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Accounting for their own care

| Sunday, May 23, 2004

When Susan Grabiak's health insurance payments were about to jump 28 percent, she didn't hesitate to sign up for a new kind of coverage that her employer, Quest Diagnostics Inc., started offering this year.

"Basically, the only reason I went into it was price," Grabiak, who works at Quest's Green Tree office, said of her decision to sign up for the company's health savings account. "I know how much I'm going to spend in an average year, and this made the most sense."

Unlike traditional health insurance programs, through which Grabiak's employer would pay most of her insurance costs and ask her to make regular co-payments, Grabiak, 47, is essentially given a high-deductible insurance program and a lump sum to spend -- tax-free -- on her health care coverage. If she spends more than she has on hand in her account, the high-deductible insurance program kicks in.

But the real appeal for employees like Grabiak is that whatever she doesn't spend rolls over and stays in her account. The money -- which can amount to $2,600 a year for individuals and $5,150 a year for families -- is hers, even if she leaves Quest or decides to retire. She would have to pay taxes on it only if she decided to use money for something other than health care expenses,

Congress allowed employers, employees and the self-employed to contribute to health savings accounts, or HSAs, when it included tax-exempt status for such accounts in Medicare legislation passed last year. While employers see the HSAs as a godsend in the ongoing fight against escalating health care fees, they concede there are some challenges in implementing it.

Topping the list is health care purchasing patterns among employees, who have grown accustomed to having almost all of their health expenses covered by their company's insurance program.

"With these accounts, we're trying to move away from the notion that employers pick up coverage from the first dollar spent," said Lale Iskarpatyoti, director of the human resources service group for PricewaterhouseCoopers in Philadelphia. "Third-party money is spent a lot easier than your own money."

Before Grabiak decided to enroll in the account, she called the insurance company to make sure she'd be able to use money in the account to pay for all her typical medical expenses, including doctor appointments and prescriptions.

"I know at the beginning of the year, this is how much money I have and this is what I have to spend it on," she said. "But I also know if something unexpected comes up, I'll pay the deductible and I'll be covered."

HSAs are just the latest in attempt by the federal government to help employers and employees rein in health care costs through tax breaks. But compared with previous programs, including flexible spending accounts, HSAs have distinct advantages.

Many companies offer flexible spending accounts to supplement existing health care coverage for uncovered benefits, including optical care and orthodontics. But a chief complaint is the "use it or lose it" feature, prompting unnecessary spending by employees who have overbudgeted and have money left as the end of the year approaches.

Employers and health care consultants point out that HSAs are portable, and money saved in the accounts can be carried over from year to year. Theoretically, a young worker with few health care expenses could save money in the account, even carrying it from one job to the next, and have a large reserve to cover health care expenses in retirement.

The programs work very much like a 401(k) retirement-savings plan, in that money is contributed tax-free by the employee, employer or both and grows tax-free in different investment vehicles. The main difference is that they are tied to high-deductible health insurance programs, but employees are not taxed if they withdraw money to spend on approved health care expenses.

"There's a series of accounts out there now -- things like flexible spending accounts -- where you select the amount of money you want to put in at the beginning of the year," said Katherine Klug, a director in Mellon Financial Corp.'s human resources and investor solutions product development group.

"The problem with those is that if you don't have qualified medical expenses in a given year, you actually lose the money in the account. And they're not portable," Klug said.

Pittsburgh-based Mellon has partnered with Lumenos, a health insurer based in Alexandria, Va., to offer HSAs. Klug said the products had drawn interest from both large and small employers, as well as self-employed people.

HSAs are almost at the point now where 401(k) accounts were 25 years ago, said Fred Edwards, benefits director for Quest, based in Teterboro, N.J.

"People were asking, 'Is this actually going to work?'" Edwards said. "Now there are very few new pension plans being put in today when compared to 401(k)s."

Edwards said as many as 35 percent of Quest employees had signed up for the new programs in some locations. But in others, enrollment was as low as 6 percent.

"We're trying to determine why it's resonating in some locations and not others," Edwards said. "We've brought up a whole generation where we told them your physician or your health plan is responsible for your health and never put the employee in that equation. You don't just change that equation overnight."

Know your options

Making sense of all of the types of health care spending accounts offered by employers can be confusing. A primer on some of the more popular options:

Health savings accounts (HSAs) have been described as "IRAs on steroids." The accounts are linked to high-deductible insurance plans; the employee, employer or both make tax-free contributions up to $2,600 for individuals and $5,150 for families. Money can be withdrawn, tax-free, to pay for health care. Money that isn't used is rolled over from year to year, and employees keep the accounts, even if they leave their current jobs or retire. The accounts, made possible by last year's Medicare legislation, are the newest offering.

Flexible spending accounts (FSAs) allow workers to set aside pretax money to pay for health care not covered by insurance. A big drawback is that employees forfeit money they've set aside but failed to use by the end of the year. In 2003, the Internal Revenue Service eased restrictions, allowing employees to sue the accounts for over-the-counter medication.

Health reimbursement accounts (HRAs) are plans in which employers set aside money for employees in an account that can be drawn on for medical expenses. The money does roll over from year to year. But employees can't contribute to the account, and if the company goes bankrupt, participants become unfunded creditors. Many employers use these types of accounts to help pay retiree health care benefits.

Medical savings accounts (MSAs) have been replaced by HSAs. They were first used in the early 1990s and limited to small businesses and self-employed people. Existing MSAs will continue, or they can be rolled over into HSAs, but new ones can no longer be started.

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