The Health Savings Account (HSA) and Can I Do Better Than a Health Insurance Company?

by RC on April 29, 2008

Health care and health insurance premium costs have been going up rapidly for many years. While it’s certainly not the biggest problem with health care in this country, one problem is the fact that, for many people, they use their health insurance infrequently, and feel like they are paying into a system (skyrocketing premium costs) without taking any of the benefits. After seeing how much my health insurance premiums were going to be going up this past December, I decided to go with a High Deductible Medical Insurance Plan this year, combined with a Health Savings Account (HSA). A HSA account is part of a “Consumer Driven Health Plan”, which supposedly allows the consumer to make more choices regarding their medical treatment and more control over how their medical dollars are being spent.

 Here’s how they work, and what I think will be the benefits of using this plan.

A health savings account is only available if you are in a High Deductible Health Plan. To qualify as a High Deductible Plan, the minimum deductible for a single person is $1,100, and $2,200 for a family in 2008. You are allowed (by law) to put up to $5,800 for a family plan, $2,900 if single. For me, this means I can put more than my max. out of pocket ($4000) in per year. Premiums for an HSA plan are normally lower than other types of plans. Contributions can be made pre-tax, if your employer has the option available, or post-tax and then deducted from your tax return. In general, you are responsible for all out-of-pocket expenses until you meet the deductible, and then there usually is a co-insurance portion. For me, the first $2500 comes straight out of my pocket. (i.e., no co-pays, I pay the entire bill) Between $2500 and $4000 worth of expenses, I pay 10%, the plan pays 90%. So for me to reach the max out of pocket, my total expenses have to exceed $2500 + $15000= $17500. After I hit $4000, the plan pays 100%.

Beneficial Features of an HSA Plan
• You can have the money to fund your HSA put into a bank account, which you can draw from to pay medical bills. Normally, your employer will set this up so the money comes out pre-tax.
• I can keep any money left in the HSA account, it rolls over to the next year, and I can take it with me if I leave my employer. (I can then still use what is left, but cannot contribute to it unless I get into another high deductible medical plan.)
• The HSA account available to me pays 4% interest per year. (This will vary based on your plan and the bank they use)  After reaching a certain limit, $2500 I believe, I can invest in a variety of mutual funds.  You will need to have a cushion, though, because should you need the money you have to sell your investments. But, using my situation as an example, after I have amassed my max yearly out of pocket, I could begin investing that money.
• If I do leave my employer, I can use any money in the HSA plan to pay Cobra premiums, if necessary. You may use your HSA to pay for COBRA premiums and Medicare premiums.
• Similar to an IRA, if you use the funds for non-medical expenses, you pay a 10% penalty plus income tax. However, once you reach 65, the penalty portion disappears, and you basically have a tax-deferred account you can use for medical or non-medical expenses.
• Similar to a flexible spending account (FSA), you can use the money for vision, dental, or over-the-counter medical expenses.

Criticisms of HSA plans
• Several health related groups feel HSA’s only benefit the healthy, and this will cause an increase in less healthy people’s insurance premiums. Although it can limit maximum expenses as well, so I am not sure if this is valid. Because prescriptions count towards the max. out of pocket, people who take a lot of expensive medications may end up paying less than they normally would.
• Many people also believe that because people have more choice, they may choose not to seek medical attention because they may have to pay out of pocket, and this may have a negative effect on their health.

Why did I do it?
Because after looking at the plan details and crunching the numbers, I have decided if I come out $1.00 ahead at the end of the year, it is a moral victory. I am hoping to do better, of course. The savings in premiums for me ($2400) is basically equal to my deductible under the previous HMO plan I was in, so I am “even” up to that point. Since I normally put about $1000 in my flexible spending account, I am now up to $3500, only $500 less than the total max out of pocket for the year. 

Now, if I were a healthy, single person, in my early 20’s I think this would be a no-brainer, at least for me.  But I am in my mid-thirties, and married with two small children. Have I made the right choice? I think I have, but only time will tell. So far this year, things have gone pretty well. I will keep you updated.

HSA Resources:
US Treasury 
Council for Affordable Health Insurance

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{ 2 comments… read them below or add one }

ideal4investors May 6, 2008 at 10:16 pm

We’ve had an HSA for two years now– and we are very happy with it. When I was employed by someone else, my employer paid $12,000 a year for my family plan. And if you think that they were paying for it (and not me with a lower salary) then you must also believe that corporations pay taxes too.

Now I have pay around $2,400 a year for my family and have the exact same coverage through Blue Cross. However, my deductible is no longer $250, it’s $7,000 for my family. But I get to put that $7,000 into an HSA, pre-tax. And it rolls over if I don’t use it, collecting interest tax free. So my out of pocket is $9,400 a year, but get to keep the vast majority of it unless we get sick or have an accident. The plan covers one annual checkup for every member of my family, well-baby visits and mammograms.

This is what insurance was meant to be. To pay for the catastrophic stuff, and not the everyday sniffles.

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RC May 7, 2008 at 11:07 pm

@ideal:
I hope my experience with an HSA is as positive as yours, so far I have no complaints. You are absolutely correct about who pays the “company’s portion” of insurance as well.
Thanks for commenting about your experience.

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