Physicians News Health news for doctors and patients.
By Franklin Rooks Jr., PT, MBA, Esq.
Introduction
Health savings accounts (HSA’s) were created under “The Medicare Prescription Drug, Improvement and Modernization Act of 2003, as a consumer-driven mechanism to combat rising medical inflation. They promote savings for future health related expenses and allow consumers to be more judicious with their health care expenditures. HSA’s are becoming increasingly popular. In 2011, 35 percent of organizations provided health HSAs, up from 29 percent in 2007.[1] Two reasons may be behind their rise in popularity. First, HSA’s are accompanied by a generous tax subsidy.[2] Second, HSA’s, which by definition are accompanied by a high deductible health plan, significantly reduces an employee’s out-of-pocket insurance premium expense.[3] But, high deductible health plans may be a gamble. Providers are sometimes on the losing end of a bet that they did not make. In these challenging economic times, providers should be aware of the payment risk with HSA’s, which is arguably greater than the risk with traditional insurance plans.
The Health Savings Account Pay-off
The payoff from a HSA can be significant for both patients and their employers. Under the Medicare Modernization Act, HSA’s enable non-Medicare beneficiaries to make annual tax-deductible contributions, indexed for inflation, into a qualified health savings account.[4] Employees save through lower premium expenses. Employers are able to deduct contributions made to the employee’s health savings account. Thus, both businesses and employees, as health care consumers, achieve savings.
The employee’s savings go beyond a reduction in insurance premiums. The funds in a HSA grow tax-free, similar to money placed in an Individual Retirement Account (“IRA”). Health savings accounts were created for the exclusive purpose of paying for “qualified medical expenses.”[5] Yet, many people utilize HSA’s to reduce their taxable income, rather than for medical purposes.[6] In addition to reducing the tax burden owed to the government, HSA’s can be used to keep assets out of the reach of creditors. Sometimes, medical providers are among those creditors.
The Heath Savings Account Gamble
Health savings accounts trade financial risk for premium savings. In exchange for a less expensive insurance premium, the required high deductible health plan saddles the policy-holder with higher out-of-pocket costs. Before the insurance carrier pays any benefits to the provider, the policy-holder must exceed the threshold of the plan’s deductible. Until the deductible is reached, the medical provider’s receipt of payment is at the discretion of the patient.
While it is true that the patient assumes more financial risk, so too does the medical provider who renders service. The patient with a high deductible health plan is betting (and hoping) that he/she will not need to use the benefits under the plan. In this gamble, the jackpot is the significant premium savings that puts money back in the pocket of the policy-holder. When the bet does not pay off, the patient could be faced with $5,900 or more of deductible and out-of-pocket exposure.[7] The patient may have medical bills that he/she cannot afford to pay. The medical provider may lose on this bet because there may be medical invoices that the practice cannot collect.[8] Because the patient is responsible for paying high deductibles directly to the medical provider, the patient’s use of a HSA directly impacts the provider’s financial interests.[9]
Medical Providers, Health Savings Accounts, and Bad Debt
Health savings accounts, through their accompanying high deductible health plan, have tilted the medical provider’s account receivable balance. The patient-responsibility portion owed to medical providers has increased, in part to due to the shifting of financial responsibilities created by HSA’s. With traditional insurance plans, patients had comparatively nominal deductibles, and the insurer paid the largest portion of the patient’s medical expense. Now, because of the high deductible, medical provider must look to the patient, rather than the insurer to satisfy the outstanding balance, at least until the deductible threshold is achieved.
As it is, the insurance industry already exerts tremendous financial pressures on providers through declining reimbursement rates.[10] Insurers and employers alike have been shifting greater financial responsibility to the patient, by increasing their co-insurances and co-payments. On top of this, providers run the risk of not being paid on the amounts attributed to unsatisfied high deductibles. Medical providers are unsecured creditors with respect to the patient balances. Patients do not pledge any collateral to receive treatment. Medical providers have no guarantee that patients will pay their respective portion of the medical bill. And sometimes, they providers have no recourse.
Unpaid deductibles are a frequently a source of bad debt for medical providers. While they were created for the exclusive purpose of paying for “qualified medical expenses,” HSA’s are often beyond the reach of creditors.[11] To the chagrin of medical providers, patients with medical debt who possess HSA’s may be able to circumvent their payment obligations through statutory exemptions for civil judgments. Several states have statutes which expressly exempt HSA’s from garnishment and judicial levies.[12] Not all states provide such exemptions for civil judgments.[13] Pennsylvania, while protecting some retirement accounts from civil judgments, does not protect all accounts. It only protects accounts arising under certain sections of the Internal Revenue Code. Health savings accounts, which arise under section 223 of the Internal Revenue code, are not among the exempted funds.[14]
Medical providers have no solace in a bankrupt patient’s HSA. Like some of the states that exempt HSA’s from judgment creditors, state exemptions in the bankruptcy code allow debtors to shield their HSA’s from creditors.[15] Health savings accounts were created for the exclusive purpose of paying for “qualified medical expenses.”[16] Yet, in many instances, this purpose is circumvented when patients can shield their HSA from the medical provider attempts to collect on the account balance. What seems clear, is that society places a higher value on the care received than the obligation to pay for it.
Advance Payment
Providers should identify whether the patient has a high deductible plan. If possible, the practice should ascertain if any of the deductible has been met. This will put the billing/collection staff on notice of the potential for payment issues. The practice may want to collect payment from the patient at the time of service. Before doing this, providers should ensure that this would not violate the terms of their participation agreement with the insurance carrier. Payment plans may be useful to facilitate regular payment in amounts that the patient can manage. Careful monitoring of the patient-responsibility portion of the accounts receivable and the age of the account should warn the practice of any signs of trouble.
Conclusion
Heath savings accounts function as Individual Retirement Accounts if the funds are not used. They provide an opportunity to save for future medical expenses, and pass savings on to the employee and the employer. However, HSA’s also represent a shifting of financial risks, and sometimes that risk is borne by the provider, in addition to the patient. Medical providers essentially provide service on credit terms, unless in the unlikely event that payment in full is made at the time of service. Health savings accounts, despite being created for the exclusive purpose of paying qualified medical expenses, are often unreachable by medical providers who seek a civil judgment against patients who default. Many states provide that HSA’s are exempt from creditors in bankruptcy. These plans are becoming more prevalent, and providers should assess the impact that these plans have, if any, on the finances of the practice.
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About the author: Franklin J. Rooks Jr., PT, MBA, Esq. is a physical therapist and practicing attorney in Philadelphia, Pennsylvania. Prior to his practice of law, Frank was a founding partner of PRO Physical Therapy, a Wilmington, Delaware based operator of physical therapy clinics. This article is not legal advice. This article is intended to provide only general, non-specific legal information. This article does not cover all the issues related to the topic discussed. The specific facts that apply to your situation determine the outcome. This article does not create any attorney client relationship between you and the author. Frank can be contacted at fjrooks@gmail.com
[1] See Managed Care Weekly Digest, 35, July 11, 2011.
[2] See 26 U.S.C.§223(f)(2). “Any amount paid or distributed out of a health savings account which is not used exclusively to pay the qualified medical expenses of the account beneficiary shall be included in the gross income of such beneficiary.”
[3] 26 U.S.C. §223(c)(1)(A)(i).
[4] 26 U.S.C. §62(a)(19). See also 26 U.S.C.§223(f)(2). “Any amount paid or distributed out of a health savings account which is not used exclusively to pay the qualified medical expenses of the account beneficiary shall be included in the gross income of such beneficiary.”
[5] 26 U.S.C. §223(d)(2)(A). “The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care. . . for such individual, the spouse of such individual, and any dependent. . . of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise.” Id.
[6] See Sen. Kennedy Issues Statement on Sen. Ensign’s Minimum Wage Amendment, U.S. Fed. News, Jan. 25, 2007, available at 2007 WLNR 1771670. “[A]ccount holders in a health savings account focus group acknowledged that many were using their health savings accounts to shelter income.”
[7] 26 U.S.C. §223(c)(2)(A).
[8] See Pamela Dolan, Sliding Economy Leaves Physicians Wary About Collections, Am. Med. News, Aug. 2009, available at http://www.ama-assn.org/amednews/2009/08/31/bisa0831.htm “The number of physicians who said they were concerned with collecting from self-pay patients and those with high-deductible plans and/or health savings accounts rose from 50% a year ago to 60% this year.”
[9] See Brandi White, How Consumer-Driven Health Plans Will Affect Your Practice, Fam. Prac. Mgmt, Mar. 2006, available at http://www.aafp.org/fpm/2006/0300/p71.html. “The main administrative headache [with HSA’s] for physicians’ offices will be figuring out how much, if anything, they can collect from the patient at the time of service. When practices have to collect from the patient, rather than the insurer, there’s some concern that the physician will be more likely to be stuck with the bill.”
[10] See Center for Medicare and Medicaid Services, CMS Office of Public Affairs, CMS Proposes Payment, Policy Changes for Physicians Services to Medicare Beneficiaries in 2010, (July 1, 2009).
[11] 26 U.S.C. §223(d)(2)(A). “The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care. . . for such individual, the spouse of such individual, and any dependent. . . of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise.” Id.
[12] See, e.g., Wyo. Stat. Ann 1977 §1-20-111 (2011); Wash. Rev. Code Ann. §6.15.020 (2011); Ind. Code Ann. §34-55-10-2 (2011); Fla. Stat. Ann. §222.22 (2011); Tenn. Code Ann. §26-2-105 (2011); Conn. Gen. Stat. Ann. §52-321a (2011); Vt. Stat. Ann. Property Code §42.0021 (2011); Miss. Code Ann. §85-3-1 (2010); Ohio Rev. Code §3924.63 (2011); Neb. Rev. Stat. §8-1.131; (examples of state statutes exempting health savings accounts).
[13] Cf. Halliburton Co. v. Mor, 555 A.2d 55, 57 (N.J. Sup. CT. 1988), holding that an Individual Retirement Account was not exempt from a judgment creditor’s levy of execution.
[14] 42 Pa. Stat. § 8124(b)(1)(ix) (ix). “[t]he following money or other property of the judgment debtor shall be exempt from attachment or execution on a judgment: Any retirement or annuity fund provided for under section 401(a), 403(a) and (b), 408, 408A, 409 or 530 of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 401(a), 403(a) and (b), 408, 408A, 409 or 530), the appreciation thereon, the income therefrom, the benefits or annuity payable thereunder and transfers and rollovers between such funds.”
[15] 11 U.S.C. §522.
[16] 26 U.S.C. §223(d)(2)(A). “The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care. . . for such individual, the spouse of such individual, and any dependent. . . of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise.” Id.
The underlying issue is lack of transparency of pricing. Often the patient calls to find out how much the doctor visit or procedure will cost. The provider and carrier usually say they can’t determine that amount until the service is rendered and the claim submitted. There is a delay of up to six weeks for the client to receive the Explanation of Benefits, outlining the breakdown of discount and charges to be applied to deductible and coinsurance.
If we could fix this system to where it is more like the Rx cost at the pharmacy which offers same time claims adjudication, we would see more patients paying at the office at time of service. No one wants to be surprised at check out with a big bill which has not been budgeted.
From the consumer’s perspective, the crazy thing is that the consumer has been started with the notion that the employer will provide health insurance, and a great one at that. Which was then unsustainable, and therefore drove benefits down and costs up in time, slowly.
However, in the case of a “frog slowly boiled to death”, the deductibles keep going up, the copays keep going up, yet…
…yet, noone told the consumer that they have to SAVE money to meet the deductible and expected copays.
If there wasn’t a low-deductible, unsustainably introduced, health insurance in the first place, people would already be prepared to pay their deductibles with CASH.
And patients would have cash. Doctors happy, patients happy. However, today, unfortunately, many don’t have cash, thus the increased risks and unnecessary financial heartache for everyone.
Many people forget to offset the potential annual out-of-pocket expenses with the savings on premium they recognize from choosing a HDHP. Often, the premium savings each year exceed the out-of-pocket risk!… a no brainer.
In truth, HSAs do put providers at some risk, as 1st dollar expenditures are often hard to collect from some patients. The easiest answer is upfront collections, which may result in patient refunds or additional patient billing after the EOB come back. That’s much better than no reimburse at all until a myriad of small charges have been billed by your office, denied, apppealed and then repriced at pennies on the dollar! Most HSA providers offer debit cards to the HSA account holders for this purpose.
Still, from a patient’s perspective, if they are funding their HSA and have some discretionary cash on hand, it’s better to pay from their non-HSA cash account, maintain the proof of service and reimburse themselves later tax free from the tax free income generated by the HSA investment.
For example if over 20 years a family accumulate $20k in reimburseable expenses and fully funds and invest in their HSA, they can reimburse themselves the whole $20k tax free from the HSA and go around the world with that money since it is merely a delayed reimbursement of qualified medical expenses, at this point funded by tax free HSA investment income, not their principle/ annual HSA contributions.