Does a High Deductible Health Savings Account (HSA) Plan Spell D-A-N-G-E-R?

In many people's thinking today in America, having a health insurance policy with a high deductible spells D-A-N-G-E-R. Anything over a $500 or $750 deductible seems unwise & simply a “bad idea”. Yet there is a new school of thought today, a fresh concept that is making sense to more and more people. The concept is called consumer driven health care and has manifested into a relatively newly (since January 2004) type of available health insurance plan known as the HSA or Health Savings Account. Consumer driven health care moves a step beyond traditional insurance by taking into account a wide array of variables in how one views health insurance.

Just as we really do not expect car insurance to pay for oil changes and minor repairs, or homeowners insurance to cover replacing the carpeting every time there is a spill, Health Savings Account (HSA) Insurance Plans are not intended nor at all designed pay for routine doctor visits, prescriptions, and minor doctor & hospital bills.

That being said, many HSA plans will still cover annual physicals, OBGYN exams, and immunizations before the deductible is met.

Virtually all health carriers (such as Anthem-Blue Cross, Health Net, Aetna, Blue Shield, etc.) offer HSAs also called HSA qualified health plans. To be “qualified”, the plans must adhere to certain IRS guidelines, one of them being higher deductible amounts. That is why you will also hear of HSAs being referred to as high deductible health plans or (HDHPs). Deductibles for these policies begin at $1,100 for individuals and $2,200 for families in 2008. They go as high as $5,600 for individuals and $11,200 for families and can fall anywhere in between. As a general rule health insurance and most all insurance, a higher deductible results in a lower the premium. HSAs typically offer significantly lower premiums with savings ranging anywhere from 25% to 50% over traditional plans.

So at this point, many people think, “wow those are some pretty high deductibles, and a large risk to take on”. Furthermore they think, “If my plan has a $5,000 deductible then followed by a $4,500 medical claim, I'll have to pay all of that money out of my own pocket!”

While it is true there is certainly a degree of risk of this happening, it is not nearly as detrimental as you may be thinking. The reason why is that the HSA account aspect of the HSA qualified insurance plan provides you with a substantial risk buffer.

Remember there are two components that make up an HSA, the insurance itself and the account. The account is where you make tax-free contributions every year (up to $3,000 annually for individuals in 2009). The interest earnings are tax-free and if you use the money to pay for medical expenses, it is tax-free. This also means that anything you pay to cover your polices deductible is tax-free.  Click on Health Savings Plans to read more detail.

Let's explain this with a real world example. Take a thirty year old man named Bob who is looking to change his existing health insurance plan. Keep in mind that the following numbers are real world. Bob pays $366 per month for his Blue Shield Spectrum PPO 750 Plan. After he meets the $750 annual deductible, this plan allows him $35 copays for doctor visits, and 30% coinsurance should he have to be hospitalized. There is a $250 brand name deductible on prescription drugs and then a $35 copay will kick in. Generics are $10 with no required deductible. The annual out-of-pocket maximum is $4,000.

Bob now is looking at Blue Shield HSA plans and is seriously considering switching to one due to a friend's recommendation. Two plans that catch his eye are the:

1) Shield Spectrum PPO HSA Savings Plan $2,400

2) Shield Spectrum PPO HSA Savings Plan $4,000

Let's take plan 1 with the $2,400 annual deductible. The monthly premium on this plan decreases to $163 per month. That's a savings of $203 every month over his current traditional policy. After the annual deductible of $2,400 has been met, the plan is pretty much the same ... $35 copays for doctor visits, 30% coinsurance for hospital stays,lab work, etc. and an annual out-of-pocket maximum of $4,000. There is one major difference however with his current plan, that being prescription drugs. This particular plan offers no coverage for either generic or brand name prescriptions until the full deductible has been met.

But let us go deeper in our comparison. Since we are savings $203 every month on premium, Bob can now take that savings and contribute it entirely to his new HSA account. Remember since he is simply re-routing the extra $203 he now pays each month, he is not increasing his outgoing expenses by even a single penny.The HSA account funds immediately begin to earn interest. After 1 year, he will have contributed $203 x 12 or $2,436. Let's assume there is a moderate 5% average interest gain on those funds. Earnings for real people are often much more. At the end of the year, he will have a total of 1.05 x $2,436 or $2,558. Now since the interest earnings in the HSA are also tax-free as long as he either keeps the money in the account or withdraws it only for HSA qualified expenses, at the end of the year, he will have $2,558 which can be applied as an above the line tax deduction.

Let's now see how much tax savings this gives Bob when it comes time to pay Uncle Sam. Bob earns $60,000 per year at his job which places him in a 25% tax bracket. If he deducts $2,558 as he is legally entitled to, it works out that he will receive $640 off of his year-end tax bill. Not bad.

Now let's add together the $2,558 which is forever Bob's money, and the $640 he normally would be paying in federal taxes and we arrive at $3,198. In one years time, switching to the Shield Spectrum PPO HSA Savings Plan $2,400 would manage to increase Bob's income by $3,198. This is all possible because Bob has an open mind to consider an HSA Health Savings Plan.

Now here are some summarizing bullet points, putting it all into perspective so that we might understand the total ramifications of switching health plans:

1. Both Blue Shield Plans are PPO plans. They both provide equal access to the same network of doctors, hospitals, and specialists.
2. Bob's current plan does offer a prescription benefit, but the HSA Plan he is considering does not. However, should he need medicine, he is allowed to withdraw money in his HSA account to pay for it tax-free.
3. If Bob should happen to have an accident or sickness, and ends up owing for example a $2,500 medical bill, he can take the money from his HSA account and pay the entire bill tax-free. Now if he happens to have the accident only one month after switching to the HSA plan, he can still make an immediate $2,500 contribution to his account and then withdraw the money to pay the entire bill tax-free. The only thing he cannot do is pay medical bills that were incurred before the date he opened the health savings account.
4. Consider the high possibility that Bob has little or no medical bills for this year, and only needs to buy medicine once or twice per year (some years more, some years less). The money contributed into his HSA account, the earnings on these funds, and the resulting tax savings creates a growing nest egg for Bob that may be used for current & future medical expenses, and ultimately as a full fledged retirement account. The $3,198 in savings (discussed in the example) repeats every year as long as he make the same contributions with a 5% annual gain. When Bob withdraws funds from the account at the time of retirement (age 65), he may now use the funds penalty-free for any purpose, not only medical expenses. If he does this, he would just have to pay regular income taxes.
5. Keep in mind, when Bob does actually retire, his income will likely go way down, as will the percentage of tax he will be obligated to pay on his HSA withdrawals.
6. Now there are cases where people do need prescription coverage because they take medicine every month. There are effective ways to deal with this situation and they should be looked at on a case by case basis. As a first resort, there are prescription discount cards available for anyone to use that typically lowers medicine costs by close to 50%. There are also mail order discount drug programs. In some case it may be beneficial to purchase a separate prescription drug plan in partner ship with your Health Savings Account. A qualified HSA specialist should be able to provide a proper analysis and solution.
7. Now if Bob decides to go with the Plan 2, the Shield Spectrum PPO HSA Savings Plan $4,000, he will experience a further reduction in premium, having to pay just $83 per month. This may seem like more risk than some can bare, but really it isn't. If properly handled, the HSA funds will build up even more quickly in this scenario and Bob will be protected. Furthermore, with a health savings account he is not just giving money away to the insurance companies in the form of inflated premiums.The money in his HSA rolls over from year to year, so Bob is actually investing in himself.

Finally remember that with all three of the plans we have looked at, the maximum Bob would ever have to pay is $4,000 per year. So there is little worry. He is protected from a catastrophic medical event which is the true intended purpose of health insurance.