Inside HSAs

Q. What is HSA?

HSAs or Health Savings Accounts are the result of federal legislation passed in 2003. 

Their main purpose, as far as the government is concerned, is to help bring down the cost of health insurance, and also health care. 

HSAs are what were known as High Deductible Health Plans, or HDHP, for short.

Q. How can I reduce the expenses?

One can reduce the expense of, for example, automobile insurance by increasing the deductible(s).

This means that coverage generally doesn't begin (sometimes preventative care can be an exception) until the deductible has been met. 

Typically, people with an HSA will choose a deductible that is at least twice the amount that people typically choose for a regular PPO policy that offers first dollar benefits for doctor visits and prescriptions. 

In the meantime, policy owners fund a separate account that is, for the most part unconnected with their health insurance policy to pay for out of pocket medical, dental, and vision expenses. 

This separate account which is roughly similar to an IRA which is highly tax-advantaged, but it has some important rules associated with it that anyone with an HSA should become familiar with. 

In a nutshell, the idea of the HSA is that if consumers spend their own money, they will be more careful about which kinds of health care services they consume, and from whom. 

Efficient providers will be rewarded, while inefficient providers will be punished, and this should have an effect on prices.

HSAs have a bit of a track record now, and there is some evidence to support that they are actually working as intended if perhaps a little slower than expected. 

Q. What are the reasons I should consider when buying a HSA policy?

A. There are many reasons to consider purchasing an HSA-qualified health insurance policy.

HSAs are essentially a tax shelter for money earmarked for medical expenses. Thus, once you establish a qualified health insurance policy, you are able to make contributions to an HSA account. The money going in to an HSA can then be written off on taxes even if it remains in the account unspent.

It can accumulate from year to year, and can also draw interest or be put in to financial vehicles of different types like stocks or mutual funds.

The capital gains are also free from taxation as long as the funds are used to pay for qualified medical expenses.

If funds are withdrawn from an account before Medicare eligibility, and used for non-qualified expense, all applicable taxes will be due as well as a 10% penalty.

After one becomes eligible for Medicare, if funds are used for non-qualified medical expense, there is no penalty, but normal rates of taxation will apply.

Though there are some rules governing how you can use an HSA which you would be wise to become familiar with, overall, they tend to make health insurance simpler, and more affordable.

To understand why HSAs are a good deal, it helps to look at health insurance the way that health insurance companies do.

Q. What is the price of policy based on?

A. The price of any insurance policy is based on probability of use.

Even if you’re very healthy, you may use your health insurance frequently to pay for doctor visits or prescriptions drugs if your policy offers first dollar coverage (plus copays) for these benefits.

Since the insurance company assumes you will be using these benefits if you are paying for them, the health insurance company will set your premium high enough to cover these costs.

As it turns out, if you opt for such a benefit rich plan, you will very likely pay more to the health insurance company than you would have paid if you simply had paid for these costs out of pocket.

Q. What all factors add to the monthly premiums?

A. Insurance companies will always do what they can to cover their costs. One significant driver of high premiums is the escalating cost of healthcare in general.

The current model of healthcare benefits actually fuels this problem because it doesn’t encourage people to shop for the best price.

If you have health insurance, and the cost of your prescription medications are the same no matter where you buy them, you are likely to shop based mainly on convenience.

Why go any further than the corner pharmacy?

If your health insurance policy didn’t cover incidental medical expenses like prescriptions and doctor visits until you’ve met your deductible, you would then have an incentive to become a better shopper.

Once there are millions of really good shoppers, the overall cost of healthcare is likely to go down. People will quickly find ways to save even if it does require slightly more effort, and HSAs are at the heart of this transformation of healthcare.

Even so, it is understandable for people used to benefit-rich plans to have difficulty in adjusting their thinking.

Some of this is due to the fact that the insurance benefits most people are used to are almost entirely employer-sponsored.

Q. What if I have an employer-sponsored plan?

A. If you have an employer sponsored plan, for example, of course it makes sense to take full advantage of whatever benefits you have.

Employers pay a lot for benefit because they see it as a way to attract and retain quality employees. As such, they are in competition with other employers for this scarce resource.

When considering an individual plan, however, you only have to worry about doing what is most financially prudent.

This is why HSAs are the way to go. Look at a benefit-rich plan, and compare the cost to a similar HSA plan.

Usually HSA qualified plans are considerably more affordable. If you were to purchase an HSA plan, every month you could save the difference in premium between the two plans.

You could then pay for the majority of medical expenses out of your HSA with pre-tax dollars—something you can’t do with a regular insurance policy.

If you’re tax bracket is 25%, you will automatically save at least this much on health care expenses right off the top.

Further, since you’re spending your own money, if you made even just a minor effort at comparison shopping, you will find that it is not difficult at all to save an additional 12%.

Q. What do I need to remember?

A. You need to remember that this is on top of the network discount you should also be receiving. When you compare all of these savings against the costs of a more traditional plan, HSAs become the easy choice.

If you decide to get an HSA, you should familiarize yourself with how they work. One thing you will want to do is keep all of your healthcare related receipts.

Additionally you will want to know how much you are allowed to put in every year, what the eligible expenses are, and much more.

Chances are, once you use it a few times you will understand how it works and you will better appreciate the benefits it has to offer.