C I S -- crime show or darn insurance?

If you're not familiar, a HSA is a pre-tax account where you can save money from each paycheck to pay for a variety of qualified medical expenses. This doesn't just include visits to the doctor, but prescriptions, eyeglasses, and even over the counter medicine. Most people use an HSA for medical expenses that aren't covered by their health insurance plans, but with a maximum annual contribution of $6,150 (for people under 55), you also have the option to use your HSA as a personal insurance plan (that rolls over from year to year) when paired with a high deductible health plan.

The biggest disadvantage to a HSA plan is that you're starting off with a small amount of money. Paying out of pocket can be difficult if you're sick or injured when your HSA holds a low balance. Over time, however, you'll end up with a hefty sum to cover your medical expenses and—best of all—when you don't spend the money, you get to keep it. HSA options vary so you may not be able to roll your own health insurance this way, but check with your employer if you're not happy with your traditional coverage.

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.

1. 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.
2. 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.
3. 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.
4. 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.