What is an HSA anyway?

If you or someone you know has been shopping for health insurance recently, you probably have come across the term HSA. A Health Savings Account, in conjunction with a High Deductible Health Plan, is an extremely effective way to lower your health care costs. People often refer to their health plan as an "HSA" if it only has an HSA attached. It's important to realize that an HSA is merely an account to hold and accumulate funds for medical expenses, it's not insurance. Most individuals don't want a deductible of $1,100 or more, and most families can't afford a $2,200 or higher deductible. So why would I advocate these types of plans? Stick with me, first I'll explain what an HSA is, then I'll explain how it saves and even makes you money.

HSAs are the best cash accumulation vehicle for the average American. First, they are tax-deductible. Contributions to an HSA are 100% tax deductible up to the legal limit ($2,900 for individuals and $5,800 for families per year [for 2008], with an extra $900 contribution allowed as a "catch-up" if you are over age 55). Withdrawals for qualified medical expenses are tax free. As long as the HSA funds are used for qualified medical expenses, the funds are NEVER TAXED. Ever. HSA funds also belong to the account holder. Forever. Unlike a flexible spending account (FSA) offered through many employers, HSA funds rollover year to year. It's never "use it or lose it". In fact, if you never use your HSA funds, you can roll them into an IRA (tax laws change at that point). For more information, check out www.hsacenter.com. As a disclosure, the site was put together and is maintained by United Healthcare, Underwritten by GoldenRule. I've found the site to be accurate and unbiased, though, despite that fact.

To backpedal a bit, there are two main types of health insurance being sold today--copay plans and "self-directed" or HDHPs with HSAs. Both types can be HMO, POS, or PPO plans. Copay plans usually have a low deductible and waive the deductible for doctor visits. High deductible health plans have high deductibles ($1,100 or more for individuals and $2,200 for families) and cover doctors visits only after the deductible is met. The reality is, the majority of health insurance claims originate from doctor's offices. A huge portion (40-50%) of your medical insurance premium is used to cover $120 office visits when the average person goes to the doctor only 2-3 times per year. The average family's health insurance premium in Colorado for 2007 was $1,066 per month (this includes any portion an employer might pay). The average family of four will visit the doctor 10 times in a year. Without insurance, the average family would pay $1,200 for those visits. With a copay plan, that same family (or family and employer) would have paid $5,117 ($1,066 x 12 months x 40%) for the same 10 visits. Even if your employer covers 80% of that family’s health premium, they would spend $1,023, a negligible difference. Insurance was always meant to cover large unforeseen expenses. Can you imagine if your auto insurance worked the same as copay plans? Oil changes, tire rotations, new wiper blades, windshield washer fluid, and the like would all be covered. But at what cost?! Since Jiffy Lube and Auto Zone would have to employ claims personnel and wait 90-120 days for reimbursement, oil changes would cost $50-$70 and wiper blades $20-25. These are obviously everyday expenses that the average motorist can afford to cover themselves. Also, because we as drivers have to pay out of pocket for these expenses, we tend to look for a good deal. When patients have to pay out of pocket for doctor's visits, they tend to examine whether or not a visit is warranted. Could that cold be treated with lots of fluids and rest, or is a run to the doctor necessary at the first sign of a sore throat and cough?

This is where an HSA kicks in. When a high deductible health plan is started, the insured should start an HSA, too. Because an HDHP will cost 40-50% less than a copay plan, it’s easy to direct the savings, or at least a portion of those savings, into an HSA. Once the HSA has been funded at least to the level of the deductible the insured has chosen, contributions can be reduced or stopped. I always recommend funding the HSA as much as you can afford every year, up to the legal limit, if possible. If a catastrophic event happens and an insured needs to cover the deductible, or the family comes down with the flu at the same time, funds are readily available to cover those expenses. Many high deductible medical plans offer riders which offer coverage to fill in the deductible gap during the first year while the HSA is being funded, and many more plans offer supplemental accident riders which pay a set benefit to pay for broken bones and other ailments, to help cover that gap. Check with an independent broker to see which plan meets your needs the best.

Many HSAs offer different investment options, as well. This is how an HSA can MAKE you money in addition to saving you money on your tax bill. Most HSAs are paying an interest rate of 3-5%. That alone is better than having the money sit in your savings account at the bank. Many HSAs also will allow you to invest in mutual funds, money market accounts, and even ETFs. My advice is to keep the amount of your deductible safe from exposure to market loss by keeping it in fixed interest, then invest the rest in other investment options with greater possible returns. Shop around a bit to find the best HSA administrator. Your bank or credit union may even offer a health savings account. Some HSAs require minimum monthly contributions or direct withdrawals from your checking account. All HSAs have fees, so check and see what those fees are. If it appears not to have fees, run. Fees are always charged, and an HSA like that will undoubtedly have some expensive back-end fees. Some HSAs don’t charge fees once you attain a certain amount of money in the account, usually $2,500. I highly recommend HSAs from Health Equity (www.healthequity.com). In addition to being a great place to have an account, Health Equity offers other tools, such as free online bill pay, debit cards, a 24/7 customer support team that will give you advice and help you shop for the best healthcare deals and cheaper prescription alternatives. I know that read like an ad for Health Equity, but they truly do a great job for their clients. Another company worth mentioning, Pharma Futures, Inc. in conjunction with HealthTrans offers free prescription drug discount cards that provide an average savings of 33% on prescription drugs. In the interest of full disclosure, I work for Pharma Futures, Inc., but I do not benefit financially from recommending the cards. Again, they are absolutely free and are accepted at 55,000 pharmacies across the US. You can go to www.pharmafutures.net for more information on how to obtain a card.

The next time you shop for health insurance, check out an HSA-qualified plan. Many employers are switching to these plans, as well, and some of them will match an employee’s HSA contribution, or even fully fund the HSA to the legal limit for the year.