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Feature Article: HSA.2.5.Net

By Paul J. Disser, Chairman of the Board and CEO, Spectrum Vision Systems, Inc. and ICMG Member

Star date 12/08/2003:  President George W. Bush signs Public Law 108.173, otherwise known as The Medicare Prescription Drug Improvement and Modernization Act of 2003 or MMA’03.  Although the media focus of attention on MMA’03 has been on the prescription drug benefits provided to seniors and certain categories of individuals with disabilities, another provision of MMA’03 under Title XII, Section 1201 of the Act, allowed for the creation of Health Savings Accounts (HSA’s) and co-incident tax advantages associated with consumer directed high deductible insurance plans.*

In June of 2006, it will have been 2 1/2 years since MMA’03 legislation was enacted.  In that time, over four million HSA/CDHC plans have been established.  According to financial services research and consulting firm Celent, “…HSA’s will generate 15 million new accounts and $62 billion assets under management by 2010.”**  The pace, undoubtedly, will pick up as employers, both intermediate sized (100-500 employees) as well as larger sized (>1,000 employees) begin to offer HSA/CDHC options as a way to control exploding employer benefits costs.

Although it is still too soon to determine the long term impact of this legislation, pundits are already lining up on the sides they hope will prevail.  For example, some proponents of the HSA/CDHC concept point to the fact that a number of enrollees in HSA’s come from the ranks of the previously uninsured due to the fact that they can now afford to buy the less expensive high deductible insurance plans.  This is logical when you consider that 70% of the insured population never has occasion to use their health insurance beyond their deductible anyway.  According to a CSHSC report, “…70% of covered employees had healthcare costs of less than $1,000 a year…”.  This statistic is consistent with historical utilization data which is, in turn, supported by tax return data including the level of itemized deductions for healthcare expenses in excess of 7.5% of adjusted gross income.  In other words, for an individual making the real median household income level of $43,318, household health expenditures would need to be equal to or greater than $3,248.85 (7.5% x $43,318) in order to qualify as an itemized deduction.  This is more than three times the level of healthcare costs as reported by the 70% of employees studied above.  Even a poverty-level family of four would need more than $1,300 in medical expenses in order to itemize.

Other articles, writers, editorial content seem to want to influence their readers that HSA’s are not living up to their hype.  By stating that HSA buyers are less than pleased with the outcomes designed into the HSA/CDHC plan, these editors are suggesting that the consumer was ignorant of the product he/she was buying; this is disingenuous at best and editorially dishonest at worst.  “Surveys” that suggest that, given a choice, people would choose a more robust medical plan with lower deductibles, less out of pocket exposure, and paid for entirely by someone else are an insult to our intelligence.  Given the “choice” I’d rather be driving a Bentley Continental Flying Spur with handcrafted leather interior, all-wheel drive and a turbo-charged 6 liter, 12 cylinder engine capable of 195 mph paid for entirely by someone else.  (Next time, I’ll be more circumspect in my choice of employers and benefit options.)

We decided to analyze our own block of HSA-converted business to determine if the early return NET affect was consistent with the original hypothesis, i.e., HSA’s would lower up-front, fixed cost premium expense while building longer term savings, NET of medical expenses under the deductible corridor.  The tables below illustrate averages in the categories according to our experience in the HSA market since December 2003:

Traditional Major Medical
$500 Deductible Family Plan
Year Annual Deductible 80/20 Reimbursed Total
% Inc Premium Co-Pay Cost
2004 4.6% $15,690 $1,500 $300 $1,200 $16,290
2005 4.3% $16,365 $1,500 $300 $1,200 $16,965
June 2006 3.8% $ 8,494 $1,500 $300 $1,200 $ 9,094

HSA/CDHC Medical
$5000 Deductible Family Plan
Year Annual Deductible 80/20 Reimbursed Total
% Inc Premium Co-Pay Cost
2004 -0- $2,613 $5,000 $2,000 $0 $4,613
2005 -0- $2,613 $5,000 $2,000 $0 $4,613
June 2006 4.8% $1,372 $5,000 $2,000 $0 $3,372

In effect, what we see is this:  Over the 2.5 year period from January 2004 to June 2006, with normal utilization levels, the “average” family that converted from a traditional $500 Deductible Major Medical Plan to an HSA/CDHC $5,000 Deductible Plan has a gross outlay of $12,598 vs. $42,349 for the Traditional Plan or a gross savings of $29,751.  When you add in the savings from the HSA component of $6500 ($12,500 HSA Contribution – $6,000 Deductible Expenses from 2004 – June, 2006) you are in an position of $36,251.  Spread this net savings of $36,251 over the 2.5 year period in question and you get annualized savings of $14,500.

To get the real impact of this concept take just one half of the savings ($14,500 x ½ = $7250) derived from our small sampling and apply it to the larger HSA market of 4,000,000 subscribers (4 million X $7250 = $29 billion).  That’s $29 Billion.  That’s a lot of cheeseburgers … or new shoes … or new paint and wallpaper in the dining room … or trips to Disney World.

Now extrapolate this savings out to the number of HSA accounts projected by Celent mentioned earlier (15 million X $7250 = $109 billion).  $109 Billion!!  Even more burgers!!!  But still less than 6% of a $2 trillion U.S. Health Care Budget.

When you are talking about Health Care in the United States, the macro-economic issues go beyond the comprehension of most citizens who are really only interested in their own micro-economic health care costs in their own micro-cosm of the universe.  But even at the micro-level, savings of approximately $600/mo/family to $1250/mo/family is something not to be ignored.

* CMS Legislative Summary, April 2004, Summery of HR1 Medicare Prescription Drug Improvement and Modernization Act of 2003.  Public Law 108-173

**Insurance Marketing Fourth Quarter 2005, p. 12

Paul J. Disser is Chairman of the Board and CEO of Spectrum Benefits Management Corporation, a benefits consulting company. Spectrum also has interests in real estate, trademarks, software and other intellectual property.  Mr. Disser has served in this capacity since he founded Spectrum in 1987.  Disser can be reached at 913-451-1672,

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