I was talking with a physician this past week about health care. I mentioned that HSAs seemed like a step in the right direction for dealing with health insurance. He gave me a blank look and I realized he didn’t know what I was talking about. If a doctor doesn’t know about this wonderful new tool, some of my readers would probably benefit from a 5 minute explanation.
An HSA is a Health Savings Account. Most people are familiar with “flex spending” type medical savings accounts where you set aside money pre-tax in order to pay for health related expenses throughout the year. If you don’t use the money for health care, you lose it at the end of the year. So if you are healthy you obviously don’t want to put too much money into this type of an account.
An HSA functions in a similar way, but you don’t lose the money at the end of the year. It basically functions as an IRA that you can withdraw money from for health care costs. The catch is, you can only put money into it if you have a high deductible insurance plan. Some employers are finding that they can switch to high deductible insurance which lowers their premiums and put the savings into HSA accounts for their employees. This works out particularly well for healthy employees because instead of all the money going to an insurance company “just in case”, a portion builds up in the account for their use later.
If you ever plan to start your own business, this is particularly valuable. Lets say you spend several years working and set aside $15,000 in a health savings account. When you start looking for insurance for yourself in your new business, you can take on a plan with much lower premium and much higher deductible because you have a $15,000 cushion. Even better, your business can make contributions to the account for you and you don’t have to pay any taxes on that contribution (subject to certain limits).
If your company offers some type of HSA setup, you should definitely look into it. Depending on your health and your future plans it can be one of the best ways to prepare for the future and free you up so you can make decisions that are driven more by what you want to do and less by the cost of health care and insurance.
Mark, your timing on this article is interesting as I literally received my new medical insurance card in the mail yesterday! It’s a HAS coupled with a high deductible plan ($4,000 in my case). The Clinton administration first launched the HSA program in the late nineties, and I was lucky enough to participate then. Unfortunately for the last several years, I was on a traditional PPO plan.
Since I’ve been self employed for all about a brief period over the last decade, HSAs really are a great solution for me. Sure, a $4,000 deductable might sound high, but my premium is now under $100 dollars. Previously it was $450 per month – for me, a young healthy guy! And it has gone up $50 every year for the last three.
Even if I max out my deductable, I’m still saving about $1,000. But the more likely scenario is that I will be saving about $4000 – $5000 dollars every year (which I can deduct from my taxes) yet have on hand for to pay for any medical emergency!
I’m very Milton Friedman in my thinking about free market solutions to societal problems, and hope more people find out about HSAs and have the ability to participate in these programs. It’s taken me three years to finally be accepted back into one. I hope congress approves HAS expansion.
Anyways, that’s my 2 cents!
Terrible idea, look at the previous post “It’s taken me three years to finally be accepted back into one [HSA].” THIS is the problem. Health insurance companies will only accept people who qualify i.e. who are low risk. I would be fine with this model as long as it only reflected life style choices but it won’t – there is too much money at stake. So here it is: the rich will pay a little and receive great care the poor will pay a little and receive crap, and this will create a breeding ground for highly contagious deadly diseases. For example google “Russian” and “tuberculosis”. HSA cannot stop that health care threat.
Trevor, This has nothing to do with class warfare, but nice try! It took me 3 years to get accepted back into an HSA because of a “preexisting” condition I had. Not serious, just a skin thing, but still it was enough for them to refuse me for a while. If the plans were more available it wouldn’t have taken so long.
The insurance companies “collect” more money (but make less profit) under the current system than if everyone looks out for themselves. There is not now, nor has there ever been a free lunch. If the government “does” health care, it will be more expensive with longer wait times like in the UK.
An individual will always pay for their own health care, whether through higher taxes, or less pay received because thier employer pays the bill.
@Trevor – Actually you could argue that HSA and IRA accounts are more beneficial for people who aren’t rich. For someone who makes $40,000 per year, being able to set aside $4,000 tax free effectively gives them 10% of their income tax free. This is a significant tax savings compared to their total income. For someone who makes $2 million per year, the tax savings is insignificant. (Plus there are phase out rules for some of these types of tax accounts.)
Also regarding your statement that rich will pay a little and get great care, but poor will pay a lot and get nothing: I use to work at a hospital and did a lot of analysis on the financials. The reason that costs were so high were because of all the people the hospital helped who never paid. A percentage of these people truely couldn’t pay their bill and the hospital was happy to help them. However, simply didn’t pay because they could get by with it.
In reality, the responsible people pay more than the irresponsible people because the irresponsible people don’t pay.
We just implemented a HDHP with HSA at my employer. If you can put a lot in the HSA in the first year or so, and stay relatively healthy, it’s a great idea (especially for those of us in group plans who don’t need to worry about being denied coverage). Our plan even covers annual physicals at 100%, which encourages people to get their annuals (after all, we always want our free stuff), and in the end can reduce the insurance company’s liability.
just hope that you don’t need any medications…even something as simple as birth control can quickly eat up your premium savings, since prescriptions will now be subject to the deductible on the health plan.
it really depends on where you live is an HSA is a good option. if you’re in a state where there is no competition between insurers, then you’ll see little savings by moving to an HSA/HDHP.
the other major issue is that people will open the qualified high deductible health plan (and love those premium savings), but then not open the savings account and fund it. so now you just have a crappy health insurance policy and nothing to back you up if you use it. savings rates are horrendous in the US right now. people aren’t even contributing to their retirement plans in so many cases, they SURELY won’t contribute to an health savings account. (and don’t tell me YOU will…i’m talking in general)
@A Morgan – On of the things I like about HSAs is the way it encourages people to take responsibility for their health. A lot of insurers offer free “wellness” type services to help people stay healthy. Healthy people mean that they make more money. :)
@njb – It depends on your insurance company. Some will pay a certain portion or help you get good rates on prescriptions that you wouldn’t be able to get on your own. But you are right, if you have to buy a bunch of medicine, the HSA account may not be much better than a regular insurance plan. In many cases it isn’t any worse (depending on how your employer funds the account).
My company is not only contributing to the “savings” portion of the HSA, they are REQUIRING employees to also contribute. We aren’t setting any minimums, but we do make it clear that you at least want enough money to cover your usual expenses. As a plus, we are in the health services industry, so these people know how bad it can be when there’s no insurance, or no money for the deductible.
I’m not sure you can require them to contribute (legally) and even if you could, they could take the money and buy beer (and pay the taxes). There’s no guarantee they’ll leave it in there to pay for healthcare. That applies to the money they put in there, and the money that the employer does.
HSA’s are like many things in personal finance/insurance/etc. They’re great if you look at them in a vacuum, but for 90% of the public, they just don’t work.
Mark: Regarding the prescriptions, they do not pay a certain amount. You benefit by getting the negotiated discount on the medication that the carrier has with the pharmacy, but it doesn’t really bring them down under retail cost much, if any.