Do-it-Yourself Health Care –The Health Savings Account

October 27, 2009Dave Spalding, VP Medical Banking

Blue Cross and Blue Shield of Minnesota

© 2008 Blue Cross and Blue Shield of Minnesota

Do-it-Yourself Health Care –The Health Savings Account

Change and Reform in the American Health Care System

2Center for Senior Citizens' Education / UST

Agenda for today

> Introduction

> Brief History of HSAs

> The Basics– Break

> Market Adoption

> Extra Credit

3Center for Senior Citizens' Education / UST

Brief History of HSAs

4Center for Senior Citizens' Education / UST

1995 2010

8 million peoplecovered by HSAs

HSA Timeline

Archer Medical Savings Accounts (MSA)

HSAs take off following key changes

Medicare Modernization Act creates Health Savings

Accounts

1996

2003 2009

Dec.2006

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HSA enrollment growth

>Rapid market adoption

>Midwest and South

>Multiple market segments

–individual, small business, national employers

>Enrollee Demographics–mirrors commercial insured–higher education level

National HSA Enrollment

0

5,000,000

10,000,000

15,000,000

Source: AHIP

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Minnesota leads the nation in adoption

Relatively vibrant commercial market place:

–Healthy market segments–Innovative employers–Relatively educated workforce

–Strong local health plans

2008 HSA Penetration AHIP

0.1%

1.1%

3.1%

3.4%

5.0%

5.6%

6.4%

9.0%

9.2%

0% 5% 10%

HI

NY

CA

US

IA

WI

NE

LA

MN

As a percent of commercially insured

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Something is happening in Minnesota

8.8%

12.1%

16.0%

12.2%

9.8%

8.3%

10.7%

3.4%

5.9%

8.4%

15.4%

10.2%

4.3%

7.4%

6.1%6.8%

9.4%10.6%

8.9%7.9%

0%

5%

10%

15%

20%

Source: MN Dept of Health

Perc

enta

ge c

hange p

er enro

llee

Premium

Health Expense

> In 2007, growth in health expense per enrollee was the lowest in a decade

> In 2007, growth in health expense per enrollee was lower than growth in wages/income for first time in a decade

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The Basics

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1. The HSA belongs to an individual

Medical “401 (k)”

Encourage individuals to save for their own medical expenses

Employer and Employee contributions permitted

Portable

Inheritable Asset

“Rolls-over” annually

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2. The HSA is a tax-advantaged account

TRIPLE TAX BENEFITS

Individual account contributions lower your taxable income

Savings can be accessed at anytime, tax-free to pay for qualified medical expenses

Savings can be invested free of capital gains

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3. Tax-favored HSAs have a lot of rules

BIG RULES

I. Rule-maker is the IRS

II. Must have qualified high deductible health insurance

III. Annual contributions limits

IV. Penalty for non-qualified withdrawal

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Big Rules: What is qualified insurance?

> Health insurance meeting all statutory requirements for minimum deductibles and maximum out-of-pocket costs

> All services, other than preventive care, are subject to the deductible, including prescription drug purchases

$5,900 maximum out of pocket

$1,200 minimum deductible

Self-only coverage

Family coverage(self + two or more)

$11,900 maximumout of pocket

$2,400 minimum deductible

2010 Statutory requirements

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Big Rules: Annual contribution limits

> COLA Index

> Maximum contribution in 2010– $3,050 (single coverage) – $6,150 (family coverage)

> Catch-up contributions– Individuals 55 and older may make additional

contributions up to $1,000

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Big Rules: Non-Qualified withdrawals

> Withdrawals for non-qualified medical expenses– Withdrawal amount is counted as income– 10% excise tax applies

> Non-qualified withdrawals for those 65+– Withdrawal amount is counted as income– No excise tax applies

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Small Rules

> Eligibility details– Married couples, tax dependents, seniors, domestic partners

> Contribution details– Mid-year enrollment, IRA roll-overs, Comparability (employer

contributions), FSAs

> Withdrawals– Qualified medical expenses, maintaining records, no-time

limit

> Type of insurance– Medical, vision, dental, LTC, etc.

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Health Savings Account Basics in Review

1. Individual medical savings account

2. Triple tax benefits

3. Lot’s of IRS driven rules

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HSA Math Example

HSA PPODIFFERENTIAL

TOTAL EMPLOYEE CASH OUTLAY

HEALTHCARE EXPENSES

OUT-OF-POCKET MAXIMUM

EMPLOYER CONTRIBUTIONS

EMPOLYEE PREMIUMS

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Income Tax Savings Example

No HSA Yes HSA

TAXABLE INCOME $100,000 $100,000

TAX DEDUCTION

ADJ TAXABLE INCOME

TAX RATE 33% 33%

TAX LIABILITY

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Market Acceptance

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The 30,000 foot view

Kaiser Family Foundation Survey– HSA enrollment exceeded HMO enrollment

nationally in 2009– Annual insurance premiums for HSAs are 20-

30% lower than traditional products

American Academy of Actuaries– After first year, HSA plan premium increases

are 3 to 5% lower than traditional insurance

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Are higher deductibles “working”? The Finance Department says YES

3.6%

5.0%

5.3%

6.5%

7.0%

0% 2% 4% 6% 8%

No CDH

less than 10% CDH

10-20% CDH

20-50% CDH

+50% CDH

Source: Watson Wyatt 2008 Purchasing Value in Healthcare employer survey

Forecasted premium increase

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Employer Contributors and Amounts

37%42%

45%

38%

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008

% Employers Contributing

Source: Blue Cross Blue Shield Association CDH survey 2008

$1,125

$815

$0

$200

$400

$600

$800

$1,000

$1,200

small firms large firms

Avg Employer Contribution

Source: Kaiser Family Foundation / HRET 2009 Annual Benefits Survey

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Become a high performing employer

Towers Perrin research has identified four cornerstones for success for employers:– Build a new mind set around health– Help employees gain confidence in their ability to manage

financial risk– Must have an organizational climate of trust and employee

well-being– Thoughtful change management, communication and visible

leadership 88% of enrollees at high performing employers reported a good experience with an HSA or HRA based-plan vs. 29% at low performing employers

71% of enrollees at high performing employers believe it is appropriate for them to share medical expenses with their employer

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Risk Adjusted Utilization: HSA vs Traditional

Blue Cross 4 year study covering over 1 million enrollees on a risk adjusted basis:– Decreases in x-rays, lab tests and ER visits– Higher levels of preventive care– Same number of people using insurance– One less script per year and higher generic

adoption

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Changing Consumer Behavior

72%

38% 38%40%

22%27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Formally TrackedMonthly Expenses

Estimated FutureExpenses

Discussed expenseswith a doctor

HSA Users All Insured

Source: Blue Cross Blue Shield Association CDH survey 2008

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More Data

36%

52%

43%

21%23%

33%30%

15%

0%

10%

20%

30%

40%

50%

60%

Choose lowercost treatments

Ask Dr aboutcost

Mail order Rx Search internetfor lower cost

Rx

HSA Users Non-HDHP

26

Source: Blue Cross Blue Shield Association CDH survey 2008

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Healthier Behavior

43%

25%21%

13%

30%

14% 15%

7%

0%

10%

20%

30%

40%

50%

HealthScreening

Exercise Diet/Nutrition HealthCoaching

HSA Users Non-HSA

Source: Blue Cross Blue Shield Association CDH survey 2008

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Global Competition

0%

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Private Expenditures as % total health exp

Out

-of-

pock

et e

xpen

ditu

res

as %

of t

otal

hea

lth e

xp

US 55%, 24%

GLOBAL 44%, 52%

CHINA 62%, 87%

FRANCE 22%, 35%

INDIA 83%, 94%

MEXICO 54%, 94%

SOUTH AFRICA 60%, 17%

1. Private Sector Share of Health

2. Out-of-Pocket % of Private sector

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Extra Credit

According to the New England Journal of Medicine, what is the number one determinant of early death in the US:

A. Genetics

B. Healthcare

C. Behavior

D. Environment

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Extra Credit

What is the annual out-of-pocket maximum for Medicare?

A. $5,000

B. $25,000

C. There is no maximum

31

Extra Credit

How will Healthcare Reform impact HSAs:

A. Eliminate them

B. Expand them

C. Don’t know, don’t care – ready to go get a drink!

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Extra Credit

Based upon average life expectancy, the Employee Benefits Research Institute estimates the lifetime, out-of-pocket expenses for a couple, aged 65, retiring in 2009 to be:

A. $15,000 to $20,000

B. $55,000 to $104,500

C. $168,000 to $415,000

33© 2008 Blue Cross® and Blue Shield® of Minnesota is a nonprofit independent licensee of the Blue Cross and Blue Shield Association