The lure is undeniable. Instead of paying high monthly health insurance premiums, you get to pay lower ones. Then the magic begins in earnest. Each year until age 65 you can invest tax-free dollars, up to a government-set maximum, into a special Health Savings Account (HSA) to use for medical expenses. What you don't spend from it on health care you get to keep. After age 65, the money can still be used tax-free to supplement Medicare. You, instead of the insurance company, own the pot of gold.

And the pot can be substantial. A family that puts the $5,150 allowable maximum into their HSA each year could accumulate $51,500 in just 10 years—plus additional tax-free earnings (the money can be held in a money market account or an investment vehicle, like a CD or mutual fund). And though a portion would surely be used for medical care, the potential savings after 20, 30, or 40 years is tantalizing. Another nifty thing: if a non-medical emergency leaves you strapped for cash, you can use your HSA funds by paying taxes and a ten percent penalty for the amount you withdraw.

HSAs are part of President George W. Bush's broad "ownership" initiative, and the linchpin of a Medicare reform bill passed by Congress in December 2003. By "owning" a large part of your health insurance, Bush says, you will spend your healthcare dollar more carefully, driving down costs and realizing savings in the process. They also provide more flexibility and choice, advocates say. That's because traditional health insurance plans may cover things you won't need, and not cover what you do, whereas people with HSAs can spend their money on any "qualified medical expenses" (like prescriptions, over-the-counter drugs, dental and vision services, and mental health services).

But critics say HSAs actually increase costs for some people, will do little for the 44 million people without health insurance, and may result in poorer health outcomes. Touted as a way to provide catastrophic health coverage for the uninsured, self-employed, or unemployed, HSAs are more likely to be used by wealthy people, according to a recent report by the Robert Wood Johnson Foundation. And only 440,000 people had set one up as of September 30, 2004, according to a report in the Los Angeles Times.

The Devil in the Details
Chicago attorney and mother of three, Teresa Hoffman Liston, has an HSA—and she says the plan is great. Liston, who underwent a mastectomy for breast cancer over a decade ago, says, "It was hard to find any health insurance. I found I'd have to pay $1,800 a month for sub par coverage. So, I went with a high deductible insurance [policy]." It has lower premiums, so she can afford putting some income, tax-free, into an HSA each month. From that she pays medical expenses.

But even Liston cautions, "Now that I feel I'm healthy, it's a good way to budget and save. But there is no 'one size fits all' here. You have to shop around and do your homework."

And there's a lot of homework to do.

An HSA isn't going to improve on most employer-provided health insurance plans, which are available at group rates. Those plans pay for most emergency, outpatient, and hospital costs. Some cover the entire cost of preventive health services and substantial portions of drug costs. For those comprehensive benefits, an employer often contributes over $700 monthly for a family plan, while the employee generally pays monthly premiums of about $350 ($4,200 a year). Usually, co-payments for medical services are required, but are only about $10 to $50 per visit.

But when an employer doesn't offer a group plan, premiums skyrocket—and they must be paid entirely by the employee. For a family of four, premiums shoot upwards to at least $1,400 per month in the upstate New York area (and about $3,000 in New Jersey). By the end of the year, a family in upstate New York has contributed close to $17,000 to the insurance company's pool. Then, should anyone in the family actually need medical services, there are still co-payments and deductibles to pay.

As employers increasingly drop health insurance benefits, many families and individuals are stuck with a choice that self-employed people have had to make all along: either pay extremely high monthly premiums or risk no insurance coverage at all. This is where the lure of the Bush plan comes in.

Here's how it works. First, an individual or family must purchase an "HSA-eligible" high deductible health insurance plan (HDHP). To be HSA-eligible, a plan must have an annual deductible of at least $1,000 for an individual and $2,000 for a family. (Many HDHPs have deductibles from $2,000 to $10,000.) These are not comprehensive plans, but are for catastrophic care. Monthly premiums for an HDHP can be as much as 40 percent lower than a comprehensive health plan, starting at around $840 for a family of four—a savings of about $6,600 annually.

That savings, or a portion of it, is then invested in an HSA (though some people don't get around to doing that investment step). The amount invested each year is subtracted from taxable income on each year's tax return, up to a maximum of $5,250 (or the HDHP's annual deductible, whichever is less) for a family. For individuals, the tax-free investment maximum is $2,650 (or the annual deductible).

Then, if you get sick or are injured and need health care, you pay "out of pocket"—from your HSA—up to as much as the deductible your HDHP specifies. If you don't have enough in your HSA to do that, you tap other personal holdings. Fortunately, there is an annual ceiling to what you're expected to pay out of pocket. For an individual it's $5,100, and for a family, $10,200.

Employers can offer HSAs and contribute into them, but fewer than 5 percent currently do. More common but similar arrangements are employer-sponsored health reimbursement arrangements (HRAs) or flexible spending accounts (FSAs). These plans give employees an account that they can use to spend in a flexible manner similar to an HSA. But only the employer can contribute to an HRA and the pot of gold is not portable: it stays with the employer when you leave your job. Employees can contribute to an FSA, but the money doesn't carry over from year to year. Some employees have MSAs (medical savings accounts), but those are being phased out.

Out-Of-Pocket Problems
The HDHP trade-off—lower premiums for higher out-of-pocket expenses—may be worth it to someone who rarely needs medical care. But it can take just one car accident or one gallbladder surgery to exceed any potential savings with an HSA. A family of four paying the lower HDHP premium of $10,080 annually could incur another $10,000 in annual expenses—more than $20,000 in a single year.

In addition, one of the small-print provisos of HDHPs is that they don't cover costs over "usual, customary, and reasonable" care. And any such costs, paid by the patient, are not tallied in the "out-of-pocket" cap. Also, expenses paid to professionals who aren't in an HDHP's network of providers don't count toward the cap. This means you could be stuck with even greater expenses than the out-of-pocket ceilings widely publicized by supporters of the HDHP/HSA plan.

Kathleen Stoll, Director of Health Policy at Families USA, says for families with even one member who has any sort of chronic illness, such as asthma, diabetes, or high blood pressure, high-deductible plans are "not going to be a smart choice."

Uwe Reinhardt, professor of economics and public affairs at Princeton University, agrees, saying the plan is not likely to help those who need it the most. He points out that HDHP premiums are still prohibitively expensive for many of the nation's 44 million uninsured, and even those who can manage it may have little to put aside in an HSA. "Even the conservative American Enterprise Institute calculated that only 6.7 million of the projected 49 million uninsured in 2006 will gain insurance under this plan," he says. That still leaves tens of millions in the US without any health insurance.

Another problem is what the experts call "market segmentation." In plain English that means that people who are healthy will buy into the HDHP/HSA combo since they anticipate savings. But as the healthier population leaves the traditional insurance pool in favor of the HDHP/HSA plan, others with chronic illnesses are left behind, creating a higher per-person liability for insurers. That cost would be passed on to those people remaining with the traditional plan, already burdened by greater than average medical expenses. In other words, those who need help the least will get it aplenty, while the neediest will find themselves even worse off.

Penny Wise & Pound Foolish?
The high deductible HDHP and a self-owned HSA create a powerful incentive for people to make "cost conscious decisions," says Michael Tanner, Director of Health and Welfare Studies at the Cato Institute, a nonprofit public policy research foundation headquartered in Washington, DC. "Cost-based selection among competing providers" will also drive costs down, he says.

But healthcare isn't a toy truck or a lawnmower. We can't rely on Consumer Reports to tell us the best buy in whatever service we might need. Are we equipped to be bargain shoppers who make decisions that require medical expertise? How will we know when cheaper care is actually more expensive, in terms of dollars or health, in the long run?

For people insured with HDHPs, the powerful incentive to save their own money could turn into a terrible dilemma—and a potential medical disaster. Patients may second-guess their own symptoms before going to an emergency room, or avoid seeking care early on, when problems may be more treatable—and not just for ankle sprains and colds, but for dizziness that could be a stroke, or heartburn that turns out to be a heart attack.

Doctors encourage preventive and early care, and it's worrisome that financial incentives would drive patients away from precisely the sort of care that is thought to be most beneficial. Certainly not all colds need to be seen. But the decision about what is serious and what isn't is often better made by a doctor, who can also help educate patients about when to be seen.

Nevertheless, Michael F. Cannon, Director of Health Policy Studies at the Cato Institute, says financial incentives shouldn't be a problem: "The Rand Health Insurance Experiment found that people responsible for the first $1,000 consumed 24 to 30 percent less care and had no harmful health effects. They eliminate unnecessary health expenditures but they don't hesitate to go see the doctor when they need to." The Rand Health Insurance Experiment was a 15-year, multimillion-dollar study to assess how much more medical care people would use if it were free, and what the consequences of that would be on their health.

But a survey of 4,000 adults just released by the Commonwealth Fund, a private foundation that supports independent research on health and social issues, found that people with HDHPs failed to fill a prescription or comply with a medical test roughly 38 percent of the time, compared with 27 percent among people with more comprehensive plans. It also found that half of patients with HDHPs racked up medical debt compared with 31 percent of people with comprehensive plans. Although the survey was of people who did not have an HSA, critics say data like these suggest that people with little money to spare will keep expenditures down by stinting on medicines and healthcare.

Promises, Promises
There is one more catch about HSAs, despite whatever other issues might make someone hesitate before going that route. The requisite HDHPs are simply not available in many locations. Without an HDHP, you can't get an HSA. A search of insurance programs via the largest health insurance broker, ehealthinsurance.com, shows no HSA-eligible health plans in many areas of the Mid-Hudson Valley, including Albany, Poughkeepsie, Kingston, Ellenville, Boiceville, and New Paltz. Phone calls to various providers confirmed this, though some say they may have plans available in the future.

Fortunately, low-income New Yorkers have another option. The Healthy NY program offers comprehensive plans through several providers at reduced premiums. For a family of four with an annual gross income less than $48,250, monthly premiums range from roughly $450 to $600 (less for individuals). For information, call toll-free (866) 432-5849 or visit www.healthyny.com.

For more information on other health insurance plans, including HDHPs and HSAs, go to www.ehealthinsurance.com.