Practical Concerns

Health Savings Accounts

By CMA Legal Counsel

The following document is part of CMA ON-CALL, CMA’s online medical-legal library. ON-CALL documents, which can be accessed at www.cmanet.org, are free to CMA members. The cost for nonmembers is $2 a page.

Congress established health savings accounts (HSAs) in 2004 to help individuals save for qualified medical and retiree health expenses on a tax-free basis under federal (but not state) tax laws.

Physicians dissatisfied with managed care plans hope that HSAs and consumer-driven health care (where patients have a much greater out-of-pocket obligation that must be satisfied before any third-party payor steps in) will give them increased control over the practice of medicine and allow them to secure higher reimbursement. HSAs are still extremely new in California, so it is difficult to gauge their effect at this point.

At a minimum, physicians will need to carefully evaluate HSA participation agreements to ensure that the added risk of collection is appropriately recognized. CMA’s Center for Economic Services will be preparing a toolkit for physicians to use when dealing with HSAs. In the meantime, below are answers to questions about HSAs as they relate to a physician’s practice.

Who is eligible to establish an HSA?

An individual is eligible to establish an HSA so long as that person:

• is covered under a high-deductible health plan (HDHP), and
  
• is not covered by any other plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage, such as dental or vision or coverage provided under workers’ compensation or auto/liability policies), and
  
• is not entitled to benefits under Medicare; and
  
• may not be claimed as a dependent on another person’s tax return.

Does that mean that third-party payors are still involved with my patients who have HSAs?

Yes, because these patients must also be covered under a high-deductible health plan. In other words, HSAs are only used in conjunction with qualifying health plans. However, the extent of the payor’s involvement before the deductible is paid will depend on the plan being offered. As of the date of this publication, that varied widely from essentially no involvement to levels approaching that of a traditional HMO.

What is a high-deductible health plan?

Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP must have an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductible, copayments and other amounts, but not premiums) not exceeding $5,100. For family coverage, an HDHP must have an annual deductible of at least $2,000, and annual out-of-pocket expenses required to be paid not exceeding $10,200. These amounts are indexed for inflation.

Does an HDHP have to be an HMO or PPO?

No, it can be an HMO, PPO, or indemnity plan, so long as it meets the requirements specified above.

Is there ever an occasion where there is a first-dollar coverage requirement for care, yet the plan still qualifies as an HDHP?

HDHPs can have first-dollar coverage (no deductible) for preventive care, such as periodic health evaluations (e.g., annual physicals), screening services (e.g., mammograms), routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, and obesity weight loss programs. (See All About HSAs, U.S. Treasury Department, August 18, 2004).

But what about costs incurred for non-network physicians? Are those included within the out-of-pocket max?

No. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside the network exceed the maximum annual out-of-pocket expense limits allowed for an HDHP. Thus, if you do not already participate in the plan’s network, a patient may be obligated to pay more than the out-of-pocket limits. Note, however, that depending upon which HDHP covers that patient, you may be a participating provider in that plan already and thus bound to accept your discounted rates. Indeed, Blue Shield advertises to potential enrollees that by using the Blue Shield network, they will be entitled to substantial discounts for medical services. (For more information on the implications of your current managed care contracts in this environment, see CMA ON-CALL document #1907, “Silent PPO Action Guide.”)

But can an HDHP tell its enrollees that it will never contribute to out-of-network care, even if the enrollees satisfied the out-of-pocket expense requirement?

Yes, and we are aware of at least one HDHP plan in California (the one offered by Blue Cross) that uses an exclusive provider organization (EPO) network. Thus, there are no benefits (reimbursement) for out-of-network services (except for emergencies). Under these circumstances, enrollees who choose an HDHP using an EPO network are likely to use contracting physicians.

What about other limitations typically imposed by managed care plans? Can HDHPs impose them as well?

Yes, according to the U.S. Treasury Department, “reasonable benefit designs” such as a lifetime limit on benefits, limits on specific benefits, and precertification requirements are not counted toward the out-of-pocket maximum limitations.

So, if the services are covered by an HDHP, could there still be “managed care” type rules that need to be complied with?

Yes, though if you are not a participating provider in the plan’s network, you would not be bound by their rules and reimbursement rates (although your patient will be).

Who can contribute to an HSA?

Contributions may be made by an individual, by an employer, or both. If the contribution is made by the employer, it is not taxable to the employee. If the contribution is made by the individual, it is an “above the line deduction.” Contributions can also be made by others on behalf of the individual and deducted by that individual (e.g., parents can purchase HSAs for their children in college and deduct the expenses).

What are the maximum amounts that can be contributed?

The maximum contribution is the lesser of the deductible amount under the HDHP, or (for 2004) $2,650 for individuals or $5,250 for family coverage. These dollar limits are adjusted for inflation each year.

When can my patients take money from the HSA and make “distributions”?

An individual is permitted to make distributions from an HSA at any time.

How are distributions from an HSA taxed?

The distribution is tax-free if it is taken for “qualified medical expenses.” Such qualified medical expenses must have occurred, however, after the HSA was established.

What are the qualified medical expenses that are eligible for tax-free distributions?

Generally, these are expenses for medical care as defined by the IRS, but only to the extent the expenses are not covered by insurance or otherwise. (A list of allowable expenses published by the U.S. Treasury Department, referred to as the 213(d) List, can be found at www.irs.gov/pub/irs-pdf/V502.pdf.)

Do health insurance premiums qualify as medical expenses?

Generally, health insurance premiums are not qualified medical expenses except for the following: qualified long-term care insurance, COBRA health care continuation coverage, and health coverage while an individual is receiving unemployment compensation.

Do unused HSA funds roll over year after year?

Yes, the money invested in a health savings account rolls over year after year.

Which health plans are currently offering qualifying HDHPs in California?

According to HSA Insider (www. hsainsider.com), HSA insurers in California include:

• Aetna
• Assurant
• Blue Cross of California
• Blue Shield of California
• CaliforniaChoice
• CIGNA HealthCare
• Great West Healthcare
• John Alden Insurance
• Medical Savings Insurance
• Nationwide Health Plans
• UNICARE
• UnitedHealthcare

In addition, Kaiser is offering an HDHP to its enrollees.

What should I consider before I sign an HSA-qualified HDHP Participation Agreement?

Physicians who are considering HSA-qualified HDHP participation contracts need to be just as thoughtful as they would be before signing any other managed care contract. In particular, physicians need to factor in the extent to which patients will have greater financial responsibility for medical services. Many low- and middle-income families, already faced with large expenses for food, housing, and transportation, may leave their medical bills unpaid. In fact, because most Americans spend less than $1,000 a year on medical services, most patients will not be able to claim reimbursement from the HDHP.1,2 As a result, physicians may be saddled with unexpected levels of bad debt in connection with HSAs. (For more information on collection efforts from patients, see CMA ON-CALL document #0112, “Collecting From Patients/Extending Credit.”)

Physicians should continue to obtain patient financial responsibility waivers and pay close attention to their HSA accounts receivable. With the advent of HSAs, physician practices should become especially vigilant in obtaining up-to-date insurance information from patients. Patients who convert coverage to an HSA that uses an HDHP provided by large carriers may present with eligibility cards that look like standard plans. Physicians will want to update their billing system records to manage these accounts receivable correctly.

Physicians need to understand that they do not contract with the HSA itself. The HSA is an account, usually created by banks and insurance companies, to help individuals pay for medical expenses. Thus, the physician’s participation, if any, is with the HDHP. Physicians who enter into an agreement with such a plan should review it as carefully as any other managed care contract. CMA provides managed care contracting resources at no cost to CMA members (nonmembers may purchase the publications). These resources, which are available at www.cmanet.org or by calling 800-882-1262, include:

• CMA’s Legal Guide to Understanding Managed Care Contract Clauses. This guide discusses potentially problematic provisions in managed care contracts, relevant law that relates to those areas, and alternative contract language.
  
• Analysis of major payor contracts (Aetna, Blue Cross, Blue Shield, etc.) available at no cost to CMA members.
  
• Taking Charge: Steps to Evaluating Relationships and Preparing for Negotiation—A Focus on Payor Contracting. This guide gives practical tools and tips for negotiating and assessing managed care contracts.

CMA also offers a contract-analysis service that reviews contracts for compliance with applicable laws and for practical application to a physician’s practice. For more information, see CMA ON-CALL document #1705, “Contract Analysis Service.”

Physicians also need to understand which regulator has jurisdiction over the HDHP. Depending upon whether the Plan is regulated by the Knox-Keene Act or Insurance Code, different protections apply.

We hope this information is helpful to you. CMA is unable to provide specific legal advice to each of its more than 30,000 members. For a legal opinion concerning a specific situation, consult your personal attorney.

For information on other legal issues, use CMA ON-CALL or refer to CMA’s California Physician’s Legal Handbook, which contains legal information on a variety of subjects of everyday importance to practicing physicians. Written by CMA’s Legal Department, the book is available on a fully searchable CD-ROM, or in a six-volume, softbound format. To order your copy, call 800-882-1262 or visit CMA’s bookstore at www.cmanet.org.

References

1. U. Reinhardt, “Some observations on high-deductible health insurance policies,” CMA Leadership Academy (November 2004).
2. K. Thorpe, MEPS data, Emory University (September 2004).

Excerpted from the 2005 California Physician’s Legal Handbook. Published with permission of and by arrangement with the California Medical Association. For ordering information, call 800-882-1262 or visit www.cmanet.org.

© California Medical Association 2005.

Sonoma Medicine, Volume 56, Number 2 (Spring 2005).