Essentially, the HSA replaces the Archer Medical Savings Account (MSA) and as of January 1, 2004, MSAs are no longer available.

Medicare Prescription Drug Improvement and Modernization Act of 2003

The widely reported senior prescription drug legislation – Medicare Prescription Drug Improvement and Modernization Act of 2003 – also created health savings accounts (HSAs).

Why does legislation amending the Medicare act address health savings accounts? It may be because these accounts are portable, are individual accounts, and monies not used for health care expenses on an annual basis can accumulate tax-free. These accumulated savings can then be used by individuals to pay for prescription drugs, long-term care insurance, qualified medical expenses, medical care, and health insurance premiums. These funds may not, however, be used to pay for Medicare coverage.

Health Savings Accounts Differ From Medical Savings Accounts

The HSA is a savings account established for each employee eligible for health insurance coverage. The employee can use the funds to pay qualified medical expenses. Unused funds belong to the employee to cover future medical expenses. The funds stay in the savings account and grow in value (tax free). HSAs can be offered through a cafeteria-style plan, but unused funds are carried over for use in future years by employees (no "use it or lose it").

So far, that is what the medical savings account did. Here’s what’s new.

There is no minimum or maximum limit on the number of employees in a practice required to establish an HSA. The MSA was limited to self-employed individuals or employees in firms with 50 or fewer employees.

Any high-deductible health plan, such as a typical comprehensive major medical policy, qualifies for use in a health savings account. A high-deductible health plan is defined as:

·  Annual deductible of not less than $1,000 for self-only coverage.

·  Annual deductible of not less than $2,000 for family coverage.

·  Sum of deductible and other out-of-pocket expenses cannot exceed $5,000 for self-only coverage.

·  Sum of deductible and other out-of-pocket expenses cannot exceed $10,000 for family coverage.

·  The annual contribution limit to the HSA for self-only coverage is $2,600.

·  The annual contribution limit to the HSA for family coverage is $5,150.

·  Only preventive care can be exempt from a deductible.

·  The minimum deductible levels are indexed for inflation^.

For comparison purposes, here are the requirements for the MSA that is no longer available:

·  A deductible between $1,700 and $2,600 for self-only coverage.

·  A deductible between $3,450 and $5,150 for family coverage.

·  Sum of deductible and other out-of-pocket expenses could not exceed $3,450 for self-only coverage.

·  Sum of deductible and other out-of-pocket expenses could not exceed $6,300 for family coverage.

·  The annual contribution limit for MSAs was 65 percent of the self-only deductible.

·  The annual contribution limit to the MSAs was 75 percent of the family coverage.

The contributions to the HSA can be made by both employees and employers with pre-tax salary reductions. The statute even goes so far as to allow others to make contributions to the HSA on your behalf. Medical Savings Accounts were restrictive in that either the individual or the employer had to fund the account.

HSAs and Health Benefit Premium Control

Because HSAs are so new, there is no way of knowing yet if this is a partial solution to the quest to control health benefit premiums. One could argue in theory on these outcomes:

·  HSAs require the use of high deductible plans. Premiums associated with qualified HSA products should decrease.

·  Employees will need to have some awareness of the cost of their health care so as to track/determine how much of the deductible remains and/or accumulates. This puts the patient directly into the economics of health care. The potential outcome is a more informed medical consumer.

·  What is not spent on medical care grows tax free in the individual’s own savings account. For some individuals, a new tax-free savings vehicle is incentive enough to live healthier. The potential outcome is a more informed and cost-conscious medical consumer who is healthier and wealthier.

·  Putting consumers in charge of spending at least some of their own money on medical care may serve to slow the tide of medical spending and the future premiums to insure medical risk.

Time will tell whether these products will work to help control the rate of rising health benefit premiums, provided that employers and employees purchase high deductible products for use in an HSA.

If one speaks with an insurance executive about whether HSAs will help to control the rising cost of health insurance premiums, the likely response is, "It depends on whether HSAs have an affect on overall utilization." There is a direct correlation between utilization and costs, so this response has tremendous merit.

If one speaks to a person that views the glass as half-empty as opposed to half-full, that individual may comment on how fast a $2,000 deductible can be spent by a consumer of health care with a chronic condition. That same person may be concerned that the HSAs could undermine the comprehensive health coverage many employees currently have.

If one dreams about early retirement, an HSA may be the answer. One of the concerns of these lucky individuals is paying for health insurance during the BERME (Between Early Retirement and Medicare Eligible) years. A tax-free, portable individual account with growth potential that can be used to pay for health care costs and premiums could be the ticket out. Early indicators are good.

There may never be one perfect solution for health care cost issues that continue to confront this county. The business of health care is much too big and complex to be fixed by a silver bullet, much less by a savings account. However, HSAs will be good for some individuals and very well could have an effect on intangibles such as incentives to stay healthy.

I want to be healthier. This past Sunday, for the first time ever – and I mean ever – I sliced up three apples, cut celery, and cleaned and situated grapes in the refrigerator for my snack food to last through the week. By late Monday evening, the kids had eaten all of the grapes and the apples. The celery, however, remains!

Expect a lot more information on this subject in the future. Worth watching for are (1) regulations that will further clarify this new law, and (2) how quickly the major health insurance carriers move to offer turn-key products that comply with HSA regulations. Stay tuned.