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Bush budget plan would boost HSAs

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WASHINGTON—A new round of health savings accounts reforms proposed by the Bush administration last week as part of a federal budget package should ease the concerns of both employers and employees about HSAs and increase their adoption, industry experts say.

The latest reforms would build on a package passed by Congress last year. The administration plan would allow HSAs to be linked to health insurance plans other than those with big deductibles, easing lower-income employees' concerns of being exposed to large medical bills.

Other provisions would allow employees to withdraw HSA funds to pay for medical expenses incurred before they set up an HSA, as well as eliminate a current inequity in which an enrollee with family coverage is saddled with a bigger deductible than an enrollee with single coverage.

The proposal also would make it easier for older enrollees to make catch-up HSA contributions and ease certain transitional issues when employers adopt HSA-linked plans and move away from plans that include flexible spending accounts and health reimbursement arrangements.

In all, the provisions, which observers say face an uphill battle to win congressional approval, would ease employees' concerns about HSAs and make them an easier sell for employers.

"These would be very significant improvements and greatly facilitate movement to the arrangements," said Jay Savan, a principal with Towers Perrin in St. Louis.

The most significant provision involves the design of health insurance plans linked to HSAs. Under current law, an HSA must be linked to a high-deductible health insurance plan, which in 2007 is one with a deductible of at least $1,100 for single coverage and $2,200 for family coverage.

In the administration proposal, HSAs also could be paired with insurance plans with a coinsurance requirement of at least 50%. As under current law, the maximum out-of-pocket limit for single coverage would be $5,500 and $11,000 for family coverage.

Benefit experts say such a design would eliminate a big barrier to HSA enrollment: the fear of lower-income employees that they could face big medical bills without insurance coverage.

"A lot of employees are allergic to such a big out-of-pocket hit," said Andy Anderson, of counsel to Morgan, Lewis & Bockius L.L.P. in Chicago, referring to the impact of high-deductible HSA-linked health insurance plans.

A 50% coinsurance alternative "would certainly broaden the appeal of HSAs," Mr. Anderson said.

At the same time, an alternative design would ease another problem associated with high-deductible plans: the fear of employers that employees, now used to small copayments for prescription drugs, will stop taking needed medications if they have to pay the full cost.

Under Treasury Department guidance, prescription drugs other than preventive medicines cannot be covered by the linked insurance plan until the deductible is met. That means employees could have to pay—either out of their pocket or from their HSA—for more than $1,000 of prescription drug bills before their health insurance coverage kicks in.

"It becomes a big cost compared to where people are today" with typical drug copayments, said Scott Keyes, a Watson Wyatt Worldwide senior consultant in Stamford, Conn.

A 50% coinsurance arrangement would ease employer concerns that employees won't have prescriptions filled, Mr. Keyes said.

Another provision in the Bush package would eliminate a problem that now can make HSAs less valuable. Under current rules, HSA enrollees can tap their accounts only to pay for medical expenses incurred after the HSA is set up.

In many cases—perhaps 60% or more—employees don't establish HSAs in tandem with their enrollment in a high-deductible plan, said Tom Hricik, national director-HSA product distribution with ACS/Mellon Financial Corp. in Pittsburgh.

That can happen for a variety of reasons, such as a paperwork glitch or employees needing more time to evaluate HSA vendors. The result, though, is employees have to use aftertax dollars to pay for a health care bill.

The administration would resolve this problem by making clear that HSA funds could be used to pay for a health care bill incurred on or after coverage in the linked health insurance plan began, so long as the HSA was established no later than the date an employee filed an income tax return.

"It is a real common-sense answer," said Jeff Munn, a consultant in the Falls Church, Va., office of Hewitt Associates Inc.

The Bush package would eliminate yet another barrier—involving so-called "embedded deductibles"—to HSA enrollment.

Under current rules, employers with HSAs have to structure family coverage deductibles in the linked health insurance plan in a way that results in less coverage than in traditional plans.

In traditional plans, an overall deductible is set for family coverage. Additionally, such plans typically use a per person, or embedded, deductible that often is equal to the deductible for individual coverage. For example, if an employer offers a health insurance plan with a $1,000 deductible for individual coverage and a $2,000 deductible for family coverage, the plan typically would include a $1,000 per person embedded deductible.

The intent of the embedded deductible is to ensure that an individual with family coverage will have the same level of coverage as an employee with individual coverage. Current HSA law allows embedded deductibles for family coverage, but they can't be less than the deductible for family coverage.

The administration package would eliminate that inequity by allowing plans offering family coverage to provide individual embedded deductibles at least equal to the deductible for individual coverage, a change that would provide hundreds of dollars of additional insurance coverage each year and make the design of HSA-linked plans more in line with traditional plans.