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November 11, 2008
Health savings accounts can help you save now and later
The concept behind Health Savings Accounts is pretty simple: You put money into a tax-favored account to pay for medical expenses now and in the future.
For most people, the hard part is understanding the high-deductible health plans they must choose to qualify for a Health Savings Account. These plans require participants to pay more of the cost of care before insurance picks up its share.
Preventive care and diagnostic tests, however, often are covered in full.
"We don't want them to scrimp on those," said Mike Debo, a sales executive with Anthem Blue Cross and Blue Shield in St. Louis. "We don't want them to be tempted not to have those tests done."
High-deductible health plans are becoming more common as employers search for ways to cut health care costs. The thinking is that consumers will be more selective about the use of health care if they're paying a bigger share of the costs, said Katie Davis, senior marketing specialist at Enterprise Bank & Trust Co.
"We have to get people to understand that the costs of health care are expensive," said Randy Ressel, vice president of sales for Anthem Blue Cross. "Co-pays mask the cost of care."
High-deductible plans cost less than conventional insurance, so many employers agree to put money into health savings accounts that can be used to offset the deductible. Employees also can contribute to the accounts. The money can be used for a broad range of medical expenses, from meeting deductibles to paying for medicines and medical equipment.
Next year, a plan must have at least a $1,150 deductible for an individual and $2,300 for a family to qualify as a high-deductible plan. (That's up from $1,100 for an individual and $2,200 for a family this year.) The maximum out-of-pocket cost for such plans next year will be $5,800 for an individual and $11,600 for a family.
Instead of co-pays of $10 to $40 for doctor visits, consumers pay for services until they reach the deductible and then pay a percentage of the cost up to the out-of-pocket maximum. Rates for doctor visits and other services are negotiated by an insurance company, but consumers are encouraged to shop around for the best deal.
Next year individuals can put up to $3,000 a year in a Health Savings Account, and families can add up to $5,950. If you're 55 or older, you can put in another $1,000.
The accounts have triple tax benefits. The money comes out of your paycheck before taxes, and it grows tax-free in the account. When you use the money to pay for medical expenses, there's no tax on that, either.
Jay Savan, a principal with Towers Perrin in Clayton, said the plans can be a good deal regardless of your health or age if you understand them and plan for expenses accordingly.
Buying insurance is all about balancing fixed and variable risks, he said. The fixed risk is the premium. The variable risk is the amount you'll spend in a year on health care for deductibles, co-payments and other costs.
High deductible plans cost less, reducing the fixed risk. Consumers can prepare for the variable risk with the health savings account. If actual costs are less than the amount you saved, you have money left for future care.
Savan said he recently priced a traditional preferred provider plan with a $500 deductible and $2,500 out-of-pocket maximum against a high-deductible plan with a $2,500 deductible.
The traditional plan cost $1,600 more in premium, in addition to the $2,500 deductible. In addition, the buyer of a traditional plan would have pharmacy and physician co-payments, which don't count against the out-of-pocket limits.
With the high-deductible plan, the $1,600 savings could go into a health savings account. The account's tax benefit of $448 (for someone in the 28 percent tax bracket) translates into $2,048 in purchasing power, Savan said.
Consumers need to estimate their total health care costs for a year under both types of plans. They need to make sure they're comparing the same kinds of care and health care providers as well. For some, the health savings account makes sense. For others, a traditional plan may work better.
Unlike flexible spending accounts, health savings accounts aren't a use-it-or-lose-it proposition. You don't have to use the money the same year you put it into the account.
The money can be invested in a variety of vehicles, from interest-bearing accounts to mutual funds. Health Savings Accounts also are portable, which means you can take the money with you if you change jobs or retire.
In retirement, money from a health savings account can be used to pay premiums for Medicare Part A or B or for long-term care insurance. You can take money out for purposes other than health care, but then you pay tax on the withdrawal.
Mark Baker, a health savings account specialist with Golden Rule Insurance Co., said the plans are especially appealing to self-employed individuals because they can reduce premiums significantly and sock the savings away in an HSA.
"We're also seeing a lot of families who are working for employers who can't afford to buy them coverage," Baker said. Some employers offer to give employees a fixed amount to buy coverage.
"They want an affordable plan that will cover them for something truly serious," Baker said. "They can put money away and save it and use it for normal health care for their families."
Posted by Wiley Long at November 11, 2008 10:56 AM