Health Savings Account Blog

The accounts make sense for people like Neal Van Zutphen, partner in a Mesa financial-planning firm who is responsible for his own medical coverage and can afford modest health costs as long as he's insured for catastrophic items.

"I'd rather pay the upfront deductibles to make sure the big stuff is covered," he said.

Health savings accounts can be set up with a bank, insurer, mutual-fund firm or other financial outfit to pay for current or future health-related costs until insurance kicks in. Cash not used in a given year isn't forfeited but remains in the account and grows tax-sheltered. Contributions are tax-deductible, and withdrawals come out tax-free if used for qualified medical expenses, which exclude elective cosmetic procedures but include most other things.

Along with mainstream medical costs, "You can use an HSA for dental, over-the-counter drugs, vision, acupuncture, chiropractors, medical-related travel and a lot more," said Craig Shelley, an Arizona native who now serves as senior vice president for American Community Mutual Insurance Co. in Livonia, Mich.

Many types of preventative care, such as mammograms, pap smears and annual check-ups, are paid for by the underlying insurance and don't require consumer expenditures.

These accounts aim to encourage use of high-deductible medical insurance policies, which feature relatively affordable premiums but which require consumers to pay more in front-end costs before insurance kicks in.

In fact, you can't establish an account without obtaining high-deductible coverage.

With these accounts, the assumption is consumers will shop for health care more carefully in hopes supply and demand factors will reign in medical inflation.

"The premise of the HSA concept is that consumer-driven health care is the answer," Celent analysts Alenka Grealish and Matthew Josefowicz wrote in a recent report. "Once consumers are responsible for payment, they will shop around and select the low-cost provider."

As Shelley sees it, medical inflation will continue to spiral out of control until consumers get more involved.

"The typical consumer has no knowledge or sense of what the real costs are," he said.

Insurers such as Aetna, Assurant, Cigna, Golden Rule, United Health, WellPoint/Anthem and American Community Mutual offer policies compatible with health savings accounts. They require a minimum deductible of $1,000 for individuals and $2,000 for families, with those amounts rising to $1,050 and $2,100, respectively, in 2006.

Policies can be obtained through work or on your own.

Other firms offer the savings and investment accounts such as JPMorgan Chase, Wells Fargo, US Bank, M&I Bank, Fidelity Investments and Vanguard Group.

The National Association of Health Underwriters (www.nahu.org) provides an Internet link to find agents who can help set up an account.

The accounts are flexible and portable, which means you retain access to the money even if you change jobs.

Also, eligibility is lenient, unless you're claimed by someone else as a dependent or covered by programs such as Medicare. No income restrictions apply, but you must be younger than 65. As with other insurance, pre-existing medical conditions might be excluded.

The tax winkles somewhat resemble those of Individual Retirement Accounts and 401(k) plans. Before age 65, non-medical withdrawals are taxed as ordinary income and a 10 percent tax penalty applies. After age 65, the penalty disappears but a tax bite remains.

Account holders face a maximum out-of-pocket expense of $5,100 (individuals) or $10,200 (families) this year, with those figures rising to $5,250 and $10,500 in 2006.

Assuming you're able to contribute more to an account than you spend over time, the balance can be used to meet post-65 medical costs or as a supplementary retirement fund, Van Zutphen said.

Critics say that not everyone needs a health savings account or should have one. If you already have other medical insurance and you're satisfied, especially if your employer helps to subsidize it, you should stick with that program. The accounts also don't make much sense if you couldn't afford to meet high deductibles using current savings.

"If you don't have enough emergency funds, it's not an appropriate tool," Van Zutphen said.

But Shelley says that the accounts can work for just about anyone, especially people who expect to build up cash quickly. In fact, some financial firms offer lines of credit against future account contributions that can get around potential high-deductible problems in early years.

"We've trained people to believe low-deductible, low co-pay is the best insurance," Shelley said. "But if you do the math, it comes out differently."