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In his January State of the Union address, President Bush announced plans to “strengthen health savings accounts” and make sure individuals and small-business employees “can buy insurance with the same advantages that people working for big businesses now get.” Since then, Americans interested in new ways to save on health care costs have taken a renewed interest in health savings accounts.

“A health savings account, or HSA, is a type of consumer-directed health coverage that pairs high-deductible health plans with tax-free savings accounts,” says Keith Patterson, a consultant with Jackson, Tenn.-based Benefit Consulting Services. An HSA works as a tax-free savings account. Employers and/or employees contribute a certain amount of money each year (the amount depends on the deductible of the health care plan, usually between $1,000 and $5,000) to the HSA, which is then used to pay for all medical expenses until the deductible is met, says Patterson. Any unused money rolls over into the next year’s HSA account.

“Individuals can put money in the account on a pre-tax basis, and it will continue to grow on a pre-tax basis as long as the money is spent on pre-qualified medical expenses,” says Don Greene, owner of Nashville’s Association Marketing.

Originally created as part of Medicare reform in December 2003, HSAs were formally authorized in January 2004. According to Patterson, the goals of the legislation were to encourage people to save for future medical and retiree health care expenses and to help individuals take more control over how their health care dollars were spent. The idea being that if Americans were paying out-of-pocket for their health care expenses, they’d make more cost-conscious decisions about seeking health care, which would then lower overall health care costs.

While it seems that HSAs are becoming increasingly popular—according to White House statistics, more than three million Americans have since enrolled in HSA programs—there is still some skepticism about whether HSAs are the solution to the nation’s rising health care costs.

The Commonwealth Fund, a private, nonpartisan foundation that supports independent research on health care issues, found in an April 2005 study that “medical bill problems are more common among those with higher deductibles. Over half (54%) of those with a deductible of $1,000 or more reported difficulties paying medical bills or are paying off accumulated medical debt, compared with just 24% of privately insured adults with no deductible.”

In a December 2005 report, the Fund also found other problems with HSAs. There are few health plans that provide enough information about providers to help people with HSAs make informed decisions, the Fund found. And though its studies showed that people with high-deductible health plans were indeed more cost-conscious than private health insurance holders, “they were significantly more likely to avoid, skip, or delay health care because of costs than were those with more comprehensive health insurance,” a potentially harmful occurrence.

And then there’s the fact that HSAs do little for lower-income individuals who do not make enough money to contribute substantially.

However, people like Patterson insist that in most cases, the potential premium savings are considerable enough to be advantageous to many small business owners.

Even if it’s not the only health plan available to employees, Greene says, it’s one that has the potential to save the employer a lot of money in the end.

“I’ve seen cases where an employee has set up an HSA and fully funded the deductible with the premium savings,” Patterson says. Based on his experience, he gives no credibility to the common argument that HSAs are for the young and healthy.

“If your premium savings can fully fund your plan and meet your deductible, what’s your worst case scenario?” Patterson reasons. “Either you’re a train wreck and you pay nothing because your deductible is already met or you’re healthy, not spending anything, and plowing your money into the future. You can’t lose either way.”

HSAs also allow greater flexibility, Green says. Once the money is in the HSA, it’s up to the employee to control how it’s spent. They aren’t beholden to anyone but the IRS.

“The employer doesn’t look over your shoulder,” Patterson says. “The bank doesn’t look over your shoulder. It’s entirely that person’s responsibility.”

That increased responsibility is one reason why people have been hesitant to consider opening HSAs. Other than the fact that HSAs are a relatively new health care option, the idea of holding on to medical receipts forever in fear of an IRS audit is too much of a hassle for some people, Patterson says.

But either way, with the influx of third party administrators that are offering HSA options, including banks such as First Tennessee and Wells Fargo, and insurance providers like BlueCross BlueShield and Aetna, and the emphatic support of the Bush Administration, it’s likely that HSAs will continue to grow in popularity. And with today’s rising health care costs, it couldn’t hurt to take a closer look.

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