Should You Switch to a Health Savings Account?
The high cost of health insurance has led to the expansion of an extremely popular type of healthcare plan called a High Deductible Health Plan (HDHP). This type of plan, in conjunction with a Health Savings Account (HSA), is becoming the healthcare plan of choice in the United States. It is clear that the enrollment trend is way up for this type of coverage. At my place of employment, this option was added to our available healthcare choices, a couple of years ago.
In fact, a statement from an annual census by America’s Health Insurance Plans (AHIP), verifies this:
“The number of people with HSA/HDHP coverage rose to 10 million in January 2010, up from 8 million in January 2009, and 6.1 million in January 2008.”
Last year, due to a lack of truly understanding the plan, I chose to stick with my traditional plan. Basically, I was nervous about switching to a plan that I really didn’t truly comprehend. But, this year, after listening to coworkers who had made the switch the previous year, I took the plunge and switched over to this new option.
For those of you who are not familiar or simply do not understand this type of healthcare plan, here are some of the basics.
- A Health Savings Account (HSA) is a pre-tax account that employees and their family members can use to pay for qualified medical expenses, which can include prescriptions, vision care, dental care, etc.
- The employee chooses how much pre-tax money to contribute each year to this plan. There typically is a maximum amount you can contribute each year. This year, 2010, I elected to contribute $6000 to my Health Savings Account. This was almost identical to the amount it would’ve cost me to stick with my traditional healthcare plan. The $6000 is equally divided up into the number of paychecks I receive each year. I get paid twice a month so, for me, I contribute $250 per paycheck. Remember, all the money contributed is pre-tax, so it basically also lowers your tax liability, which is the same as a 401K contribution.
- In my plan, the employee (that’s me) will pay for the first $3000 of medical expenses and, after that, the plan will pay 80% of the expenses and the employee will pay 20%. After the total amount of out-of-pocket expenses reaches a certain amount (for me it is $6000), the plan will pay the full amount. The maximum annual contribution for a family in 2010 is $6150 if the employee is under 55 years of age.
- The employee, and spouse, if needed, will receive a checkbook and a credit card that will be used to pay for the qualified medical expenses.
Pros
- This is, by far, the most important! If you don’t use the full amount of your annual contribution, it is STILL YOUR MONEY! This money will stay in your account and will roll over to the next year. In the past, I have had pre-tax healthcare spending accounts which was “use it or lose it” in the year that you contributed. As the balance of the account grows, you may open an investment account and transfer money into a mix of mutual funds, similar to a 401K.
- If you have built up enough in your bank account, you can lower or curtail your contribution in the ensuing year. As a result, you can free up some money for other expenses that you may have. Or you can continue to contribute in a pre-tax manner, building up the amount in your account.
- You tend to be a lot more discerning when it comes to your medical care. Believe me, doctors do not like these types of plans, because they think that their patients may compromise their healthcare by neglecting to have procedures performed because of the cost. I don’t look at it this way. Instead of just going along with what the doctor suggests, I tend to ask more questions about what is being prescribed. I think this is healthy (no pun intended).
- If, by chance, you had to pay any qualified medical expenses out-of-pocket, you can pay yourself back later in the year when there are sufficient funds in your account. In other words, as long as you have kept the receipts and can justify the payments, you can write yourself a check from your Health Savings Account.
- The cost to contribute to this plan is roughly exactly the same as I would’ve contributed to my traditional health plan. And the fact that if there is anything left over goes to me is the greatest advantage of this plan.
Cons
- Probably the biggest negative about this new healthcare plan is trying to understand it fully. As I mentioned earlier, I didn’t opt to switch over to this plan in the first year it was offered. I didn’t because I simply did not understand its implications. Educate yourself on what a High Deductible Health Plan is with a Health Savings Account. It is a drastic change from your traditional healthcare plan.
- You may not initially have enough money built up in your plan to pay a medical bill since you are responsible for the first $3000. What you can do is write a check for as much as you have in your account and pay the remainder later when there is money in the plan. This is a different mindset from paying bills on-time, as I have always done. Healthcare providers recognize the popularity of Health Savings Accounts and certainly understand that there may not be enough funds at one point in time to pay a bill.
- You will want to keep a detailed record of all of your medical bills and when you paid them. I don’t necessarily consider this a hassle because I like to keep detailed records. But, for most people, this may be considered painful.
I am just over six months into this new healthcare plan. Currently, I have about $700 in outstanding medical bills that I have yet to pay. But, I know that in a couple of months, the funds will be available to pay those bills. This is a different mindset that I have had in the past about paying any bill. I definitely think that the pros far outweigh the cons when it comes to switching to a Health Savings Account. I am convinced that there will be money left at the end of the year that will still be my money that I can use in ensuing years. If not, I also know that I will be fully covered and I will be paying basically the same as I would have with my traditional healthcare plan.
It is my suggestion that you get educated and learn about this revolutionary healthcare plan, especially if you are given this option through your employer. If you do your homework, I am convinced that you will reach the same conclusion that I did. It is time to switch.
Another pro: after retirement age, funds that weren’t used for healthcare can be used for other expenses without penalty- though you do pay taxes o such withdrawals.
Thekla,
You are correct. Another advantage to using an HDHP. I think this type of plan scares a lot of people. I am really warming up to the benefits. I am almost 8 months in and it’s working out well for me.
Best,
Bob
We have been looking at these types of plans but were never able to decide on them because they are hard to understand and the information out there is not very well explained.
This article cleared up a lot of questions about these types of plans, thanks!
Hi David,
That was the goal of the post. I know it’s a pretty dry topic but people need this type of information to make an informed decision. If you have any more questions don’t hesitate to ask. If I don’t have the answer I will get it for you.
Best,
Bob
The health care reform plan changed some of the regulations for HSA’s (I believe including lowering the cap on how much you can contribute annually and making them taxable). It would be wise to look into this before switching.
Hi Stacy,
The only real change for 2011 that could affect HSA policy owners is that over-the-counter medications will not be able to be purchased pre-tax and won’t be considered eligible medical expenses. So, for example, I currently buy an acid reflux medication over-the-counter and I can pay for it with my pre-tax HSA money. Next year I will simply request from my doctor that he make this a prescription for me and it should be covered.
You may be confusing an HSA with an FSA (Flexible Spending Account). It is true that FSA contributions will be limited to $2500 starting in 2013 but this does not apply to an HSA account.
Best,
Bob
Nice informative post about Health Savings Accounts. One of the best ways to maximize the amount of money in your HSA, is to reduce the amount that you take out of it when you pay your medical bills. Patient Advocates such as INSNET, LLC specialize in helping people save money on their out of pocket medical bills. Any medical bill over $200 is eligible for risk free medical bill review and negotiation. They keep a percentage of the amount they save on your bill, and there is no fee if there is no savings. Visit http://www.myinsnet.com to learn more.
Dennis,
Thanks for your compliment and any organization that can help us consumers lower our health costs, I am all for. Thanks for your comment.
Best,
Bob
And then you get a major chronic ailment like cancer that will cost hundreds of thousands to treat and hey presto, say goodbye to your house, your car and your savings. Or well… your life, more than likely.
Actually, your plan’s out of pocket max generally kicks in to prevent just that because the plan normally covers 100% of eligible costs once you reach the cap, which is typically low enough to be reasonable. (Check your own plan though as they do vary.)
Hi,
There typically is an out-of-pocket maximum with an HSA. Check with your plan for this information.
Best,
Bob
Thekla,
Thanks for your input. I appreciate it. You are correct. Plans do vary on out-of-pocket maximum.
Best,
Bob
There is one thing that I feel derails this entirely is the difference Hospitals and doctors bill outside of an Insurance Plan. I had a bill that was for $300+ – I went to the Accounting office and after they found that I had Insurance the amount the Insurance co was being billed was $35 – so same procedure same amount of time for them getting the money (perhaps less if I were actually paying the bill) BUt a magnitude less for the company. I have seen this differential again and again … and not limited to hospital fees – prescriptions are also subject to this “magic” effect. Perhaps if there were real standardisation the process mentioned above would work …..
Most plans should allow you to get their discounted price on in-network services – you might want to check with your insurance company about that.
Hi John, you might want to check with your insurance company on this– in most cases, if you use in-network provdiers, you can submit the claim through them towards your deductible. It won’t get paid (just credited to your deductible) but the doctors are typically contractually required to charge you the negotiated insurance co discounted rate rather than the full price.
more info here too
http://hsaresources.com/faq/
Hi Eric,
Thanks for this link. It does answer a lot of the FAQs on HSAs and potential changes going forward.
Best,
Bob
Hey Bob,
Good luck with the new plan. I switched to an HDHP/HSA a few years back and totally loved it. It covered 100% of wellness visits, a physical, OBGYN for my wife, etc. My company even threw in a kicker of $800 the first and second year. Mine was managed by Aetna and they were very good to work with.
We switched to a traditional plan last year when my wife got a new job that covered her and I for no cost. If not for that, I’d still be in the HSA with about 7 grand in the account and minimal expenses.
Thanks for the informative post.
Hi Eric,
When my company started with the HSA they offered to deposit $500 into your account for free. Not anymore but it is definitely worth it. No cost is unheard of these days. I can’t imagine that it will stay like that but I hope so for your case.
Best,
Bob
This has intrigued me, as I was just about to get a health insurance plan this week (I’ve just finished college).
What I don’t understand is…what if you fall seriously ill and have thousands of dollars in medical bills that your health insurance would normally cover? Is your ability to pay for it contingent on how much you have saved up in your account?
Also, can I empty out the account (and get taxed on it) at any time? Say, for an emergency.
Hi Tim,
As mentioned previously in another comment, there is an out-of-pocket maximum with each plan. You will have to check on that with your plan. If you are emptying the account to pay for a medical bill that you paid on your own, then you will not be taxed on it. But, if you are using the money for non-medical expenses then it will be similar to using your 401K before the age of 59 1/2. You will pay a penalty and taxes.
Best,
Bob
You might want to make clear that the contribution limit for an individual is only $3050. The contribution limit for a family is $6150.
When you write
“The employee chooses how much pre-tax money to contribute each year to this plan. There typically is a maximum amount you can contribute each year. This year, 2010, I elected to contribute $6000 to my Health Savings Account”
this implies that you (“I” / “The Employee”) are acting as an individual, but a $6000 contribution is not possible for an individual. As with an IRA, there are potential difficulties/penalties with contributing more than the max allowed.
Tony,
Thanks for that. I have a family and am not considered an individual. A family contribution is $6150 as you stated. You are correct and I apologize for not clarifying. I am glad that you did.
Best,
Bob
Bob,
You leave out one major con… What do you do in case of catastrophic medical condition?
I should start off by saying I am licensed to sell all lines of insurance, but I do not sell health insurance.
The reason you buy insurance is not to cover you in case you get bumps, bruises, etc. It is to make sure you don’t end up in complete financial ruin in case something major happens. It’s really the same reason you buy homeowners insurance and keep the deductible higher to keep costs down. You can afford to pay some of the out of pocket items, but the insurance is there in case something major happens. Also, if you incur multiple smaller medical issues within a short time frame, you will not have the money to cover them.
I do like the HSA account and it’s a great way to save some money on medical expenses because everything is pre-tax; however, I would NEVER recommend someone use an HSA as a replacement for actual insurance. That’s bordering on irresponsible. A much better option is to max out your HSA if you can and then take out a High Deductible Health Plan. As you accumulate more money in the HSA, you can keep raising the deductible to a point where you are comfortable that you are covered.
There are a couple misconceptions in your post.
First, an HSA plan is actually a PPO plan. Second, just like a PPO plan, it has a maximum-out-of-pocket. A max-out-of-pocket is the dollar amount at which point the insurance company pays 100% of all future bills; the insured doesn’t have to pay anything else.
With HSA’s, oftentimes your deductible is your max-out-of-pocket. For example, my HSA plan has an $1,800 deductible. My deductible is also my max-out-of-pocket. So once I spend $1,800 in a calendar year, the insurance company pays 100% of my medical bills for the rest of the year.
Ironically, most traditional PPO’s have higher max-out-of-pockets than their HSA counterparts.
I hope this helps.
Nick Paloukos
Hi MKienbaum,
There is an out-of-pocket maximum in the event of catastrophic medical condition. This varies with the plan that you have.
Best,
Bob
My apologies, I misread the top of your article that specifically states using an HSA in conjunction with an HDHP. This is a fantastic way to set up your health insurance needs. The only possible downside is that you have to wait until you have the funds available to pay the bills; however, I think the benefits far outweigh the negatives here.
As a health insurance broker who spends most of his day educating clients on the benefits of HSA coverage, I am excited to see well-written articles written about them. Bob, after reading the article and especially the comments, you definitely know your stuff.
One term I use to help clients visualize what an HSA account is, is to compare it to a traditional IRA. HSA accounts are effectively a traditional IRA that you can also use (tax-free) towards qualified medical expenses. This gives my clients a visual of something they may already know about, and we can build on that.
In addition, even if an individual or family fully funds their HSA account every year but does not have considerable expenses, if they live a comfortable amount of years past retirement (where they can also use the HSA towards Medicare supplement and long-term care premiums) it is likely than can exhaust the account without the tax-hit on the back end.
I could talk about these plans all day long. Thanks for putting stuff like this out there Bob, I’ll be sharing it on my networking platforms.
Nick Paloukos
Thanks Nick,
I am living the HSA myself so I have certainly familiarized myself with the benefits and the concerns. I appreciate your comments.
Best,
Bob
Can someone explain (briefly) how this differs from an FSA (Flexible Spending Account)? Or point me to a good website explaining the differences/similarities? Is this something that has to be offered by your employer?
Hi AW,
A Flexible Spending Account is where you project how much you plan on spending on eligible expenses in the coming year. The only problem is that at the end of the year you either use the money or lose it. With an HSA you can roll over any remaining balance and don’t have to project how much money you will be using that year. I would imagine that if you are self-employed that you can purchase this type of benefit but I can’t say that for sure. My employer offered this plan and I eventually decided to take advantage of it.
Best,
Bob
Too bad the anointed one wants to nuke these out of existence….
Hi John,
I hear what you are saying. Let’s take advantage of this plan while we can. As of this moment, at least for this year and next, there are no significant changes.
Best,
Bob
My HSA has been a lifesaver!! I am about 3 yrs into it. When I had some MAJOR health bills last year, and no money in my checking account, my HSA had ~$5K in it and saved my wife’s life. Quite literally! I encourage everyone to max out what they can contribute to their plan and “save it for a rainy day” because when it rains, it pours (as far as medical bills are concerned)!
Hi,
I love to see true life experiences being discussed here. I am glad that you had the money in your HSA. I hear you . When it rains it pours. Thanks for your contribution.
Best,
Bob
Hello,
So, if you have a medical expense but have not yet accrued the funds in your HSA, does that mean you have to or can delay paying the bill until you have the funds accrued? I’m thinking doctors wouldn’t be too keen on that idea.
Thanks.
I have been under my HSA plan for 4 months now. As part of my employers benefit package they gave me, they put in $500 a year into the HSA account yearly. As I got into the plan mid-year, they prorated it and put in $250. I had to use most of that up with an abscessed tooth and needed to be pulled. 2 weeks ago I was bit by a spider and needed to goto the doctor. Every doctors office we went to required full payment because they called and found that I had a high deductible ($3000) that had not been met.
I told HR this week that I wanted to switch to the regular co-pay plan because of this. Starting out, how am I supposed to take care of emergencies when there is nothing in my HSA account?
I mean $500 of free money is hard to turn down.
Any advice?
In theory, you should have sufficient emergency savings (non-HSA) to cover your deductible for the first year. If you don’t, then perhaps an HDHP/HSA plan is not right for you. You may also be able to work out a payment plan with the doctor’s office so you don’t have to pay the full bill in one lump sum.
Keep in mind that once your HSA balance grows, you can use it to reimburse yourself for previous medical expenses that you paid out-of-pocket (as long as they occurred after you joined the HDHP).
I had a hospital bill that went to collections in the tune of 5k roughly. I used http://www.klfinancialservices.com to assist me in negotiating with the collection agency, they were able to cut my bill in more than half and help improve my credit score in the process.
Thanks for sharing your thoughts on featured. Regards
Having been on an HSA for a year now, I’d say it’s only a good idea for young, single, healthy people who can sock into it more than the maximum contribution for a few years. If you have to spend anything out of it in the first year or two, you might never catch up. You’ll be paying for your healthcare at the insurance company’s discounted rates, but you’ll be paying for 100% of that bill with your own paycheck up till you hit the deducible, which is unlikely unless you have a major emergency. Assuming you only need to go to the doctor a few times, but not so often than you spend $5000 or whatever your family deductible is, an HSA can crush your finances quickly.
I got on my HSA at age 35 and have only had one year to contribute. Since my wife got pregnant we’ve burned through all I’ve been able to save thus far – every test and doctor visit, even at in-network rates, was $50 and up, plus a couple of surprise ‘not covered at all’ tests which cost hundreds. With the baby due next June and the end of the fiscal year coming up, I’m likely to be on the hook for several thousand dollars out of my savings account rather than several hundred dollars in co-pays. Sadly, our re-enrollment at work doesn’t come until July, but I suspect a standard PPO will be the better option. Had I been on the HSA when I was in my 20s and single, it would have been a nice savings plan, but I wouldn’t recommend starting one to anyone who actually needs to go to a doctor outside of preventative checkups unless they’ve got a few thousand to spare.
We’ve had a high-deductible insurance plan with an HSA for 5 years now. The HSA is supposed to cover your deductible (for us, it’s 5K a year for the family) and any minor medical expenses up to your deductible. You don’t use the high-deductible plan for doctor’s office visits – you do get the insurance company’s discount, but you can also negotiate with the doctor for his cash-pay rate. After the first year, you have more than enough money to cover most normal medical expenses AND the deductible if you happen to need more care than your account contains (the catastrophic event such as cancer, stroke, heart attack, etc.). I believe our plan limit is 3 million per event, but I’d have to go back and check it. The insurance company still has too much power over us, because the records are submitted to them even though they don’t ever pay a thing, and I don’t like that aspect of it. I am a person who does cut back on preventative care when I am not on a traditional plan, and that is not good, either. I have never run to the doctor for every little thing, but when we had group health insurance I took better care of myself. That’s just my personal failure and perhaps it isn’t yours. I have mixed feelings about these plans. I think they are a good start away from employer-provided health insurance but I would also like the insurance companies not to have my records if they are not paying for anything.