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Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs). The Cornerstone of Consumer Directed Health Care. 2003 Medicare Modernization Act Created Health Savings Accounts. First: A special Qualifying High Deductible Health Insurance Plan (HDHP) Second: A Tax-preferred Health Savings Account.

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Health Savings Accounts (HSAs)

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  1. Health Savings Accounts(HSAs) The Cornerstone of Consumer Directed Health Care

  2. 2003 Medicare Modernization Act Created Health Savings Accounts • First: • A special Qualifying High Deductible Health Insurance Plan (HDHP) • Second: • A Tax-preferred Health Savings Account Actually Two Related Components:

  3. HSA Eligible Individual • You have a qualifying high deductible health plan (HDHP) on the first day of the month. • You have no other health coverage except what is permitted under Other health coverage (see IRS Pub. 969). • You are not enrolled in Medicare. • You cannot be claimed as a dependent on someone else’s 2008 tax return.

  4. HSA Qualifying Insurance (HDHP) Requirements:2008 IndividualsFederally Mandated • Deductible: Between $1,100 and $5,600 • Maximum Annual Out-of-Pocket Expense Limit: • In network can be as high as $5,600 • May have different limits out of network • Maximums COLA adjusted annually • HDHP covers in network expenses: • Above the deductible (coinsurance may apply) • Above the out-of-pocket limit (100%)

  5. HSA Qualifying Insurance (HDHP) Requirements:2008 Family(more than one person)Federally Mandated • Deductible: Between $2,200 and $11,200 • Maximum Annual Out-of-Pocket Expense Limit: • In network can be as high as $11,200 • May have different limits out of network • Maximums COLA Adjusted Annually • HDHP covers in network expenses: • Above the deductible (coinsurance may apply) • Above the out-of-pocket limit (100%)

  6. AdditionalHSA Qualifying Insurance(HDHP) Requirements • In general, insurance must not cover expenses below the deductible except: • Certain preventive care services may be allowed under the deductible (see IRS Bulletin 2004-15) • Until January 1, 2006 certain prescription drug benefit riders will be permitted (see IRS Bulletin 2004-15)

  7. Health Savings Accounts:Contributions (2008) • Eligible Individuals and Families may contribute, on a tax-free basis, up to: • Individuals: $2,900 • Families: $5,800 • Limits undergo annual COLA adjustments

  8. Health Savings Accounts:Contributions • “Catch Up” provision: • Age 55 to Medicare eligibility, each spouse may contribute to his or her HSA an additional: • $800 per year in 2007 • $900 per year in 2008 • $1,000 per year in 2009 and thereafter • Both employers and employees may contribute (up to the legal limits).

  9. Health Savings Accounts:Contributions • Like IRAs: • Investment income compounds on a tax-free basis. • Funds carry over tax-free from year to year. • Unlike IRAs • Contributions are not phased out with increasing Adjusted Gross Income • Can be made in addition to 401K and IRA contributions.

  10. Health Savings Accounts:Distributions • If used to pay for qualified medical expenses or long term care insurance: • Always tax and penalty free. • May be withdraw at any time for these purposes (even years later)!

  11. Health Savings Accounts:Distributions Not Used To Reimburse Qualified Health Care Expenses • Under age 65 are: • Taxed as income • Plus a ten percent (10%) penalty. • If 65 or older: • Taxed as income • But No penalty.

  12. Value of Tax DeductionVersus Individual Spending Not Including any State or Local Tax Savings! Tax Benefit for the Maximum Contribution in an “Average” Tax Bracket

  13. Value of Tax DeductionVersus Family Spending Not Including any State or Local Tax Savings! Census Bureau

  14. Investment Strategies • Distributions are not required at the time an expense is incurred! • Paying for expenses from a non-HSA account while deferring reimbursement allows for more rapid growth of the tax-free Health Savings Account balance. Reproduced with permission: Doctors Club of San Diego, Inc.

  15. Family Deferred Versus Immediate Reimbursement

  16. Health Savings Account Scenario2008 Healthy Family(Healthiest 90% with 2.6 persons on average per family) • $5,800 annual HSA contribution • 8% Average annual rate of return • $1,200 Annual & Dental Health Care Spending

  17. Investment Goal? It is possible to grow one’s HSA to the point where annual interest income exceeds annual maximumout-of-pocket expenses Fireproof!

  18. Where Can the money forHealth Savings Account Contributions Come From?

  19. Increase Deductibles Significantly… Reversing the Incentives? 2005 ShouldReduced Insured Spending (& Lower Premiums?)By At Least 64%! Arithmetic reduction in Insured Spending plus A Behavioral reduction in Total Spending Rand Corporation: R-3476-HHS

  20. 2006 Cost of 1st Dollar Coverage(HMO or other coverage that pays for day-to-day careas well as major illnesses and injury) Average employee health benefit~$8,222* ($4,242 individuals - $11,480families**) *Calculated based on historic national estimates and the ** Kaiser Foundation 2006 Employer Health Benefits Report

  21. Consumer Directed Health Care Convert to high deductible HSA ~$4,522 HSA Premium No Behavioral Reduction ~$3,700 Savings ~$5,032 Savings + + 30% Behavioral Reduction ~$3,190 HSA Premium $8,222 Annual Premium* *Calculated based on 2005 Estimate from Hewitt Associates &2006 Kaiser Family Foundation Employer Health Benefit Report

  22. HealthSavingsAccount Health Reimbursement Arrangement Flexible Spending Account • Rolls Over Tax Free • Employee owned • Accrues TF Income • Employee: • Maintains • Reports • Substantiates • For Any Use After 65 • Rolls Over Tax Free • Employer Owned • Accrues Income??? • Employer Must: • Maintain • Report • Substantiate • Doesn’t Roll Over • Use it or Loose it • No Income? • Employer Must: • Maintain • Report • Substantiate Consumer Directed Health Care ~$3,700 Premium Savings Becomes an Employer’s Tax Free Contribution to An Employee’s…

  23. The vast majority will have money left over each year that rolls over tax-free (along with interest income) for future health or retirement needs! Catastrophic Insurance Pays the Really Big Bills! Day to day care is now completely FREE on a tax-free basis up to the amount the employer contributes Employercontribution should exceedannual employee expenditures ~90% of the time Premium Savings Now BecomeTax-Free HSA Contributions

  24. Insurance Savings used as Potential Employer Contributions: Potential Employer Contribution: ~$3,750

  25. Increased Purchasing Power • With HSAs, 100% of the dollar is now available to purchase services. (No intermediary overhead: 15.4% of premium) • Virtually all qualifying plans give consumers access to the insurer’s discounted rates (PPOs) • Cash discounts range from 5% to 55%

  26. What About High Utilizers? • Very few people actually “live” in the high utilization part of the curve. • High deductible health insurance functions as a stop loss for the HSA/ HRA as an investment.

  27. Catching Up With ExpensesA Worst Case Scenario? • At thirty (30) years • A $5,800 annual contribution each and every year • 8% average annual rate of return • $6,000 Out-of-Pocket each and every year

  28. Health Savings Accounts Consumer Directed Health Care Thank You ! James G. Knight MD CEO & Founder, CDHC Inc.

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