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December 18, 2006
A History Lesson in Health Savings Accounts
Health insurance dates back to the late 1600s in England, although it began as disability insurance. In the United States, health insurance - better known then as sickness insurance - came about in the late 1800s. At that time most people were treated in their homes.
Along with the discovery of penicillin and other medical advancements, the need for health insurance grew rapidly. Instead of just being treated in the home, there was a bigger demand for hospital treatment. The health industry blossomed, but along with it came increasing medical costs.
As a society, we historically tend to help the few in need. For example, farmers from surrounding areas would get together to rebuild a neighbor's barn if it burned down. This not only helped the farmer in immediate need but also created the expectation that if someone helped his neighbor, he would get help if a loss happened to him.
Health insurance works on this same neighbor-helping-neighbor principle. A health insurance company may insure a million people and assumes that 10 percent to 15 percent of them incur about 90 percent of the medical costs. By pooling together the insurance premiums from all their customers, the insurance company ensures there is enough money to pay medical claims from the few customers in need at any given time.
Health care and health insurance have developed over the years, offering us choices on how to apply the neighbor-helping-neighbor principle to medical costs. Those choices include low deductibles, benefit-rich plans, doctor office co-pays, prescription co-pays, Health Maintenance Organizations, Preferred Provider Organizations and the newer high-deductible plans. With double-digit increases in health-premium costs nearly every year, the trend has been moving toward higher deductible plans to reduce premium rates.
In August 1996, the Kennedy-Kasselbaum bill was passed, which brought about the four-year trial phase for medical savings accounts. The accounts are now permanent plans known as Health Savings Accounts. These health insurance plans are high-deductible plans with a twist. They integrate a savings account with the health insurance plan and offer added tax-saving benefits.
How does a health savings account work? By taking a high-deductible plan instead of a low-deductible plan, you are going to reduce your premium substantially. The concept of an HSA is to take some of the premium savings and put it into your account. This money can earn interest and grow tax-deferred. You have access to that money (it is yours, not the insurance company's) for any medical expenses you are eligible for according to the Internal Revenue Service.
Besides regular health care costs, HSA eligible medical expenses include hearing, dental and vision expenses. Any money that you put into the account over the course of the year - within IRS limits - can be deducted from your gross income, reducing your taxable income. This deduction is available whether you use the health savings account money or not.
When you withdraw money from your account for IRS-allowed medical expenses, the withdrawal is not taxed. If you do not use the money in your account, it just rolls over to the next year. This is not the old flexible spending account approach that "if you don't use it, you lose it."
The health savings account concept allows consumers to take more control of their health care expenditures. Instead of giving precious dollars of earned income to the insurance companies that they invest and make money on, you are keeping a larger portion of the premium and investing it yourself for your own medical expenses.
Health insurance companies charge premiums based on a lot of risk factors. One of these risk factors is the amount of your deductible. With a low deductible, the insurance company charges a higher rate because the risk of your using the health insurance is much greater. If you do not use the health insurance, the insurance company still keeps your premium. By choosing a higher deductible, the risk of you using the benefits is reduced dramatically. This means that if you do not need the insurance benefits, you have kept the money in your own pocket.
Let's face it. The original purpose of health insurance was not to pay for doctor visits or one or two prescription drugs. It was designed for the catastrophic losses that could bankrupt you.
We do not expect our auto insurance to pay for oil changes, tires or brake jobs, so neither should we expect our health insurance to pay for all the little things. By getting back to the original purpose of health insurance we can help control the premiums, reduce the yearly rate increases and keep more money in our own pockets.
Is a health savings account for everybody? No. But it does make sense if you have earned income, want to reduce premiums on your health insurance, want to help control premium increases, are age 18 to 64 and would rather keep some of your premium dollars in your own pocket rather than giving it to the insurance companies.
Posted by Wiley Long at December 18, 2006 03:11 PM