During his State of the Union address in January 2006, and on several occasions since then, President George W. Bush has spoken about his administrations plans to stem the tide of health care costs in this country.

Pointing to the fact that the costs for private health insurance have risen 73 percent in the last five years, the President recently said, This is unacceptable for this country to have health care costs rising as fast as they are. If we want to be the leader of the world, we must do something about it.

At the heart of Bushs plan are Health Savings Accounts (HSAs). HSAs were designed to give employees more control over their health care choices, thereby compelling them to make better, more cost-effective choices. It is presumed that when faced with having to pay their own medical bills rather than having them paid for by a third-party insurer, people will search for ways to reduce their own health care costs and make their increased deductible go further. As an additional incentive, the less they spend on their own health care, the less they will need to dip into their HSAs, which will continue to grow, tax-free, until retirement.

A recent survey by Americas Health Insurance Plans shows that more than 3.2 million Americans have now chosen the higher-deductible HSAs to finance their insurance costs.

Benefits for Employees

When given the option, HSAs are particularly beneficial for the lowest health care spenders. These are typically the young and healthy employees for whom the HSA savings go all but untouched and are allowed grow more like a second retirement savings plan than a medical insurance plan.

But everyone gets sick now and again and finds him or herself having to purchase prescription medication, or visit an emergency room. In those occurrences, the HSA funds are available, and those who have them can look upon the required co-payments as all but prepaid. Not only are these costs essentially prepaid, but also the dollars in the HSA used to pay them are accrued pre-tax. This effectively reduces the costs of any co-payments for medications or emergency room visits by the same percentage as the employees tax rate.

And while these employees may be healthy and financially stable today, the future is less certain. If their health situations change, the funding of HSAs becomes their safety net, or rainy day fund that can help them to offset excessive co-payments for medications and tests that come as the result of catastrophic injuries or illnesses.

Furthermore, because the funds in an HSA are held in a tax-exempt trust or custodial account, rather than in an employer-held account, the participant does not lose any amount in the account (other than the non-vested portion of the employer contribution) in the event of a job change. Therefore, employees can either roll the funds over to a new job, or use them offset COBRA payments if the job change is a dismissal or layoff.

Employers Benefit As Well

While these funds grow and serve as a sense of security for the employee, they also bring significant benefit for the employer as well. First, because plans that include an HSA require the participant in the plan to pay a higher deductible, the premiums for the insurance portion of the plan are significantly lower, thereby reducing the employers costs. Second, employers improve their bottom lines by contributing a pre-determined, controlled amount to their employees HSAs. Third, these contributions to HSAs for eligible employees are tax deductible.

HSAs also offer administrative benefits to employers. Because HSAs place the responsibility of using funds squarely on the employee, employers are relieved from the burdens associated with administering and verifying the use of those funds. This had not been the case with previous health care savings plans such as Healthcare Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs). Additionally, a peripheral benefit comes with the offering of an HSA. Because employees have greater responsibility for their medical spending, they will tend to make better decisions in an effort to save more money and to allow funds in their accounts roll over from year to year. Healthier employees not only accrue higher account balances, but also reduce employers expenses for time lost from work.

On the Other Hand

It is on this point, however, that the two sides of the HSA debate tend to split. Those who favor HSAs claim the employer benefits from more conscientious employees created by greater responsibility for their health care choices. However, opponents argue that the practice of employees going to their physicians for each sniffle or going to the emergency room for treatment of a sore throat is too ingrained to be changed.

Opponents also say that there just are not enough health care options out there today for the HSA to be truly effective. They believe that until something is done in this country to tackle the diminishing supply of available health care options, there does not exist the competitive pricing in health care that would allow for the kind of cost savings that would make HSAs effective.

There are many positive reasons for a business to offer a high deductible insurance plan with an HSA. However, as opponents point out, there are also many reasons to temper enthusiasm and consider whether such a plan is right for the business and for the eligible employees who may select it. [IA]

Jeff Bowers is a Certified Financial Planner with more than 15 years experience in the insurance and financial planning industries, and is a member of the Financial Planning Association. He holds a certificate in Financial Planning from Kaplan College. He is also a registered representative with SII Investments, Inc., member NASD/SiPC and a registered investment advisor.