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Well, who would have thought that my posts regarding Consumer Driven Healthcare would spark so many calls and e-mails. Since a blog is an ongoing story that is forever being written, I don’t always get the chance to write every detail. Over time, this will change as I add more and more content – I can only type so much in a day.
One of the e-mails I received asked if I believed that Consumer-driven healthcare could work without insurance. The answer of course is no. If you had the chance to read my article in Benefits Canada this month, I provided some options for Canadian companies to use the US-model of delivering CDH with the use of a Health and Welfare Trust (HWT). In the article, I suggested that companies offer an Health Spending Account in the form of an HWT as a replacement to traditional insurance for predictable claims. An HSA is an ideal funding model to cover predictable claims, the ones you know your employees will incur and therefore you have no need to insure for the event. After all, nobody would ever consider buying gas insurance for their car so why would you pay a premium for your annual dental cleaning.
However, I cannot stress enough the importance of insurance for the unpredictable. That is, after all, why we buy insurance. If anyone thought that I suggested we abandon insurance and go to a cash-savings model only, I apologize. What I wanted to stress is that the decision making on how premiums are paid and what they are paid for should be part of the decision making process of the consumer. Maybe not immediately, but certainly down the road once the support network is in place to educate and inform consumers to make sensible choices. The key issue at hand is the ability for consumers to make choices and spend their money in a more sensible manner. Buying insurance for the unpredictable claims and using their HSA for the predictable is money spent, in a sensible manner.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
PHSPs With No Limits
If you are a sole-proprietor, you can open a Private Health Services Plan through most third-party administrators and insurers to finance your healthcare costs as well as insurance premiums. Most sole-proprietors are individuals (i.e. tradespeople, lawyers, hairstylists, etc..) while some are employee groups (i.e. smaller retailers, professional firms, etc..) One problem that is causing grief is the growing number of HSA Providers offering PHSPs to sole-proprietors and NOT following the rules in terms of contribution limits.
If you are a sole-proprietor (unincorporated), you may qualify for a PHSP up to an annual maximum depending on the structure of your family ($1,500 / sole proprietor, $1,500 / dependent over 18 years old, $ 750 / dependent under 18 years old). Some HSA providers have ignored this rule, clearly defined in IT-339R2 (Meaning of Private Health Services Plan). This can be a problem for small business owners with a PHSP. One, you may be placing more claims through an administrator than you are allowed to claim on your return, costing you more money in administration fees to the HSA provider. Secondly, your deduction may be offside if you are offering a PHSP to your employees as an unincorporated entity. So, what should you do?
First, look at your existing deposit schedule versus claims and compare this amount to the logical maximum you would be entitled to with a PHSP. If you are above the maximum, you should speak with your HSA Provider regarding options for reducing the amount. If you have employees, it is important to note that their funds should be residing in a Health and Welfare Trust and not a PHSP. Secondly, you should remember that as owner – you may only deduct your PHSP contribution or the amount of the smallest contribution made to an employee, whatever is lower. Many HSA Providers forget this and the last thing you want is an auditor pointing this policy out to you.
In summary, PHSPs are great as long as you follow the rules. When choosing an HSA Provider, be sure to ask them about their policy on PHSP maximums and over-funding. If you have a group, ask them how they structure their plans to accomodate multi-employee HWT requirements. If they are confused by your questions….buyer beware!!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Many readers would argue that this is the number one benefit of having a Health Spending Account. Others will say it is the tax-savings. Personally, I would agree with the Flexible Spending crowd on this one.
In case you did not know, Health Spending Accounts cover a wide range of services and procedures – far more than any insurance plan on the market today. While an HSA is technically an insurance plan in the eyes of Canada Revenue Agency (CRA), it follows a claiming schedule designed for tax deduction purposes as opposed to caps or maximums based on general insurance risk and claiming patterns. To clarify, think of your traditional health insurance plan from Manulife or Sun Life. The plan has maximums for things like prescription drugs, massage therapy visits, and private duty nursing. These caps or maximums are tied to the premium you pay. The lower the maximum or allowance for each item, the lower the premium you pay – similar to the deductible on your car insurance and the price you pay in premiums.
A Health Spending Account on the other hand has no plan design and the items you can claim for reimbursement are at the discretion of the owner – as long as you have sufficient funds in the account and the claim is considered eligible by CRA. The rules for claiming come from Canada Revenue Agency’s interpretation bulletin IT-519R2 Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction. In addition to covering the basic items (drugs, therapy, dental, etc..) the funds can also be used to pay for many of the items insurance plans refuse to cover – such as smoking cessation, fertility drugs, elective surgery, cosmetic surgery, special needs schooling and more…
The key advantage is that you dictate the amount you want to spend and what you want to cover, not your insurance provider. If you or your employer decide to deposit $1,200 into your Private Health Services Plan (PHSP) or Health and Welfare Trust (HWT), you can spend it all on one service (such as massage therapy) or on a variety of services for you and your family. The flexibility of the HSA means that you have complete control over what you spend and when you spend it – a true advantage. For more information on claiming, feel free to view our making claims information page here at HSACanada.com.
On the weekend, my business partner and I went to establish new bank accounts for Gremolata. We had a 2:00pm appointment and I was assured that all I had to do was show up, sign some documents, and be done – max 5-10 minutes. I can be so naive sometimes.
Of course, it turned into a flood of paperwork, documents, signatures, witnesses, initials, duplicates, and authorizations just to give the bank our money. Now I understand that the bank wants to limit their liability and to protect the interests of the client but the process was certainly not customer-focused. This has always puzzled me about the banking and insurance industries…why do they make it so difficult to give them your money?
I have worked in several industries outside of the finance and insurance world and I have yet to find one where paperwork and multiple forms are so rampant. The health insurance industry in particular is filled with paperwork and forms. I have always believed in making the sign-up experience as painless as possible for the customer. After all, why would you make the process for a customer to give your their money so tedious that they would consider not following through. At Benecaid, we are always trying to reduce paperwork and automate the process because we believe that the barrier to accessing our products should never be the paperwork involved with purchase. I wish more companies in our industry would follow this philosophy. It would have reduced my level of frustration with the bank on Saturday.
What a week for the markets with yesterday being the biggest drop in 7 years for the Toronto Stock Exchange (TSX). And as I type this, people on Wall Street and Bay Street are panicking, waiting for the bell to see what will happen in the US. So far this morning, the Fed unexpectedly cut interest rates by 75 basis points and U.S. Treasury Secretary Henry Paulson, spoke to the US Chamber about the need for Congress to agree quickly on a package of tax cuts and other measures to boost the economy. Everybody is nervous – especially those with Health “Savings” Accounts south of the border. Some of our US counterparts have their HSA money invested in a wide variety of funds and equities. It is one thing to loose $500 in one day on a bad stock bet. It is another thing when that $500 was to pay for your diabetes medication!
Luckily, I live in Canada. My Health and Welfare Trust does not earn interest for me and I cannot invest the funds. It sits in the account, through good times and bad times, waiting for me to make a claim. The only thing bothering me today is my retirement fund…it is getting battered to pieces. But I have invested in solid companies…so I know they will come back. They always do. So I will sit back, relax, and hope that my HSA colleagues south of the border can afford their medication by the time the bell rings this evening.
A new report from the Employee Benefit Research Institute (EBRI) claims that the consumer-driven healthcare model is doomed. The report states that “should health education initiatives prove ineffective, the ‘consumer-driven health movement’ could well be doomed, especially if it relies upon fully educated health consumers taking self-initiated actions.” The report goes on to say that consumers lack the education to fully understand their plan. “They have not been taught to speak up to health care providers, to be partners in their own health coverage and care,” states the report. Nor do they know what to expect in connection with the finances of health benefits or healthcare.”
While I am sure everyone agrees that communication is key to the success of consumer-driven plans, I disagree with the statement that they are doomed. Consumer-driven plans using HSAs can easily be compared to investments and savings in the early 80s. Up until the early 80’s most people required a stock broker to buy and sell stock on their behalf. Mutual Funds existed, but few people understood how they worked or how to participate. Many people had a defined-benefit pension, but nobody understood how the money was managed and invested. Consumer access to information was scarce and the ability to enhance personal wealth through investing was limited to the few. However, over time the market access expanded, information became more readily available, and consumers became more savvy. It did not happen overnight and it took several product failures before the investment industry found the right products and tools to turn personal wealth and investing into a consumer-driven product. But it still happened.
Today, very few people would have difficulty identifying and explaining the features of an RRSP, a Mutual Fund, or a GIC. Likewise, they would probably have one already in place and be making regular contributions. A growing number may even self-manage their portfolio on-line and access information and resources from a variety of Web sites and cable channels such as BNN or CNBC. Now, don’t get me wrong, I am not saying that everyone should rely on CNBC for their investment advice. What I am trying to explain is that the investment industry shifted from being a consumer-excluding to a consumer-driven one over the past two-three decades and I think consumers would agree that it worked out for the better. The same holds true for health benefit programs.
One could argue that the health benefits industry is behind other industries due to the relationship plan sponsors have played over the past few years in doing the work for their employees. When consumers are not forced to make decisions and find information, the support tools for the industry never evolve. Nobody would have envisioned twenty years ago that consumers could access real-time stock quotes and perform on-line stock trading without a broker. We never would have imagined self-directed RRSPs or “day-trading”. Why should it be so difficult for the health benefits industry to evolve as well? Plan Sponsors accepted defined-contribution plans, and turned their employees into consumers. Perhaps we need to step back and let the industry evolve? Who knows…20 years from now a Health Spending Account could be as basic a savings vehicle as a chequing account.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Fund Management
When you open an account with an HSA provider, you need to be certain that the funds are being deposited into a secure and reliable account. The last thing you need is an HSA provider poorly managing your money. As I have said before, beware of those companies looking to make a quick buck with little respect for the interpretation bulletins issued by Canada Revenue Agency.
Health and Welfare Trust (HWT)
A Health and Welfare Trust must always be set-up in a custodial trust account in the name of the owner. Some HSA providers operate their own trusts while others use a third-party (like CIBC Mellon, TD, etc..). These trusts must be managed by third-party trustees and the funds may only be released from these accounts with the approval of the trustee for eligible medical expenses. When evaluating an HSA provider, feel free to ask them where the trust is established. If they operate their own trust or use a third-party, do some investigating on the account and their practices. This can be done through the Office of the Superintendent of Financial Institutions (OSFI). If the trust company is legitimate, they will be regulated by OSFI and their Web site offers great resources to determine the stability of the trust company being used.
Private Health Services Plans (PHSP)
PHSPs are most often managed using dedicated bank accounts. A good PHSP provider should have a dedicated bank account established with a Tier 1 institution exclusively for the funds held for a client’s PHSP. They should never be deposited into a firm’s operating account. A few years back, I heard of a major HSA provider in Canada depositing PHSP funds into their operating account (i.e. the same account used to pay their own business expenses). I was shocked to hear this! Always ask your provider where the funds reside!
General Policies/Procedures
Whether you have a Health and Welfare Trust or a Private Health Services Plan, your provider should always have a statement of financial responsibility available for you on demand. This statement should be signed by the firm’s Director of Finance or CFO and provide information on where the funds are held, how the accounts are structured, and the processes and procedures they use to ensure your deposits are managed in a responsible manner. The statement may also provide the name of their auditor and their general accounting procedures.
In summary, remember to consider fund management as an important evaluation tool in choosing an HSA provider. If they are reluctant to disclose the procedures and suppliers….buyer beware!!
The Canadian Taxpayers Federation, with the help of the CD Howe Institute, released a tax-proposal for the federal government this morning entitled Lower, Simpler, Faster – Towards a single tax rate for Canada. The proposal recommends the federal government embark on comprehensive tax reform with the goal of adopting a single personal tax rate. As an immediate first step, the authors (Mark Milke & John Williamson) recommend that Canada move to two federal income tax rates of 15% and 25% by 2012. There are currently four tax rates of 29%, 26%, 22% and 15%.
Their proposal also called for a decrease in the number of deductions available to Canadians. While they noted medical expenses as a deduction, I was disappointed to see less emphasis placed on reforming the current medical tax credit. The CTF plan proposes a generous personal exemption, stating that “Basic personal exemptions should be set at a generous level to exclude those with the lowest incomes and ensure the tax system remains progressive“. Supporters of the HSA could argue that the CTF proposal would have more support from other lobby groups (and the voting public) if it balanced their tax model with more sensible deductions.
A workforce with more money in their pockets is only beneficial if they are healthy and can produce. While I agree with the report, one could argue that the replacement of the medical tax credit with some of the HSA policies outlined in the US Medicare Modernization Act might prove to be an additional benefit. Allowing every Canadian to have access to an HSA and deduct it from their personal income taxes like an RRSP would be a good step forward to keeping Canadians healthier, and not just wealthier. While I understand the CTF proposal was focused on tax and not deductions, I certainly hope we see more discussion in Ottawa regarding the US-model for Health “Savings” Accounts as tax-savings vehicle to promote healthier and wealthier citizens.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Administration Fees
Every HSA provider charges an administration fee for managing your health spending account. But what is reasonable and what should you look for in choosing the right HSA provider? To make a sensible decision, you should look at the different fees being charged and the pros and cons of each.
Administration Fee
Most HSA providers charge an administration fee. These fees tend to be in the range of 10% and 13% of deposits or claims. If you pay more than 13%, you should look elsewhere as there are many lower-cost alternatives. The fee is generally used to adjudicate your claims and manage the funds. Some HSA suppliers charge the admin fee on deposits while other charge it on claims reimbursed. Both models have their advantages. The first one takes the admin fee off on deposit, so you do not have to worry about it later when you make claims. The later charges you the admin fee each time you make a claim. They both end up costing the same, so not something to worry about – it is simply a personal preference.
Account Set-up Fee
Some HSA providers charge an account set-up fee. These fees can be as high as $300.00 simply to gain access to an account. These providers also charge an administration fee on deposits or claims. In my opinion, there is no need for a company to charge you an account set-up fee if they are charging you an administration fee – it is simply a cash grab. If you are opening an HSA for the first time, and you are unsure if it will be beneficial, I would strongly recommend using a provider that does not charge an account set-up fee. You are wasting your money!
Cheque Processing Fees
These fees are usually issued when a reimbursement cheque is issued (these fees average between $3.00-$4.00 with most HSA providers). The fee is applied to the batch of fees and not each claim. These fees cover postage requirements, cheque processing, and related charges to the trust account or bank account – depending on if you have a Health and Welfare Trust (HWT) or a Private Health Services Plan (PHSP) respectively. If a provider charges a cheque processing fee, the first thing you should look at is their admin fee. If they are charging 12% or more in admin fee, then they should not be charging you a cheque processing fee. You should never be asked to pay more than $4.00 for a cheque processing fee – the math simply does not justify it.
In summary, when choosing an HSA provider, you need to consider the fees and what works best for you. Try to avoid account set-up fees whenever possible. If you pay an admin fee, ensure that the cheque processing fee is reasonable. the lower the admin fee, the more acceptable the cheque processing fee. If the admin fee is high (over 12%) and they charge a cheque processing fee as well, look elsewhere.
I was watching the news this evening and saw yet another story about Corey Worthington Delaney, the Australian 16 year old who hosted 500 guests at his suburban Melbourne home. Sounds like a fun event until you learn that it took a host of police to break it up and caused $20,000 in damage. Now please believe me. If I was his father and I finally got my hands on him, it would take 12 Swiss surgeons to surgically remove those “signature yellow sunglasses” off the remains of what used to be his head. But the marketer inside me with a message to share has to say…bravo!
Now I am not condoning what he did, however, it does demonstrate the power of the internet and media in today’s world. In marketing, bad publicity can sometimes be as effective as good publicity – if it gets your message out. Corey’s party was promoted with zero cost using his mySpace page. He did not have to pay anyone to come, and he certainly did not need to issue a press release to get the media to cover his story. He made the spotlight on every major news network globally, using the internet. I wonder if Bill Gates is giggling at home while watching the news this evening.
My blog is devoted to Health Spending Accounts and I have decided to use this medium as a way to cost-effectively share my message to the world. Sure, I have questioned if it will be an effective medium. However, when I see the results of a 16 year-old, a mySpace page, and a desire to throw a little party for his friends – I start to realize the true power of the internet to share a message. I just hope my blog is a bit more useful for my readers out there.
Of course, if all else fails, I guess I could always cash $20,000 in stocks and get some Aussie to throw an HSA party for me!
HSA Information for Canadians 
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