One Solution for Government Entities Facing Budget Problems

How One Missouri City Made a Change to Save Taxpayers Millions

In 2003, The United States Congress created a novel idea in health care funding: The Health Savings Account. It was included in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. [I like to refer to it as the good part of the bill seeing as how Part D has proven to be a budget disaster for the government.] Under the new plan, a consumer (or employer) purchases a high-deductible health plan (HDHP) and opens a health savings account (HSA).

The HSA has been commonly referred to as a “medical retirement fund” because of its similarities to an IRA (or 401k in employer purchased situations). Money that is deposited into the account is tax-deductible, reducing the consumer’s tax liability. The account grows on a tax-deferred basis (You don’t have to worry about getting a 1099 each year to file with your taxes). When money is withdrawn from the account for qualifying medical expenses (see IRS Publication 502 for a complete list of qualifying expenses) the money is tax-free. The account is owned by the consumer (important in the case of employer-sponsored plans) which means that they are able to take the money with them if they leave the employer.

How does this save government entities money? Read On.

The city of Mehlville’s Fire Protection District became embroiled in controversy a few years ago when the fire board recommended a 36% tax increase to offset projected costs of health care. The board estimated that by 2009 health care costs would have risen to $4,000,000. After voters ousted many of the board members in favor of reform-minded board members, details of the costly plan surfaced. Citizens became outraged to learn that the tax-payers were footing 100% of the cost of the plan for employees, their spouses and dependents. The health plan had almost no deductible, very low office visit co-pays and many other very costly benefits.

What the new board did, after investigating ways to save the tax payers a painful increase in taxes, was to implement a HDHP/HSA combination. The board found that, by switching to the much lower premiums associated with the HDHP, they were able to contribute $1,500 to each participating employee’s HSA. [This reform was offered as an option on the new employee benefits plan. Employees that chose to remain on the old health plan are now responsible for 50% of the cost of dependent coverage, increased office co-pays and a $500 deductible.] Enrollment in the HDHP/HSA plan is up to 36% of those covered by the Mehlville Fire Protection District. The district hopes to be able to extend the benefits to all covered in the next three years.

The end result of the switch to this plan has resulted in a 2008 fiscal year budget for health care of $940,000. Even at a growth of 10% (higher than the historical rise of 4-6% for HDHPs), the budget for FY2009 would only be a quarter of what was projected under the old plan. All of this was done without an increase in taxes. This, my friends, is an example of effective governance. A tax-payer funded group was conscious of the cost of increased taxes to its citizens and decided that there must be a better way to solve the problem. If only other branches would learn from this example.

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Brian Simpson is an independent insurance agent in St. Louis, MO

For more information on Health Savings Accounts, see The HSA Center

[H/T to Show-Me Daily]

Cross posted at RedState