Better consumers of health care: tax-advantaged health plan options.

• Author: Williams, Ken
• Position: ADVICE / HEALTH CARE

CONSUMER-DRIVEN health-care plans (CDHPs) using higher deductibles, copayments and contributions help drive spending responsibility. Consumers spend their own money more wisely than they spend an employer's money. Bearing responsibility for overall financial and physical health, individuals become better consumers. Employees must begin weighing cost and quality when choosing health-care providers and services. When individuals become consumers, the health-care revolution will really influence costs.

Employers want employees to become better consumers. Employers need to establish goals for their benefit plan designs that meet their company's diverse objectives. Health plan designs exist with a multitude of options. We've witnessed Congress' efforts to help employers and employees by passing tax-advantaged legislation. CDHPs offer the most attraction for untaxed personal accounts. Flexible spending accounts (FSA) started in the mid-'80s. In 2002 Treasury/IRS guidance established health reimbursement arrangement (HRA) tax treatment followed by December 2003 legislation requiring high-deductible health plans (HDHP) before establishing health savings accounts (HSA).

FSAs, HRAs and HSAs reimburse employees for "out-of-pocket" coinsurance, copayments, deductibles, dental, vision and other "qualified" eligible health-care expenses not reimbursed by an employer's plan. Remember, employers use this "out-of-pocket" corridor of spending and reimbursement to encourage individuals to be better consumers while holding down costs. FSAs and HSAs allow employers and employees to set aside pretax dollars to pay/reimburse "qualified" eligible expenses. HRAs are employer only funded promises to pay/reimburse eligible expenses. HRA and HSA balances may be rolled over from one year to the next. FSA "use it or lose it" clauses unfortunately cause built-in health--care spending. FSAs may offer dependent care accounts.

To establish an HSA, individuals must be enrolled in Treasury/IRS defined HDHPs. For 2006, a HDHP must have a $1,050 self-only and a $2,100 family minimum deductible. Out-of-pocket...