Since their creation as “tax-advantaged” accounts by Congress in 2003, the prevalence of health savings accounts (HSA) has been growing steadily despite the reality that the health insurance industry doesn’t like them.
Even with the industry floating “Fear, Uncertainty and Doubt” (a.k.a. FUD-factor), consumers are starting to see the light when it comes to high deductibles and HSAs, and it can be easy to understand why.
So what makes HSAs so great?
When you purchase a low-deductible health insurance plan, the carrier charges you more in premium for the first few thousand dollars of coverage than the amount you’d pay if you had paid your medical bills directly.
Here’s an example:
If you have a $0 deductible family plan and you increase the deductible to $2,000, you would get roughly $3,600 back in premium savings to pay a maximum $2,000 in out-of-pocket costs for medical bills. That’s $1,600 of free money! If your family happens to stay healthy all year, you might save $3,600!
Expanding on this simple revelation, it turns out that if you can find a family policy with a $12,900 deductible (the maximum deductible considered HSA compliant in 2015), your premium savings should be about $14,000—equating to savings between $1,100 and $14,000 depending on how healthy your family stays in a given year.
So why wouldn’t you get a policy that guarantees you save money regardless of your health status, but could allow you to save $14,000 each year if you’re lucky?
If you run a business, like me, with a bunch of employees, the savings realized with a health plan design change is far more dramatic. The law of averages tells us that only a small percentage of your employees will have significant health expenses in any given year, and for each of those few families you can expect to save only $1,100. In fact, The US Department of Health and Human Services issued a study recently that shows that the median family, with everyone under the age of 65, consumes under $2,800 of health services per year. So in the most common cases, you will save $11,200 ($14,000 premium savings minus $2,800 median medical bills = $11,200) per family!
In all cases you save by going to the maximum deductible even if every employee had a catastrophic health incident each year!
Based on the information I’ve shared here, and other information relating to individual rates, expected losses, and distribution of health service consumption, your average business of 100 employees can save roughly 37.5% or about $600,000 each year!
So what does this all have to do with HSAs?
A $12,900 family deductible sounds pretty scary to most employees, especially if they recognize that the reimbursement for these costs are all held by the employer. “What happens to me if I have to change employers, or worse, get caught in a RIF and need to go on COBRA?” Potential for leaving an employee with a large out-of-pocket exposure is not a popular idea for responsible employers, let alone rightfully concerned employees. But there is a way to counteract out-of-pocket exposure for your employees.
Health savings accounts (HSAs). As long as a health insurance plan does not cover the employee for anything in the first $1,300 single/$2,600 family of medical and prescription drug expenses, that employee is eligible to have their employer fund their health savings account for any amount up to $3,350 single/$6,650 family per year. If the employer doesn’t fully fund those amounts, the employee may take a tax deduction for any additional amount they contribute themselves to get to those limits. The HSA is a tax-free savings account, owned by the employee that grows tax-free! The employee can make tax-free withdrawals from their HSA to pay for virtually any out-of-pocket medical expenses. Unused balances in the account grow tax-free into larger savings, and can be invested in similar ways to a 401(k) plan allowing savings to grow rapidly. If a job change occurs, all balances in the HSA are owned by the employees and remain in their accounts. When they reach the age of 65, the employee can make withdrawals in the same way they can in their 401(k), or they can continue to use the money tax-free for health expenses and long-term care insurance.
But wait, there’s more!
Since individuals with high deductibles are responsible for paying more out-of-pocket for medical expenses from their HSAs until a reimbursement arrangement kicks in or deductibles are met, they are more likely to seek preventive care, including annual physicals and cancer screenings (because under the ACA law these costs can’t be subjected to the plan deductible). In general, there’s a new financial incentive for employees to stay healthy so they tend to live healthier lifestyles. In fact, a 2011 study by AHIP revealed that those enrolled in an HSA sought preventive care at higher rates than those enrolled in a traditional Preferred Provider Organization (PPO) plan. Since the industry has reached consensus that preventive care is a major factor in improving our health and lowering costs, chalk this up as another win for HSAs.
In a nutshell, we’re much better off when we increase our deductibles to the highest amounts allowed and then tuck away the premium savings in our HSAs for use when medical procedures are not considered preventive care. We become empowered to reap the rewards that should accompany good health and savvy medical care decisions. When we’re healthy, we save money. When we choose lower-cost providers, we save money. When we do get sick, we have a funded account that completely covers our out-of-pocket expenses, and a health insurance plan that provides great coverage after we exceed our deductibles. We should be designing all of our health plans to reward comparison shopping and healthy behavior.
Mark Galvin’s activities and advocacy around consumer-directed health plans (CDHPs) and health savings accounts (HSAs) have been covered in the Wall Street Journal, People Magazine and a number of other high-profile news outlets.