Unraveling the Mystery of High Deductible Health Savings Account (HSA) Plans

Understanding the Concept of Health Savings Account (HSA) Insurance Plans

Just as we don't expect car insurance to cover oil changes or minor repairs, or homeowners insurance to replace carpeting after every spill, HSA Insurance Plans are not designed to cover routine doctor visits, prescriptions, and minor medical bills. However, many HSA plans still cover annual physicals, OBGYN exams, and immunizations before the deductible is met.

Almost all health carriers, such as Anthem-Blue Cross, Health Net, Aetna, Blue Shield, etc., offer HSA qualified health plans. To be "qualified", these plans must adhere to certain IRS guidelines, including higher deductible amounts. This is why HSAs are often referred to as high deductible health plans (HDHPs). Deductibles for these policies start at $1,100 for individuals and $2,200 for families in 2008, and can go as high as $5,600 for individuals and $11,200 for families. As a general rule, a higher deductible results in a lower premium. HSAs typically offer significantly lower premiums, with savings ranging from 25% to 50% over traditional plans.

The Risk Buffer of HSA Qualified Insurance Plans

While there is a degree of risk involved with high deductibles, the HSA account aspect of the HSA qualified insurance plan provides a substantial risk buffer. 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 means that anything you pay to cover your policy's deductible is tax-free.

A Real-World Example of HSA Benefits

Let's consider a real-world example. Bob, a thirty-year-old man, is looking to change his existing health insurance plan. He currently pays $366 per month for his Blue Shield Spectrum PPO 750 Plan. After meeting the $750 annual deductible, this plan allows him $35 copays for doctor visits, and 30% coinsurance should he 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 is now considering switching to a Blue Shield HSA plan due to a friend's recommendation. Two plans that catch his eye are the Shield Spectrum PPO HSA Savings Plan $2,400 and the Shield Spectrum PPO HSA Savings Plan $4,000.

Let's take the first plan with the $2,400 annual deductible. The monthly premium on this plan decreases to $163 per month, saving Bob $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, with $35 copays for doctor visits, 30% coinsurance for hospital stays, lab work, etc., and an annual out-of-pocket maximum of $4,000. However, this plan offers no coverage for either generic or brand name prescriptions until the full deductible has been met.

The Financial Benefits of Switching to an HSA Plan

Since Bob is saving $203 every month on premium, he can now contribute that savings entirely to his new HSA account. After 1 year, he will have contributed $2,436. Let's assume there is a moderate 5% average interest gain on those funds. At the end of the year, he will have a total of $2,558. 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.

When it comes time to pay taxes, Bob, who earns $60,000 per year at his job and is in a 25% tax bracket, can deduct $2,558, saving him $640 off his year-end tax bill. Adding together the $2,558, which is forever Bob's money, and the $640 he would normally be paying in federal taxes, we arrive at $3,198. In one year's time, switching to the Shield Spectrum PPO HSA Savings Plan $2,400 would increase Bob's income by $3,198.

Key Points to Consider When Switching Health Plans

Here are some key points to consider when switching health plans:

• Both Blue Shield Plans are PPO plans. They both provide equal access to the same network of doctors, hospitals, and specialists.
• 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.
• 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.
• 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. 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.
• Keep in mind, when Bob does actually retire, his income will likely go down, as will the percentage of tax he will be obligated to pay on his HSA withdrawals.
• 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 partnership with your Health Savings Account. A qualified HSA specialist should be able to provide a proper analysis and solution.
• 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 bear, 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.