Happy open enrollment season! There once was a time not too long ago when this annual rite of selecting the best health benefits package was purely a back-office phenomenon handled by corporate benefits managers and human resources people.
Today, thanks to the Affordable Care Act and the trend toward "consumerization" of healthcare, open enrollment season has become a kind of consumer exercise in actuarial science where we try to select the best insurance plan based on how healthy we think we'll be for the next twelve months.
Increasingly, that exercise is landing on the Health Savings Account (HSA) as the most attractive option.
An HSA is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). Created under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, HSAs provide patients in high-deductible health plans ($1,300 for an individual, $2,600 for a family) tax relief when paying for health-related expenses. Funds allocated to an HSA can be invested, and its growth is not taxed. When HSA funds are used to pay for health-care expenses in retirement, patients take advantage of the tax-free trifecta: current tax deduction, tax-free growth, and tax-free distribution. Employers can contribute to their employees' HSAs, too, adding on an even bigger potential tax benefit.
According to a study published in the September issue of Health Affairs, the number of U.S. households with a Health Savings Account (HSA) jumped tenfold from 2005 to 2012--reaching 6.52 million and suggesting that consumers are starting to see the tax benefits of these accounts.
Just how advantageous are these tax benefits? For tax year 2015, an HSA allows contributions up to $3,350 a year for individual coverage, or $6,650 a year for family coverage to your account tax free. This annual amount can be paid as a monthly contribution or all at once. For tax year 2016, the allowable annual contribution for individual coverage remains the same while the family-allowable contribution will rise by $100 to $6,750. If you are 55 or older, you may be eligible to make an additional "catch-up contribution" of $1,000 to your HSA. That's a nice tax free score, and it looks like Americans are starting to recognize that.
I spoke recently with Lorens Helmchen, PhD, an Associate Professor of Health Policy and Management at the Milken Institute School of Public Health at the George Washington University. He co-authored the study, "Health Savings Accounts: Growth Concentrated Among High-Income Households and Large Employers," and he told me that, while those who have adopted HSAs thus far remain a relatively small minority, the trend is certainly on the upward trajectory.
"We're estimating that fewer than 10 percent of tax return filers were making contributions to a Health Savings Account. That suggests that take up to HSAs has been increasing rapidly, but is still at a low overall level," Helmchen said. "It's still not a widely used means of paying for your healthcare."
It may not be well-known by the majority yet, but it's clear the utilization of these accounts is trending upward. And as they continue to infiltrate the public consciousness, it's becoming clear that the groundwork has been set for a systemic shift in how employees pay for their health benefits.
With many employers finding themselves vulnerable to unsightly overhead or looming taxation of very generous plans--such as the Cadillac Tax--under the Affordable Care Act (ACA), a growing tactic has been to shift the burden of healthcare to employees. Employees in high-deductible health plans have felt that type of crunch, and now are starting to view HSAs as something of a reprieve.
A 2014 study from S&P concluded that the ACA's legacy may ultimately be "recognized as the starting point of the reconstruction of the U.S. health care benefit industry and a catalyst for how companies provide health care insurance for their employees." The rising popularity of HSAs may just be what the future looks like. Instead of the traditional model of relying on employers for their healthcare, HSAs ensure that employees are incentivized to shoulder the responsibility for their healthcare. In turn, the study suggests that employers would theoretically have more fiscal flexibility and could offer contributions to an HSA as a way to attract talent.
Helmchen concurs with that vision.
"I can see this becoming another offering in the menu of fringe benefits, one more instrument to compete for talent," he explained. "Like 401k contributions."
There's still plenty of time before HSAs take over as an employee's preferred way to save for healthcare expenses, but early indications are there is plenty of reason to assume we're standing on the precipice of a huge change in the provider relationship.