A Better HSA Option for Seniors

 

“If the program ends up depriving the federal treasury of tax revenue, it’s only because older couples are allowed to keep a little more of their resources to pay for . . . retirement medical expenses. . . With concerns about the financial pressures on so many senior citizens who live on fixed incomes, enacting a robust Medicare Advantage HSA program is a great way to allow all Medicare recipients to give themselves a tax break to pay for qualified medical expenses.”

William G. (Bill) Stuart

Director of Strategy and Compliance

October 4, 2018

My reaction to the news was mixed.

Lasso Healthcare, an insurer based in Texas, will be offering [https://1reason.com/retirement_and_estate_planning/lasso-healthcare-to-launch-a-medicare-msa-in-17-states/ ] a Medicare Medical Savings Account (MSA) program to more than 20 million Medicare beneficiaries in all 1,151 counties in 17 states for an effective date of coverage of Jan. 1, 2019.

This effort dramatically increases the distribution of the product, which is currently available to Medicare beneficiaries in only 111 counties in two states. This is progress.

At the same time, the MSA program is flawed. If the Lasso expansion leads to more MSA options at the expense of a genuine HSA-based Medicare Advantage option, we will have lost the battle.

Medicare Medical Savings Accounts

MSAs follow a prescribed formula. They are a premium-free Medicare Advantage option with a $3,600 deductible. Every participant receives a federal government contribution of $1,020 into an MSA managed by Optum Bank). Participants are responsible for the net deductible ($2,580), which they must pay with their own funds (including HSA dollars if they participated in an HSA program before they enrolled in Medicare). Participants are allowed to keep funds in their MSAs, which roll over, collect interest, and can be used to reimburse future expenses tax-free.

The base Medicare Advantage plan doesn’t include prescription drug coverage, so participants must purchase a Part D plan if they want coverage for prescriptions. When all is said and done, it’s unlikely that an MSA participant incurs less than $1,020 in deductible and prescription drug expenses, so they’re not likely to accumulate balances.

The MSA program does offer one advantage to Medicare. Every day, 10,000 Americans turn age 65 and become eligible for Medicare. A growing number of these newly minted 65-year-olds have been covered by HSA-qualified or other high-deductible medical plans for years. The astute among them have learned to become engaged consumers of medical care.

They understand when to self-medicate rather than run to a doctor . . .

. . . when to access after-hours care at a retail clinic or urgent care center rather than a hospital emergency department . . .

. . . what question to ask a doctor to determine which treatment option to choose (because patients usually have multiple options that can achieve equal outcomes) . . .

. . . how to look up or estimate the cost of care at a certain facility or from a certain provider . . .

. . . and how to negotiate prompt-pay discounts when they are financially responsible for a service.

And when these engaged and educated consumers enroll in Medicare, unless they live in one of 111 counties in two states, they don’t have access to a Medicare option that engages them and offers them financial incentives to remain astute consumers.

Expanding MSAs to more than 1,000 new counties across the country will offer more enrollees access to the MSA program. Given the financial structure of the program – with high net deductibles and little opportunity to roll over unused balances for future care – they receive little reward for their shopping efforts.

A Robust Option

What Medicare really needs is a robust Medicare Advantage HSA option. The program would look like this:

First, it would include Part A (inpatient), Part B (outpatient), and Part D (prescription drug) services all wrapped into a single plan. It would have a low premium.

Second, it would have a single deductible of between $1,500 and $2,000. Participants wouldn’t receive a contribution from Medicare.

Third, this Medicare Advantage HSA option would not be disqualifying coverage, so anyone enrolled could participate fully in an HSA program, just as anyone not enrolled in Medicare or other disqualifying coverage can today.

Think about this approach.

People who participate in an HSA program during the years leading up to their Medicare enrollment could transition right from an employer or nongroup HSA-qualified coverage to Medicare HSA-qualified coverage. Their deductibles might be different, and services covered might differ as well, but they would remain covered by the same type of medical plan as they’ve experienced prior to their Medicare enrollment.

Participants would retain their HSAs that they established during their working years. They can do so today, of course. The difference is that they can continue to make contributions to their HSAs if they enroll in the Medicare Advantage HSA option. Under the current MSA program, they must open an account with a specific bank, and all contributions except a deposit by Medicare are prohibited.

In the Medicare Advantage HSA program, participants could contribute up to the $3,500 statutory maximum in 2019, plus an additional $1,000 catch-up contribution. These contribution levels would allow them to pay any Medicare Advantage cost-sharing, plus their qualified dental, vision, and over-the-counter expenses. And they could pay their Medicare premium with pre-tax HSA dollars as well.

Today, HSA owners who enroll in any Part of Medicare are disqualified from making further contributions (or accepting employer contributions) into their HSAs, even if they continue to work and are enrolled in their employer’s HSA-qualified plan.

MSA Medicare Advantage HSA
Deductible $3,600 $1,500 to $2,000
HSA contribution limit $1,020 $4,500 in 2019
Source of contributions Medicare Individual
Premium $0 Set by insurer
Prescription coverage Not included;

must buy Part D

Included

A Continuing Benefit

HSA participants have the opportunity to build medical equity through their working years. They make pre-tax contributions to their HSAs, enjoy tax-free balance growth, and make tax-free distributions for qualified expenses. Funds that they don’t use in a given year – whether because their claims are low or they pay their current qualified expenses with personal funds so that they can build their HSA balances – roll over for future use.

When these participants enroll in Medicare today, they have a decided advantage over their contemporaries who must rely on 401(k) plan distributions and Social Security income to fund their medical expenses in retirement. And this is no small task. Fidelity’s annual survey indicates that a couple retiring at age 65 this year will spend $280,000 on premiums, cost-sharing, and spending on non-covered services during the remainder of their lives.

An individual with a $100,000 401(k) balance at retirement who incurs $10,000 in annual expenses will exhaust his balance in eight years and four months because he must withdraw enough to cover his expenses plus taxes (assuming a 17% tax rate – the 12% federal marginal tax rate and a 5% state income tax). In contrast, an HSA owner with the same balance and annual expenses can cover 10 years worth of expenses with the same $100,000 balance in an HSA.

The problem today is that the HSA owner can make no more contributions to his account once he enrolls in Medicare. And the Medicare recipient who never chose – or never had access to – an HSA plan receives no tax benefit when he pays his qualified expenses.

A robust Medicare Advantage HSA program would allow anyone who owned an HSA prior to enrolling in Medicare to make additional contributions, not just distributions as is his limit today. And people who don’t own HSAs prior to enrolling in Medicare can begin to enjoy the tax advantages that others have experienced for years.

 Assessing the Cost

What’s the cost to the federal treasury? That’s the question that Congress must answer before it passes any legislation. The cost will depend on the final design of the program and the assumptions that the Congressional Budget Office (CBO) or Joint Committee on Taxation (JCT), the two sources of congressional scoring, apply to their model.

It’s important to look beyond the models to understand the source of any program cost. If the program ends up depriving the federal treasury of tax revenue, it’s only because older couples are allowed to keep a little more of their resources to pay for those $280,000 of retirement medical expenses (all of which are HSA-qualified). With concerns about the financial pressures on so many senior citizens who live on fixed incomes, enacting a robust Medicare Advantage HSA program is a great way to allow all Medicare recipients to give themselves a tax break to pay for qualified medical expenses.

The Legislative Path

No one in Congress is stepping forward to champion this issue – at least not visibly. The concept has general support among many Republicans who favor market approaches – rather than top-down dictates from the federal bureaucracy – to shaping pre-65 and Medicare coverage. And it’s a natural issue for Democrats who want to help older Americans manage their medical bills without eroding support for the party’s Affordable Care Act (ACA), which applies primarily to pre-Medicare commercial options.

Legislation to create a Medicare Advantage HSA would most likely pass as part of a larger bill, such as periodic Medicare reform legislation, a bill that offers bipartisan reform in commercial-market regulation, or a grab-bag piece of legislation passed during a lame-duck session between election day and the end of a session of Congress eight weeks later.

And what if there is no legislation? Then perhaps consumerism advances a little in the Medicare market with the continued expansion of the MSA program. That expansion doesn’t require congressional action. It will come when private companies that offer Medicare Advantage plans identify this market niche as a viable business opportunity. The program won’t begin to deliver the benefits to participants that a robust Medicare Advantage HSA plan does, but it’s something. And any Medicare option that incents patients to act as true consumers of health care, rather than hungry diners at a buffet, is a step in the right direction – even if it’s only a baby step.

What We’re Reading

Many state elected officials have passed or are considering legislation to end “surprise” medical bills – particularly invoices from out-of-network providers who the patient didn’t know weren’t part of the insurer’s network. Now, Congress is considering legislation to protect consumers as well.

How does the cost and quality of care in your state compare with the national average? Check out this interactive map published by The Commonwealth Fund to find out.

Too many employees don’t understand their medical benefits. Also, they often aren’t comfortable making medical or financial decisions. When their medical coverage requires them to balance medical and financial decisions, many are paralyzed. Learn more here.

« | »

Leave a Reply

Your email address will not be published. Required fields are marked *