Taking the pulse of health spending program; 'Bank account' product garnering attention

Health spending accounts are expected to become increasingly popular as companies and self-employed Canadians sharpen their focus on cost controls during the economic recovery, experts say. Described by some as a "bank account" for health and dental benefits, the product is garnering attention at a time when employers of all sizes are bearing rising costs for those services. Still, they are not without controversy. Labour unions argue that health spending accounts can lead to "the erosion" of benefits depending on how they are used.

Both advocates and critics agree, however, that governments are increasingly shifting the cost burden of universal health care. Ontarians, for instance, began paying a health-care premium in 2004, even as the province cut coverage of chiropractic services, physiotherapy and routine eye exams for most residents. Such moves have put added financial strain on both consumers and employer-sponsored benefit plans. And those costs are only expected to increase as the population ages. It is estimated that 22.1 million people have extended health care coverage and 12.3 million have dental plans, according to 2008 data from the Canadian Life and Health Insurance Association. Even so, other statistics suggest that households' out-of-pocket health costs amount to about $2,000 a year.

A recent Deloitte survey, meanwhile, found that nearly two-thirds of Canadians "feel unprepared to handle future health care costs." "In Canada, people really like the concept of insurance and protection. And I think that worked for a really long time until people started to have a lot of friction with their employees because the plans were ever-escalating in terms of cost," said Marla Schwartz, co-president of health benefits company Benecaid. "When your business isn't growing and you've got an uncontrollable cost on your income statement that is going up anywhere from 15 to 30 per cent per annum, you can't sit back and watch it happen."

Traditional employer-sponsored plans normally feature a list of available benefits. They often include caps on coverage such as dental care, chiropractic care and massage therapy. In contrast, a health spending account allows an employer to deposit a preset amount in an employee's account each year to pay for qualifying medical and dental expenses. The money, which forms part of the employee's overall compensation, is deposited on a pre-tax basis. The employer determines how much is contributed and those contributions qualify as business deductions.

The main advantage for employers is their costs don't necessarily increase each year. (Health benefit companies usually take their cut by charging a 10 per cent administration fee.) Health spending accounts are also credited for reducing "frivolous" claims by employees, experts say. "Sometimes, if you've got massage therapy coverage, then what will end up happening is people say, 'I should be using that.'" said Kim MacFarlane, product director of group benefits marketing services for Manulife Financial Corp. "Whereas if you give them a health care spending account, they think more carefully about where they are spending."

Health spending accounts can also be set up by self-employed workers but there are caps on annual contributions. The limits are $1,500 per adult and $750 per child. Overall, Benecaid estimates that health spending accounts can generate savings of up to 35 per cent versus the medical tax credit because they are funded with pre-tax dollars. Although health spending accounts have been around since the late 1980s, they are more widely used in the United States where they are called health savings accounts, experts say. There are no comprehensive statistics on their usage in Canada but demand is expected to grow.

Nonetheless, not all benefits companies promote that approach. Both Manulife and Sun Life Financial Canada recommend that clients use health spending accounts to augment their core benefits plan. That's because using a health spending account as the sole source of coverage is problematic. "There are concerns about that because it really doesn't offer any protection if there is a catastrophic event," MacFarlane said. In such cases, the insurance policy that wraps around the account has a high deductible but pays for major health expenses. "(For) cancer coverage, you are talking about costing in the neighbourhood of $60,000 per annum depending on the type of cancer," MacFarlane said. "If you have a health care spending account that only provided you with $1,000 of coverage - that is a daunting financial exposure."

Those sentiments were echoed by Dave Jones, vice-president of market development for Sun Life's group benefits. "Employers need options to manage the spiralling costs of health care and HSAs are a great way to introduce cost management, consumerism and choice with their employee base," Jones said, " but on the other side of the ledger, employers have benefits for variety of reasons and ensuring their employees are covered for catastrophic events and other scenarios are some of the key drivers." Labour unions say health spending accounts are being proposed by employers as a way of capping or restricting existing benefits.