacist is charging more than $10 for a prescription medication. Your insurance company is covering the difference between what you pay and what your doctor and pharmacist actually charge.

That makes health care appear less expensive than it really is. But these expenses eventually show up as higher premiums. Your employer sends more money off to the insurance company the following year and withholds more money from your paycheck to help cover these premium increases.

Many employees might be interested in helping to break this cycle through health savings accounts. Since premiums for high deductible policies – coverage that kicks in only after you’ve spent $1,000 or more in a year on medical care – are far lower than for standard medical coverage, employers and employees can save.

What happens to these savings? They can be deposited – tax-free – into a worker’s health savings account, where it’s available to pay for expenses below the insurance policy’s deductible amount.

The account belongs to the worker and can be used – tax-free – for medical expenses. Money that isn’t spent stays in the account, so that you can save for future medical needs. And since the account doesn’t belong to an insurance company or to your employer, you can take it with you when you change jobs.

#1 Whirlpool Corp.: As of Jan. 1, more than half of this company's 21,500 insurance-eligible employees will be enrolled in one of two optional CDH plans from Definity Health. The company uses four salary tiers to determine how much each employee pays for premiums.

#2 Apogee Enterprises Inc.: This 4,000-employee manufacturing company dumped all of its existing health plans in favor of a full-replacement CDH plan from Aetna, Inc. Integration of a flexible spending account has offset concerns over the high deductible.

#3 City of Las Vegas: More than 60% of Las Vegas's 2,100 insurance-eligible city employees are enrolled in a Lumenos CDH plan. Employees can earn additional HRA dollars by participating in a health risk assessment.

#4 "In the first year since going live with a full-replacement CDH plan in January 2003, per-member, per-month (PMPM) medical claim costs at St. Luke's Hospital in Maumee, Ohio, dropped 12.7%, according to recently tabulated first-year results. The hospital also saw pharmacy PMPM expenses plummet 20.4%"

#5 "Fletcher-Thompson's Pellerin, who switched to an HRA plan about a year ago. "It seems only natural that if you want to get a handle on costs, you need to involve the people using the product--employees," she says. Fletcher-Thompson now puts between $600 and $1,200 a year into employees' HRAs, depending on the number of people in the person's household. Employees use the funds for co-payments, prescriptions, and any other expenses; after the HRA is used up, the co pays come from their own pockets. Only a handful of employees have spent the entire amount, Pellerin says, and the company's total costs have dropped 10%."

#6 "In June 2003 Governor Rick Perry signed into law HB 3257 which changes the way the State of Texas applies the State of Texas Supplemental Compensation.  Effective this September 1, 2004 the State of Texas Supplemental Compensation which is presently added to most employees paychecks will be discontinued.  The money instead will be deposited into an account known as a Health Reimbursement Arrangement (HRA).  The HRA will work like a Flex Medical Spending Account.  The State of Texas will deposit for each qualified employee a certain dollar amount (presently $500) with a plan administrator.  Qualified employees will be issued a debit card by the plan administrator which can then be used to pay for health related co-pays and deductibles at participating physician offices and pharmacies"

• HRA contributions: How much of the deductible should be covered by an HRA? If the bridge is too small, employee behavior is less likely to change.
• Setting deductibles and premiums: What are the advantages of offering both a low- and high-deductible CDH plan?
• Preventive care: Is $400 a year per person enough for preventive care?
• Debit cards: How employees can use a single debit card to access FSA and HRA funds at the point of service.
• Out-of-pocket expenses: Where should out-of-pocket costs be capped to compete against other health plans?
• Coverage: Should the HRA be limited to traditionally covered medical expenses or expanded to include such services as Lasik surgery and orthodontics?
• Should pharmaceuticals be covered by the HRA, or carved out? What is the best reimbursement mechanism?

Notice 2004-23 The IRS provided guidance on what constitutes preventative care, as there had not been any uniform definition already in place. This notice provided a safe harbor for preventive care benefits allowable with a high-deductible health plan (HDHP) without satisfying the minimum deductible. However, preventive care would not generally include any service or benefit intended to treat an existing illness, injury or condition.

The IRS determined, with Rev. Rule. 2004-38, that prescription drug benefits could only be provided when it is subject to the same deductible that applies to the HDHP. Therefore, if an individual were covered by a supplemental prescription plan that is not an HDHP, contributions to an HSA would not be allowed for those deductions.

Based upon the prior ruling, the IRS recognized how it could impact individuals with separate prescription coverage or rider policies. Accordingly, Rev. Proc. 2004-22 provides transitional relief by allowing deductions for these individuals with the separate plans for prescription benefits for the months before January 1, 2006.

The final area of guidance relates to medical expenses that may be paid or reimbursed on a tax-free basis from an HSA. Generally, the expenses may only be paid or reimbursed if the expense is incurred after the HSA was established. Notice 2004-25 provides transitional relief due to the lack of trustees or custodians who are willing to open HSAs. For 2004, this allows an HSA established by an eligible individual on or before April 15, 2005, to reimburse expenses incurred on or after the later of January 1, 2004, or the first day of the month that the individual is an eligible individual.