One of the White House's key health care goals for 2006 is to make health savings accounts more attractive. President Bush has asked Congress to raise the limit on how much money can be contributed to an HSA per year. He would also like to create a tax deduction for all out-of-pocket expenses paid via an HSA that is set up individually rather than through an employer. Furthermore, the Bush plan would let taxpayers write off insurance premiums for high-deductible plans that they obtain outside of a traditional employer-sponsored plan.
I think HSAs are a great innovation, and not simply because they provide employers with a way of buying cheaper coverage for their workers at a time when health care costs continue to rise. No, I like HSAs because I think they provide an aspiring entrepreneur with a health insurance cushion so that he or she feels more comfortable leaving a job that provides coverage in order to start a company.
Think back to the time when you were first contemplating striking out on your own. You most likely had a job at a company that paid you a nice salary and offered a retirement plan and other benefits. Starting a business meant giving up the safety net your employer had provided. And since you probably couldn't afford to take a comparable salary at first, you also faced a variety of unappetizing choices like dipping into savings, or running up credit card debt, or borrowing money from your friends and family.
But although becoming an entrepreneur involves taking a huge financial risk, I'll bet that didn't faze you nearly as much as the decision to walk away from your employer's health insurance plan. Giving up coverage is a difficult step to take, especially if you have a family. This is why so many entrepreneurs treat their start-ups as moonlighting gigs for months and, in some cases, years after they launch.
So what does this have to do with health savings accounts? In health care industry jargon, HSAs are portable, which means that people can take an HSA with them when they leave a job. The balance also rolls over from one year to the next, so any money that goes unspent accumulates with interest. This is income that workers set aside on a pretax basis. And in some cases, it's not even their money. Employers who adopt HSAs to reduce the cost of their health insurance plan can use the savings to fund some or all of their employees' accounts.
We're not talking about huge sums, of course. HSAs came into existence only two years ago, and many people spend what they place in those accounts each year. Plus, there are limits on how much money you can deposit annually. Currently, individuals are allowed to save up to $2,700, while families can save up to $5,450 per year. Even if a would-be business owner has only a few thousand dollars saved, however, that money enables him or her to pay for basic medical expenses like doctor visits, pharmacy bills, and new eyeglasses.
Like any health care alternative, HSAs involve tradeoffs. A start-up entrepreneur must pair his or her HSA with a high-deductible plan that will cover major medical expenses. In some cases, it's possible to continue to use an individual insurance policy set up by a previous employer. But in states that have "community rating" laws, which are intended to prevent insurance companies from charging different rates to different individuals, obtaining high-deductible coverage may be difficult.
Assuming that an entrepreneur qualifies for this type of insurance, there is still risk involved. The government caps the amount of money an HSA holder can be asked to pay out of pocket--$5,250 for individuals and $10,500 for families--but that's still a lot. And if a person has $1,000 in an HSA, and a $5,000 deductible, a $4,500 medical expense could be extremely painful.
Still, even critics allow that having an HSA is better than no coverage, which is exactly the circumstance faced by many start-up entrepreneurs and the people they recruit to come work for their young companies. A lot has been written about HSAs from a consumer perspective, but one of their least-understood benefits is that they provide a little security to the person who wants to take the entrepreneurial leap.
Carl Schramm is president and CEO of the Ewing Marion Kauffman Foundation in Kansas City, Missouri, and a contributing editor.
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