April 2005 Legal Briefs

Questions & Answers on Health Savings Accounts

Questions & Answers on Health Savings Accounts

In my February 2005 article I discussed “high-deductible health plans” (HDHP’s) and related “health savings accounts” (HSA’s), which can be a cheaper-cost alternative to the more traditional low-deductible health insurance policies.  This article focuses on some detailed questions about HSA’s:

1. The deductible on a family-coverage HDHP cannot exceed $5,150, but a policy can allow annual out-of-pocket expenses as high as $10,200.  What does this mean?

For an insurance policy to qualify as an HDHP, its provisions must meet certain guidelines; but there still may be wide variations in coverage.  An individual should understand the details of a policy very carefully, to make sure they match his needs and his tolerance for risk.  (Someone purchasing an individual policy may be able to select from several choices, but an employee with an employer-provided HDHP typically cannot do so.)   

An HDHP’s deductible is the dollar amount of qualifying medical expenses that must be paid by the policyholder before the insurance coverage starts paying claims.  For example, if a family HDHP has a deductible of $5,150 (the maximum for 2005), all qualified medical expenses that are incurred before reaching that total will generally need to be paid by the individual, not by insurance–either from an HSA or from other sources.  (As a special exception, the HDHP still may pay certain “preventive care” expenses even through the deductible has not yet been met.)  

All policies with the same deductible are not alike. One insurance company’s HDHP may require the insured to pay nothing more for qualified medical expenses after the deductible is met.  Another company’s policy may require that the insured continue splitting qualified medical expenses with the insurance company (even after the deductible is satisfied) until (1) the deductible, plus (2) ongoing co-pays (for doctor visits or prescriptions), plus (3) ongoing co-insurance (a 10% or 20% share of hospital bills, medical tests, etc.), have finally reached the policy’s “out-of-pocket expenses” limit, which may be as high as $10,200 for family HDHP policies ($5,100 for self-only policies).  

Of course, it’s not possible for an individual to make an HSA contribution larger than the HDHP deductible for a particular year.  On this basis, if an HDHP potentially requires an insured to pay “out-of-pocket expenses” substantially larger than the HDHP deductible, there may be no funds in the HSA to pay the difference–unless unused HSA balances have been carried over from prior years.  (As a limited exception, persons between 55 and 65 can make “catch-up” HSA contributions of $600 per year in excess of the HDHP’s annual deductible.)

If an employee has no ready assets for paying out-of-pocket medical expenses in amounts exceeding the balance in an HSA, it would be best to have an HDHP that does not require the insured to pay anything more (or very little) after the deductible is satisfied. The same is true for a person who is chronically ill, or requires a lot of regular medications, medical tests and doctor visits.  

By contrast, if an HDHP policyholder is in fairly good health, and is wealthy or has substantial extra HSA balances built up, an HDHP that allows “out-of-pocket expenses” to substantially exceed the deductible may be an acceptable means of further reducing the insurance premiums.  This increased risk may be appropriate in combination with good health.  

2.  Will an HDHP pay for all medical expenses after the deductible and maximum “out-of-pocket expenses” are met?  

Not everything. A policy pays only for what the policy covers.  Certain procedures and services may not be covered at all, and for others the coverage is limited.  (Whenever limits of coverage for certain conditions are exceeded, no more of those claims are paid.)

It’s quite possible for a policyholder to incur legitimate medical expenses that an HDHP does not cover.  For example, a doctor may prescribe medications, procedures or physical therapy aids that an insurance company says are “not medically necessary.”  Such expenditures won’t count toward the policy’s deductible, nor toward any “out-of-pocket expenses” limit. The fact that these items are outside of the policy’s coverage may not be obvious in advance.

Similarly, insurance coverage may be limited to a certain number of treatments per year, no matter how “medically necessary” the doctor says they are—for example, physical therapy after surgeries, home health visits, or psychiatric care.  In other cases, a policy imposes annual dollar limits, or “life of the policy” caps for certain types of expenses.  When these caps are reached (usually because of a major illness or accident), any further medical expenses of the particular type will be outside of the policy’s coverage for the stated time period—or permanently.

Another common restriction is “pre-certification” for certain medical procedures.  The policy may decline to cover certain procedures if they are not pre-certified, or may impose a penalty (reduced benefit) if the procedure is not pre-certified.

Insurance companies also limit their coverage by reducing actual medical fees to what they call “customary” charges.  They also may cover expenses such as hospitals and surgeries at a higher reimbursement rate (probably 90%) only if the providers are “in-network.”  (An out-of-network provider might be covered at only 80%, for example.)  

Assume that a policyholder uses an out-of-network provider, whose stated charge for a certain procedure is $5,000.  The insurer decides that the “customary” fee for this service should be $3,000.  (An in-network provider agrees in advance to reduce its fees to $3,000—whatever the insurance company determines is the “customary” fee.  The $2,000 difference does not have to be paid.)  However, an out-of-network provider does not agree in advance to reduce the bill to $3,000, so the policyholder going out-of-network may still owe the $2,000 difference.  This amount does not count toward the deductible under the HDHP, nor toward maximum “out-of-pocket expenses” under the HDHP—because the policy does not recognize or cover any expenses greater than the “customary” fee.   

As theses various examples illustrate, there are many ways that particular medical expenses may not count toward either the deductible or out-of-pocket expenses.

3.  Will being insured under an HDHP help to control medical expenses, in  contrast to coverage under a standard low-deductible insurance policy?  

Probably, but it depends on a person’s choices after he is covered by an HDHP.   Hopefully, people will take active control of their medical expenses by “shopping around” for more cost-effective alternatives.  They may choose not to incur some medical expenses, when given an actual choice between (1) spending their HSA funds in that way, or (2) “saving” as much of their HSA funds as possible.

With a standard insurance policy, the insured does not write the check for covered expenses.  Therefore, unlike a household checking account, a person covered by low-deductible group health insurance does not feel the money flowing out, and has little incentive to limit expenditures.  Once a standard insurance policy’s low annual deductible is satisfied, most things are covered by insurance, so the insured might as well “pile on” more medical expenses.  If a doctor suggests that certain optional tests might help, there is no reason to say no. After a standard insurance policy’s annual deductible has been satisfied, there is every incentive to accelerate as many medical procedures as possible into that same year—instead of delaying them into the next year, when a new deductible would apply.  People naturally “over-consume” medical expenses unless they have a reason not to do so.

Even standard medical insurance policies contain some financial incentives and disincentives:  The co-pay for generic drugs is usually smaller than for brand-name drugs; the co-pay for a regular doctor visit is fixed or smaller if the patient chooses an “in-network” provider; and the patient’s required coinsurance percentage is less for hospitals and medical tests that are “in-network.”  But these are lesser-cost/greater-cost choices for the same service, and may not affect the individual’s overall consumption of medical services.

The “economically rational” consumer will actively search for lesser-cost choices if he’s spending money from his own HSA account to pay for medical expenses.  If every doctor who is “in-network” has a $25.00 co-pay per office visit under a standard insurance policy, the patient just chooses any one of them.  But a policyholder with an HSA whose medical expenses are still within a $2,500 deductible (not reimbursed by insurance) will think more carefully about whether he wants to write a check to a doctor who charges $45 per visit, a doctor who charges $60 per visit, or a specialist who charges $110 per visit. Different patients will make different choices in this situation, but some will make a “cheaper cost” choice if the medical condition is minor and they see a way to spend less from their HSA.

A person controlling his own HSA might also limit his family’s emergency room visits, trying to use a 24-hour minor emergency clinic instead, or waiting for less important treatment until regular doctors’ hours.   

When consumers are motivated to make “thrifty” medical choices, their behavior will result not only in more retained funds in HSA’s, but also lower medical reimbursements by insurance companies.  Consumers’ self-imposed medical-spending restraint could benefit the entire system, lowering future medical insurance premium increases on HDHP’s.  

A possible exception is the consumer who has substantial ongoing medical conditions and regular required treatments.  This person probably cannot limit medical expenses by simply making more rational decisions.  This person has little hope of retaining any unused funds in an HSA at the end of a year, because everything will be used.  A standard low-deductible policy would be simpler, because the person at least could avoid the burden of writing all the checks and maintaining all the records required by an HDHP and an HSA.

4.  In what circumstances would an HDHP be an attractive alternative?

(a) A model situation for group HDHP coverage is a start-up company or very small company made up almost entirely of younger individuals—particularly if they have higher incomes, could use some tax benefits, and have the desire to plan their health care expenses carefully.  Statistically, these persons are under-users of medical services. Premiums for low-deductible standard health insurance for young employees like this may be several times as large as the amount of medical expenses incurred by these people in a year.  These individuals may feel that they are unnecessarily spending a lot of money on health insurance, much of which could be recaptured by making careful choices.

(In any insurer’s pool of insured persons, younger persons’ premiums “carry” the older persons.  An employer with mostly younger employees might help them by switching from traditional low-deductible health insurance coverage to a group HDHP, depositing any premium “savings” into employee HSA’s.  Any additional amounts required to fully fund the HSA’s (the difference between the HDHP’s deductible and the employer contribution) can be deposited by the employees—if they wish—on a tax-deductible basis. Employees’ HSA contributions that are deducted from income not only (1) are easier for higher-compensated employees to make, but also (2) have greater tax advantages at higher income levels.)

(b) Those people who are buying an individual medical insurance policy (not part of a group insurance plan) are good candidates for HDHP coverage. So far, about 80% of all HDHP’s have been sold to individuals. (Even persons with no earned income can have an HDHP and an HSA.)  Many small business owners need an individual policy, either because they have no employees, or because they are purchasing insurance only for themselves personally and cannot afford group coverage for employees.

Any medical insurance policy covering only one individual or one family typically costs substantially more than the same coverage provided under a group plan.  If a person has no other affordable access to medical insurance, an HDHP with a higher deductible will cost a lot less than regular low-deductible medical insurance; and an HDHP always provides “peace of mind” concerning major medical expenses.

Persons with chronic medical conditions or pre-existing conditions may be unable to obtain individual medical insurance policies on any basis.  With a high enough deductible under an HDHP, it’s possible that ongoing costs of a particular pre-existing condition will fit within the deductible amount, alleviating insurers’ concerns—and some individuals may become insurable again.  

(c) If an employer can no longer afford low-deductible group health insurance, and is considering terminating insurance coverage for employees, a switch to group HDHP coverage will be a lot cheaper for the employer than the regular low-deductible insurance premiums have been, and is much better than providing nothing.

(d) For the employer who has not been able to afford any group insurance in the past, HDHP coverage certainly provides an attractive “entry-level” way to expand benefits, without incurring the cost of full coverage.  This is primarily beneficial when employees (1) are financially able to make the related HSA contributions, and (2) are in a tax bracket where deducting HSA contributions is helpful to them.   

5. Is there a timing problem in using HSA balances to pay medical expenses that fall within an HDHP’s deductible?
 
Yes, there can be some major timing issues, and policyholders need to anticipate and plan around this situation if possible.  Ideally, an employer will not just help to set up HDHP’s and HSA’s for employees, but will also explain how employees can run into difficulty paying their medical bills unless they set up and follow a careful plan for funding their HSA’s.  (Among other options, an employer might consider a “payroll-deduction” plan, causing the employee’s HSA to be funded automatically with payments held out of the employee’s paycheck.)

Paying medical expenses with low-deductible insurance is a lot different from trying to pay medical expenses from whatever balance is available in an HSA when the high deductible on an HDHP has not yet been met.  (As much as possible, the HSA owner’s medical expenses should be prioritized and scheduled so that medical spending will not get ahead of planned deposits to the HSA.  This may sound “obvious,” but a person familiar with low-deductible insurance may not automatically think about the problem.)
 
With a regular low-deductible group insurance policy, a person has full coverage available from the day when the policy goes into effect.  If that person has a car wreck ten days after the insurance becomes effective, the insurance is fully available to pay for the lion’s share of the necessary hospitalization, surgery and physical therapy.  By contrast, if the same person has a family-coverage HDHP with a maximum $5,150 deductible, and plans to contribute about $430 per month to the HSA throughout the year to fund the deductible, this person may be poorly prepared to deal with large “emergency” medical expenses that are below the deductible amount and occur early in the HDHP coverage year.   

Once a person builds up a nice “carryover” balance in his HSA (from prior years), the possibility that “surprise” medical expenses could occur while the account is not well-funded will be less of a threat. In the beginning, a person who is self-funding his HSA and does not have other liquid assets may want to choose an HDHP with the smallest possible deductible ($1,000 individual or $2,000 family), and in later years can increase the deductible as carryover balances plus new contributions work together to build up balances in the HSA.   

6.  How do FSA payments differ from HSA payments?

Another method of funding medical expenses that are not covered by insurance is a “flexible spending account” (FSA)—sometimes called a “flex account,” “cafeteria plan” or “Section 125 plan.”  This is a salary-reduction agreement.  The employee requests in advance that his salary be reduced by a certain amount.  The employer then credits the reduction amount to an FSA for the employee.  By law, the full year’s medical expense election in an FSA becomes available to the employee, if needed, as soon as the FSA year begins.  Thus, if an employee elects to have $200 per month placed in an FSA to reimburse medical expenses, a total of $2,400 of reimbursement funds will immediately become available for non-reimbursed medical expenses (those not covered by insurance), although it will take a full year at the rate of $200 for the employee’s salary-reduction agreement to put $2,400 into the account.  In other words, an FSA is sort of like a “line of credit” that can be used all at once if necessary and can operate at a deficit until finally it catches up at year-end.

One major difference with any balance in an FSA is that an employee must “use it or lose it” in each plan year.  There is an incentive to use up any remaining balance at the end of each year, by finding medical expenses to spend it on.  With an HSA, however, there is an incentive to save.  The funds in an HSA belong to the employee and cannot be forfeited.  Any excess balance will roll over from year to year.  However, as explained earlier, funds cannot be paid out of an HSA unless funds have actually been deposited.

7.  Will an FSA still be available to someone who has an HSA?

Yes, but only to a limited extent.  Nationwide, about 10% of employees have “flexible savings accounts” (FSA’s)—otherwise known as Section 125 or cafeteria plans.  An FSA is generally available to pay any qualifying medical expenses that insurance or other reimbursement plans will not pay (such as co-pays, deductibles, co-insurance, out-of-network charges, and treatments exceeding allowed limits).  An employee can put a certain amount of his salary into an FSA plan on a pre-tax basis, if the employer makes such a plan available.

There will be a built-in conflict between FSA’s and HSA’s, because a person with an HDHP cannot set up an HSA if that person has any insurance or plan that will pay medical expenses before the deductible on the HDHP is met.  

If, for example, an individual obtains a family HDHP with a $2,000 deductible, he can put $2,000 into an HSA; but if he also has an FSA that will reimburse any of the medical expenses falling within the $2,000 deductible, he is disqualified from having an HSA.  It is possible for existing FSA plans to be narrowed so that they will not conflict with HSA provisions.  What will be left of the FSA plan after restricting it will be much less useful, but probably still worth having.  

8.  What expenses can be paid from an FSA?

A person with an HSA can still have an FSA if its purpose is limited to paying any IRS-qualified “medical expenses” that are outside the range of typical health insurance coverage.  Even a person with an HSA can use an FSA to reimburse for dental and vision care expenses to the extent not paid by other insurance.  

If the individual is covered by an HDHP and has an HSA, he cannot use an FSA to satisfy regular co-pays or co-insurance on doctor visits, prescriptions, hospitalization, medical tests, etc., until after the HDHP’s deductible has been satisfied.  It’s possible to set up an FSA that, among other limited choices, allows reimbursement of only those medical expenses that exceed the high deductible amount (such as a $2,000 deductible on a family HDHP) and are not otherwise covered by insurance.  (However, the funds placed in an FSA plan each year are “use it or lose it,” and it’s hard to guess in advance whether medical expenses will exceed the high-deductible amount.)

There is one exception to the rule that the HDHP’s deductible must be satisfied before standard medical expenses can be paid from an HSA owner’s FSA.  This exception is for “preventive care.”  (Preventive care does not include treatment for any existing illness.)  The terms of an HDHP may require some categories of preventive care expenses to be counted toward the policy’s deductible, but the IRS will allow these particular expenses to be reimbursed from the FSA even before the deductible is met—as long as they are not actually paid for by insurance or HSA funds.  

Using a fairly sophisticated strategy, an employer could design an FSA to pay “preventive care” expenses, in addition to non-reimbursed dental and vision care, and any regular medical expenses that may exceed the related HDHP’s deductible amount.  To some extent, FSA contributions could be calculated in anticipation of regular “preventive care” expenses (annual doctor visits and related tests, mammography, colonoscopy, cancer screening of various types, hearing tests, tests and ultrasounds during pregnancy, routine well-child care, child and adult immunizations, etc.).  The amounts set aside in an FSA on a tax-free basis then constitute a second tax-deductible medical fund (but are “use it or lose it”), on top of HSA contributions that cannot exceed the deductible on the related HDHP.

9.  Apart from “cash flow” issues, are there reasons why an employer would contribute to an employee’s HSA in installments, rather than in an annual lump sum?

Yes; but how strongly an employer cares about this may vary with the specific situation.  

An HSA is completely portable.  Any funds that an employer contributes to an employee’s HSA will immediately belong to the employee.  An employer could make a full year’s HSA contribution at the beginning of an annual insurance coverage period; but if an employee suddenly leaves, any funds in the   employee’s HSA will go with the employee.  

Another issue is that an employer has no control over how an employee spends the funds in an HSA.  (If funds distributed from an HSA are not used for qualified medical expenses, those funds are taxed to the individual as income, and are also subject to a 10% penalty tax.  But the individual cannot be restricted from withdrawing the HSA funds at will, to use for any purpose.  (It’s foolish, but it’s permitted—and then the HSA funds will no longer be available for their intended purpose.)   

Instead of lump-sum annual contributions to employee HSA’s, an employer might prefer to fund each employee’s HSA in quarterly or monthly installments.  This would link the employer’s contributions to continuing employment, and would cause less money to be in an HSA at any one time.

 (The downside is that an employee may need to incur large medical expenses fairly quickly within a plan year, and will want to use the HSA to pay those expenses until the insurance policy’s high deductible has been met; but the employer’s funding of the HSA in installments may lag significantly behind the employee’s need for money to pay such expenses.)

10. Is an HSA exempt from garnishment, levy, and set-off in Oklahoma?

Not at the present time.  HSA’s are still new, and at some point Oklahoma’s list of exempt assets might be changed to include HSA’s—but this is hard to predict.  (Because an HSA is not an IRA or any other type of retirement account, it isn’t in the same category, and isn’t given the same treatment as other funds protected from creditors.  It’s just a special account set up to pay medical expenses.)

 I believe HSA’s in Oklahoma can be reached by garnishments and levies, and an HSA is probably not exempt from set-off by a bank.  (None of this is a problem for employees who are making regular child support payments and loan payments and are paying their taxes.  But in a larger organization, a few employees may have problems with creditors.)

If an employer funds an employee’s HSA in a lump sum and creditors garnish those funds, the goal of providing a workable health plan for the employee and his family is thwarted.  

If an employer contributes to employees’ HSA’s, that employer is required to make the same dollar-amount or same percentage-amount contribution to all HSA’s of employees having self-only HDHP coverage.  Similarly, the employer must treat equally all employees with family HDHP coverage, and must make a same-dollar contribution or same-percentage-amount contribution (or else no contribution) to HSA’s of those employees.  (However, what is contributed in connection with self-only HDHP’s does not have to be the same as what an employer provides to employees with family-coverage HDHP’s.)   

My point is this:  It is not possible to hold back HSA contributions from certain employees because of creditor concerns, while contributing to the HSA’s of other employees.

You may ask, “Why has this not been a problem with other employer-sponsored insurance benefits in the past?”  Because they are structured differently.  For example, a medical insurance policyholder has no right to draw money out of an insurance policy without submitting qualifying claims.  An individual’s creditors stand in no better shoes than the policyholder; and they, too, cannot draw out money from insurance without submitting valid medical claims.   With a health insurance policy there is nothing to garnish, except maybe checks that are due to the individual for medical reimbursements.

With a flexible savings account (FSA) there technically isn’t any account that “belongs” to the employee.  For this reason a creditor has nothing to garnish by stepping into the employee’s shoes.  An FSA is actually a “salary reduction agreement,” wherein an employee does not pay a certain amount of salary, and instead promises to pay certain expenses on the employee’s behalf—but only if qualifying expenses are incurred before the end of the plan year.  The employee cannot draw out any money “at will,” because it’s a benefit usable only for non-reimbursed medical expenses.  Any amount not used for qualifying expenses by the end of the year is forfeited to the employer.

But HSA’s are designed to give an employee “ownership.”  An account follows the individual when he changes jobs, retires, etc.  The employee has free control over the money and can withdraw it at will, for any purpose, as mentioned above.  These features create an unrestricted cash fund that creditors and others can garnish or levy against.

11.  Can an HSA be pledged to a lender as collateral for a loan?  

It may be contractually possible to accomplish this (it’s not illegal), but it definitely should not be done.  When the owner pledges an HSA as collateral, the Internal Revenue Code will treat this like a complete withdrawal of the HSA funds from the account (not for a medical purpose).  

Assuming that the HSA owner is under 65 and not disabled, pledging the HSA balance will result in the whole pledged amount being included in the individual’s taxable income for that year, and a 10% withdrawal penalty will also be owed on those funds.  These provisions are so punitive that a person who needs the money might as well withdraw the funds from the HSA (not borrowing against the HSA).  The income tax and penalty are going to be the same either way.

(The provisions on pledging an HSA are basically the same as for pledging IRA balances.  It’s not illegal to pledge an IRA balance, but doing so is very foolish.  It will cause the entire amount of the pledged IRA to be treated as a distribution of income to the individual in the year in which it is pledged.  In addition, for persons below the age of 59 ½, pledging an IRA will result in a 10% early distribution penalty.)

Banks should be careful not to take either an IRA or an HSA as collateral on a loan.  It’s also important to avoid a “blanket pledge” of deposits (a standard catch-all provision in fine print in the list of collateral on many loans) that does not carefully delete HSA’s and IRA’s from coverage.  

12.  In what ways would filing tax returns and keeping related records be more complicated for a person who has an HSA?  

An individual’s HSA contributions (not including employer contributions to the individual’s HSA) are deducted from income on line 28 on the first page of the 1040 income tax return, before arriving at “adjusted gross income.”  Even a person who takes only a standard deduction (someone who cannot itemize deductions) can take this deduction.

However, it is not possible to file a Form 1040EZ, nor a Form 1040A, if a person wants to deduct HSA contributions.  The HSA deduction can only be taken by filing a Form 1040.

A second requirement is that a person must file a Form 8889 for each year in which HSA contributions or distributions are made. This form (1) helps the person calculate the maximum allowable HSA contribution for the year, and also (2) requires the person to account for any distributions from the HSA—whether spent for permitted purposes or not.  Owning an HSA forces an annual filing of a Form 8889 along with the tax return.

A third requirement is record-keeping.  An HSA owner must keep records sufficient to demonstrate that distributions from the HSA are being used to pay or reimburse qualifying medical expenses. If a person writes a check or uses a debit card at the drug store, it’s important also to obtain and keep a register receipt or prescription receipt, listing the item that is a qualifying medical expense.  (The individual must retain records sufficient to prove that the money was spent on qualifying items.)

In addition to keeping records to prove what expenditures qualify for reimbursement by the HSA, the owner probably should be ready to demonstrate that the particular expense was not paid or accounted for in any other way—in other words, it was not reimbursed by medical insurance, nor deducted as a medical expense on Schedule A to Form 1040.  An HSA owner probably needs to keep detailed records of medical expenses paid or reimbursed by health insurance, just to prove that those payments received from insurance did not pay or reimburse the items paid by the HSA.

Tax returns can be audited for up to three years after the date on which they are filed.  If a taxpayer files a tax return on April 15, 2005, for the 2004 tax year, and made distributions from an HSA in 2004 to pay qualified medical expenses, that taxpayer should retain 2004’s medical expense records until at least April 15, 2008.  

For taxpayers who regularly itemize their deductions, it’s no surprise that documentation to prove the appropriateness of deductions must be retained for several years.  But a vast number of persons who will become HSA owners may not currently be itemizing deductions, and may be unaccustomed to the level of record-keeping that HSA’s will require.

13. Will an employee with an HDHP have more paperwork to handle, compared to low-deductible health insurance?

Definitely.  With low-deductible insurance, the insurer (instead of the insured) deals with all of the claims presented by the insured’s medical providers throughout the year.  The insurer determines what expenses are covered by the plan, then the medical provider (or the insured) gets paid by the insurer, and an “explanation of benefits” arrives in the insured’s mail, summarizing what has been done.   The individual only has to retain the “explanation of benefit” forms and deposit a reimbursement check once in a while.  

If an employee has a flexible savings account (FSA) in addition to a low-deductible insurance policy, the employee forwards to an FSA administrator the “explanation of benefits” form for any items that the insurance company has not paid in full. The FSA administrator handles the paperwork, determines whether a request for reimbursement of the remaining amount is proper, and sends a check to the employee.

In the procedures just mentioned, the medical insurance company and the FSA administrator do the following:

(1) determine whether particular expenses are eligible and covered, and in what amount;

(2) request more information (mostly from medical providers), if submitted claims have not been adequately documented;

(3) keep a running total of amounts applied toward the deductible, as well as certain types of care that have dollar limits, or annual “maximum number of visits” limits;

(4) maintain a bank account from which payments are made;

(5) prepare “explanation of benefits” forms (or the equivalent) for the insured’s records; and

(6) prepare and mail checks to medical providers (or to the employee, if for a reimbursement).

The question, “Who processes the paperwork?” will become a more important issue when insurance policies become high-deductible and an FSA is no longer available to cover ordinary deductibles, co-pays, co-insurance, out-of-network charges, etc.

When a family-coverage policy with a $5,000 deductible is in place, the insurer might pay nothing to medical providers or to the insured in most years, because the deductible will not be met.  Thus, when medical providers learn that the insured has a $5,000 deductible, the providers will probably not want to “file insurance” as a means of payment.  Instead, most providers are going to ask for payment at the time of service.  For this reason, the individual will be directly paying almost all medical bills from the HSA.  The individual will also be the person responsible for collecting and retaining adequate documentation for each medical expense, because medical providers may not be filing claims with the insurance company at all.

To avoid paperwork (particularly in a year when the insured’s deductible is not met), an insurer with a high deducible policy might instruct the insured to submit medical receipts to the insurance company only after the insured can prove that the deductible for the year has been satisfied.  On this basis, the insured would be paying all medical expenses directly, and at the time of service would need to be obtaining from each medical provider the same level of documentation that the insurance company itself typically requires when a medical provider files claims directly with the insurance company.

Perhaps eight or ten months into the year, when a high deductible is finally met, the insured would finally submit a large stack of documentation to the insurance company to prove the validity of claims adding up to the entire deductible amount.  At that time (many months after medical services are provided), the insured may realize for the first time that better documentation is necessary for certain expenses from various medical providers, and he probably would be obtaining this himself, rather than the insurance company doing so, if the medical provider did not directly file with the insurance company.

Some people who are good at organizing, keeping records, budgeting, balancing checkbooks, etc., will probably do very well at managing the tasks associated with an HSA and HDHP.  But other people are impulsive in their spending, don’t save or budget their money, hate math, have no patience for paperwork, and are not detail-oriented.  This second group will have trouble collecting and maintaining necessary records to document that a high deductible has been met, and that HSA funds have been spent on qualifying medical expenses.  

One way the HDHP reduces medical premiums is by reducing the amount of claims-processing and check-writing by the insurance company.  Logically, if the insurance company’s paperwork-shuffling is reduced, that work is being shifted to someone else–the insured or some third party.  An employer probably should not just set the employees up with HDHP’s and HSA’s and turn them loose.  Ideally, employees would have some detailed guidance on what’s necessary to take a more active role in managing their own medical services and record-keeping.

Even better, the employer could make someone available to help employees understand specifics of insurance coverage and how to fund their HSA’s.  This person should be able to explain what are qualifying medical expenses, and how to obtain necessary documentation from providers.  

However, a person’s medical history is always a very private subject, and employees will not want some other company employee looking at the details of their specific medical conditions, medical tests, types of prescriptions, etc. The ideal situation might be to have a third-party organization available to help employees deal with their HSA and HDHP issues.  But this is an additional expense, and is contrary to the objective of decreasing the employer’s (and employee’s) overall cost of medical coverage.