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I was thinking about Health Spending Accounts, like I always do, and thought I would write a blog entry to clearly articulate the differences between HSAs and traditional insurance. I thought this would be a valuable tool for consumers considering an HSA over an insured plan. Here we go…
Insurance
Places limits on coverage to a defined maximum. Some plans allow you to have a higher limit for a higher premium.
Health Spending Account
There are no limits in terms of specific coverage. If you are incorporated and have a Health and Welfare Trust, the amount you can contribute is unlimited. If you are unincorporated, you are entitled to limits based on the number of dependents eligible from your Private Health Services Plan. Either way, you are not limited to a specific amount of coverage, you can allocate the funds to whatever healthcare costs you see fit.
Insurance
Requires a premium to be paid. This premium is equal to the true cost of claims plus 20-30% to allow for risk factored into the plan to ensure profitability for the insurer.
Health Spending Account
The premium is really a deposit structure equal to the true cost of claims plus 10% to cover administration of the plan. These costs are fixed.
Insurance
The cost of the premium is defined by the insurer and can be increased at their discretion based on claims from the previous year.
Health Spending Account
The cost of the plan is driven by the consumerand there are only increases if the HSA owner wishes to deposit more money into their account.
Insurance
The plan covers immediate dependents only such as spouse and children under age 18.
Health Spending Account
These plans cover any dependent related to the account holder by blood or marriage, regardless of age, as long as they are financially reliant on them in a given year.
Insurance
These plans may limit coverage to within Canadarequiring a supplemental travel policy for out of country health care expenses.
Health Spending Account
The funds in the account can be used to reimburse claims globally provided it is an eligible expense in their home province.
Insurance
The premium paid cannot be reimbursed and is lost at the end of the year. If no claims are made, the insurer keeps all of the premium.
Health Spending Account
The funds in the HSA roll-over to the next year and are not lost. Note: This applies to a Health and Welfare Trust. If you have a Private Health Services Plan the funds are lost after 2 years from date of deposit if not spent.
Insurance
The plans do not cover all procedures and drugs.
Health Spending Account
Funds in the account can be used to cover all drugs and treatments prescribed, dispensed, and performed by a medical practitioner including smoking cessation, fertility treatments, and elective surgery.
Insurance
These plans require basic medical underwriting and do not cover pre-exisitng conditions.
Health Spending Account
There is no medical required and the funds can be used to cover pre-existing conditions.
In previous entries I have talked about cost-containment and I recently realized that perhaps this topic needs some more clarification. Cost-containment is a buzz-word used by many in this industry and different players have different versions of what they bring to the table in terms of value. While they all offer good solutions, sometimes the simplest of models are overlooked. To support this, I ask the following…
What costs can you yourself as a business owner truly contain when it comes to health benefits?
For many, the answer is nothing. But think for a minute about what you pay and what it is used for. You pay a premium for health insurance much like you would a premium for auto insurance. The big difference is what you pay to have covered. Let’s assume your body is like a 2008 Volkswagen Passat. It has tires (or teeth) to grip the road. It also requires regular maintenance (like massage therapy or acupuncture) to keep it running and to prevent wear. Ten years down the road, you may need to spend money on a new engine not covered under warranty (like elective surgery) to keep it going for a few more years. In case you get into an accident, you buy insurance to protect you from the unforeseen and to give you the money you need to get the car back into working condition. Similarly, your body could become stricken with Cancer or Diabetes where you need drugs to help fight the disease and keep you in working condition as well.
The big difference here is that the last item, the unforeseen, is truly the only item you need to buy insurance for when it comes to your car. You don’t buy maintenance insurance or tire insurance as these are predictable expenses and it would not make sense to pay an insurance premium for something you already know you are going to need. Mind you, some form of fixed rate gas insurance might have been a good idea these days! The issue today is that we don’t treat the protection of our bodies the same way we do our cars. We insure the entire package, tires, maintenance and collision. Further, we choose a low-deductible so that we pay a higher premium unlike our cars where we tend to choose a higher one given the risk and the balance we are willing to take between upfront costs and unforeseen costs.
This is where I believe that the basics of cost-containment should be focused. For every day medical costs, we should be paying them out of our pocket in real dollars. After all, if you know that your teeth need to be cleaned every 6 months, why would you buy insurance for it and pay an inflated premium? It is going to happen just like a new set of Winter tires every November or an oil change. Instead, you should be using a more sensible financing vehicle to pay for the predictable medical costs and only purchasing insurance for the unforeseen, like Cancer, Heart Disease, or Diabetes.
To pay for the predictable costs, a Health Spending Account is the ideal solution. You can control the amount you spend and benefit from the tax savings. Secondly, you can contain the rising costs of premiums by taking away the claims you used to run through the plan and leave it for drug-only – the unforeseen costs if you will. If you are in decent health, you may wish to get a higher deductible drug plan, further reducing the premium you pay. The deductible amount can always be run through your HSA, so you are not loosing by doing this. If anything, you are saving even more money in taxes, a win-win solution.
Well, there you have it – my thoughts on cost-containment. I could have talked about per visit maximums, generic drug replacement, or electronic card adjudication and fraud monitoring. But the reality is that cost-containment really begins with the employer using the simplest of philosophies. Of course, it helps if you know a bit about cars in my analogy.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Portability
Health Spending Accounts are portable, meaning you can take them with you. OK, they may not be the same as the picture of your family or cat on your desk but when it comes to changing employers your HSA belongs to you and you can take it wherever you go. That is, provided it is a Health and Welfare Trust OR a dedicated Private Health Services Plan account (i.e. not notional credits). As a small business owner, you may also choose a different HSA provider or administrator and move your funds accordingly. In recent weeks, I have been hearing stories about HSA providers refusing to allow clients to move their HSA funds. As always, when I hear it, I report it.
Let’s look at both scenarios…
As an employee, you may have been issued a Health and Welfare Trust from your employer. Let’s assume you received $100/month over a three year period and you left the company. Next, let’s assume that you never really used the funds and had saved up $2,500.00 over the past 3 years. While your employer may not be providing you with any more deposits upon departure, you can still use the funds in the account for future eligible expenses. If you have a Health & Welfare Trust or a Private Health Servcies Plan not linked to a flex benefits program (i.e. using notional credits), the funds can go where you go.
For the employer, you may decide at one point or another to move your HSA program to a different provider. There can be many reasons for the move – it is not really important. However, you do have the right to move the funds over to another administrator at any time. Your current HSA provider cannot limit you from moving the funds, however, they may charge you a fee for the transfer. Either way, you should never accept a response from an administrator that the funds cannot be moved. If you decide to move your group HSA and you are challenged by the provider, you need to get tough with them.
If you currently have an HSA program and you want to move it to a new provider, you should speak with your broker/advisor, consultant, or incumbent carriers. Each of these parties should be able to help you with the transition. If your current HSA provider refuses to cooperate….buyer beware!!
I have spent a few months looking at claims and how people submit them into Benecaid, where I currently work. Submitting manual claims can be a very frustrating experience for those not living inside the insurance world. Paperwork, mailing addresses, originals versus copies – it can be a real headache. That being said, I thought I would share some of the biggest mistakes people make when submitting claims to an insurance company.
1. Original Receipts & Prescriptions
This is by far the biggest issue for customers. You should always send the original receipt and if you have it, a copy of the prescription to validate that it was prescribed by a doctor. The second item isn’t always necessary but is handy to ensure faster processing. If you want a copy for your records, keep the photocopy AND NOT the original. The insurance provider or HSA adjudicator will question the copy and most likely return it to you. After all, if they received a copy, how many other companies did you send the copy to?
2. Use The Right Form
With so many forms, it is hard to stay on top of which one to use. Every insurer or HSA provider should have the forms readily available on-line. If you are unsure which form to use, your best bet is to call your insurer or HSA adjudicator once a year and ask. Download and print a couple and keep them on file.
3. Complete the form in FULL
Many insurers have standardized forms designed to be scanned to retrieve the data and convert it into an electronic format. This technology is used to speed up the processing and is designed to be a benefit for the customer. When you do not complete the form in full, or enter information in the wrong place, it can cause problems in scanning and slow-down the adjudication of your claim. Take your time and complete the form in full. Most insurers and HSA adjudicators have reference guides you can ask for if you need help…just ask them for a copy.
4. Send Your Claim to The Right Address
Be sure to send your original claim and the correct completed form to the right place. Many insurers and HSA providers have more than one location for adjudicating claims. If you are unsure of where to send your claim, call their customer care department before you send it. It can save you problems down the road.
5. Coordination of Benefits
If you are already covered under another plan (i.e. company plan or spouse’s plan), the insurer will most likely ask you to submit your claim to the first insurer before you submit it to them. They will cover anything not covered from the other plan up to your maximum. If you have an HSA, it is always wise to send the claim to your insurer first. When you receive the claim back, the difference can be taken out of your HSA. To do this, you simple forward the original Explanation of Benefit (EOB) received from the original insurer with a claim form. The HSA adjudicator will take the amount unpaid from your insurer and reimburse you the difference from your HSA. While it is a complex process, it does save you money in the long-run from your HSA. After all, if you already have insurance through another source and it is not costing you anything, you should take advantage of it!
These tips are not going to ensure that every claim is paid but it will help to make the process faster and ensure proper adjudication. If you follow these tips, you should see a significant reduction in follow-up with your insurer or HSA to find out…”Why won’t you pay my claim?”
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
Tax-free Savings Accounts (TFSA) were not the only thing announced during the federal budget this week. New allowances were made to the list of eligible claims in addition to some strong actions to be taken to tighten up the words and rules on prescriptions and vitamins. Go Flaherty, get tough with those supplement-poppin baby-boomers!
The budget approved the following items to be included as eligible expenses: altered auditory feedback devices for the treatment of a speech disorder; electrotherapy devices for the treatment of a medical condition or a severe mobility impairment; standing devices for standing therapy in the treatment of a severe mobility impairment; and pressure pulse therapy devices for the treatment of a balance disorder. Expenses for service animals specially trained to assist an individual who is severely affected by autism or epilepsy to cope with the individual’s impairment, was also added. Currently, the rules only recognize an individual who is blind, deaf or has a severe impairment that markedly restricts the use of the individual’s arms or legs.
Finally, the budget announced that it would revise the wording on prescription drugs. Currently, drugs, medications and other preparations are eligible for the Medical Tax Credit when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. To clarify the issue, the government is going to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.
This is good news! By reinforcing the rules, the government is taking a serious stance on the importance of the Medical Tax Credit as well as Health Spending Accounts. This should be a taken as stern message to some of the fly-by-night HSA providers to shape up your adjudication and HSA knowledge, or ship out!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
One of the biggest issues facing employers, both small and large, is the never ending increase year over year in the cost of their health benefits plan. Whether they are a global corporation or a sole-proprietor, the increases in annual premiums for health insurance is making a huge dent in the value vs. cost equation. Annual premiums are calculated at renewal each year by the claims incurred in the previous year. Since claims and overall costs continue to rise, pretty much every policyholder can expect an increase in premiums every 1-2 years. Luckily, the model for an HSA is very different.
When you establish a Health Spending Account, you make an assessment of your needs for healthcare costs in a given year. You may decide that you will spend a certain amount on predictable items like dental cleanings and massage therapy. You may also decide, and it is strongly recommended, to buy a basic insurance solution to cover the unpredictable events, like illness and drugs. The total amount needed to cover these costs is what you would then deposit into your HSA. The key here is limiting the claims you make against insurance and increasing the claims you make through your HSA. This model allows you to make claims without every dollar contributing to premium increases. As a result, you obtain a better level of budget certainty year over year as you have greater control of your spending and where it is being spent. Since you are using real dollars for 75% of the costs, assuming 25% of your HSA is reserved for drug-only insurance premiums, you have greater control on spending and can increase the contribution to your HSA or cost as you see fit.
When you think about the money you spend on your health insurance plan, most people would say that they have 0% control over the costs. With an HSA for the predictable claims and a basic drug plan for the unpredictable, you can at least gain control over 75-80% of you plan. I am sure you would agree that any degree of control and budget certainty is better than none!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
If you apply for insurance, one of the first things they ask you for is the list of dependents. Most people have had traditional insurance at some point in their life and so we all know that a dependent is basically your spouse, and children under 18-21 years of age. You can have a child as a dependent over age 21 with many plans however, they need to be enrolled in school full-time. Well, when it comes to Health Spending Accounts, you can kiss this goodbye!
Health Spending Accounts use a different model for determining dependents thanks to the wonderful people at Canada Revenue Agency (CRA). Because the rules for HSA delivery are tied to the guidelines related to taxes and financial dependents, an HSA allows you to cover a wider range of family members, not just the spouse and kids. In the CRA’s interpretation bulletin IT-339R2 Meaning of Private Health Services Plan, it clearly states that the funds may be used by the employee, the employee’s spouse, and any member of the employee’s household with whom the employee is connected by blood relationship, marriage or adoption. This means that in theory, an HSA should be able to cover a grandparent, an uncle, a sister, a nephew or anyone else in your family. Of course, to be a friend of CRA, it is recommended that if you choose to add one of these dependents, they should be financially dependent on you for support in the year.
The key point here is that you are not limited to your immediate family for coverage with an HSA. If you have an elderly parent who relies on you for financial support and care…use an HSA! If you have a brother or sister who struggles to care for their autistic son and rely on you for help…use an HSA! Got a university drop-out son or daughter at home who just won’t leave the nest…use an HSA!
There is no limit to how and who you can coverage with your HSA as long as you remain smart about the guidelines set by CRA. If they rely on you for financial support, then they can be your dependent.
Every time I meet with a financial advisor, a lawyer, an accountant, or a potential Benecaid client, I am always asked the same thing…
What is an eligible claim?
Well, many different providers of HSAs have different interpretations on what CRA is trying to say. Medical expenses eligible to be paid out of the HSA (HWT or PHSP) are expenses which would otherwise qualify as medical expenses within section 118.2(2) of the Income Tax Act. The list is pretty long when you think about ALL the varying practitioners, procedures, and conditions out there. So here are a few simple rules to make it easier…
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Treatments MUST be performed by a Licensed Medical Practitioner.
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Products must be prescribed by a Licensed Medical Practitioner AND dispensed by a Licensed Pharmacist or Licensed Medical Practitioner.
Important!! Don’t forget that each province sets the guidelines as to what a Licensed Medical practitioner is! If the health profession has a college established granting registration numbers and certificates to each practitioner (like doctors, dentists, etc..), then chances are they are licensed.
Equally Important!! The Licensed Medical practitioner must be licensed in the jurisdiction of the HWT or PHSP account holder. What does that mean? Well, if you live in Alberta (where massage therapy is not regulated by a college) and visit Ontario (where it is considered a licensed medical practitioner), your claim should be rejected by your HSA administrator. Why? Because the service was not considered an eligible expense in your home jurisdiction. Think about that before your next holistic accu-aquatherapy-meditation trip to Bora Bora!
HSA Information for Canadians 