HSAs May Be Health Care's Remedy

The high-deductable, tax-favoring savings accounts encourage individuals to spend wisely.
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America spent more than $1.9 trillion on health care in 2004, representing about 16% of our nation's gross domestic product -- nearly double what most industrialized countries spend. Health care spending has been growing at more than twice the rate of inflation.

American households spent a record $236 billion in 2004 on out-of-pocket medical expenses, including co-payments and deductibles. And of course, many households -- more than 40 million Americans -- have absolutely no health insurance.

No financial issue in America, including budget deficits, trade deficits and potential stock market declines, has the potential to so completely undermine our economic system. Our future depends on finding a solution. Health savings accounts, which are expected to be a major topic of President Bush's State of the Union address tonight, could help provide a cure for this health crisis.

How We Got Here

For the past 60 years, health insurance has primarily been offered through employers. That started in World War II, when wages were fixed, so employers offered health insurance to compete for workers. By the 1950s, the cost of health insurance had become a deduction for companies, though it is still not deductible for employees. Health care packages were then sweetened with promises of retiree health care -- a cost to be deferred into the future.

Now we're in that future. And the costs are staggering, making our products uncompetitive in the global economy. Last year,

General Motors

(GM) - Get Report

is reported to have spent $5.2 billion on health care for its employees and retirees. That adds $1,525 to the price of every car it sells!

The soaring costs have set off a vicious round of job losses, pushing those without private health insurance into expensive emergency rooms. The unemployed and the very poorest patients are covered by state Medicaid programs. But low-wage workers who are not covered by their employers are faced with staggering medical bills and even bankruptcy.

The Role of Incentives

There are some bad incentives in our current system. When businesses -- or their health insurance companies -- are picking up the tab, there is absolutely no incentive for individuals to care about how much health care they use.

And there's no tax-deduction incentive for people to buy health insurance policies, because individuals can't deduct the premiums.

But most important, there's no reward anywhere in the system for staying healthy! That is, there

was

no reward until health savings accounts came along two years ago. HSAs are an incentive for people to stay healthy and spend wisely, because the money they

don't

spend belongs to them and grows tax-deferred.

How HSAs Work

HSAs combine a high-deductible health insurance policy and a tax-favored savings account. Instead of buying a health insurance policy with a $250 deductible, you'd buy a policy with a $5,000 deductible, or your employer would buy it for you.

It sounds scary to have such a high deductible, but the policy costs much less. The money you or the company saves on insurance premiums -- as much as 40% of regular costs -- can go into a special, tax-deductible savings account and be used to pay for medical expenses, tax free. Unspent money grows for future years' expenses.

Many employers contribute some or all of their insurance-premium savings into these HSAs for their employees. In 2006, an individual can put up to $2,700 a year into an HSA, or $5,450 for families.

But you can start an HSA account with a much lower amount. Later, if you incur medical bills, you can put more money into the HSA on a pretax basis and immediately pay your bills.

And for those who can't afford a contribution, the low-cost medical insurance plan, despite its high deductible, will at least protect them against bankruptcy caused by medical expenses.

Where and Why

If your company doesn't offer health insurance coverage, you can search for individual HSA plans at

ehealthinsurance.com. Bob Hurley, eHealthInsurance's vice president of strategic operations, says his company's site is seeing a higher percentage of people choosing HSAs.

In fact, Hurley is advising younger workers to turn down employee-sponsored plans in favor of these inexpensive HSA policies. He notes that with company plans, if you lose your job you'll be stuck with an expensive, temporary-coverage Cobra plan. And if you have a pre-existing condition, you may not find health insurance when Cobra runs out. An individually owned HSA is tax-advantaged, secure and portable.

The real benefit to our society is that HSA incentives encourage people to spend their health dollars wisely --

because it's their own money

.

That's why companies such as Fontis Healthcare Services are creating online wellness tutorials for employees in the plans they distribute. Workers who participate can earn extra HSA contributions from their employer. Says Fontis CEO James Smith: "The huge problem of spending 15.8% of our GDP on health care can only be solved by reducing the demand for health care in America. And the way to do that is to get people incented to lead healthier lives."

The government is not the solution. That's been tried in Canada, where its Supreme Court recently ruled that the long lines generated by a state-sponsored health system inherently violate their guarantees of human rights. Their court said private health insurance plans must be allowed to compete.

Maybe it's time to try individual incentives to stay healthy. We'll all be better off. And that's the Savage Truth.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column by the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage also was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of the McDonald's and Pennzoil corporations.