Health Savings Accounts: A Better Way?
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For those who need it, conventional health insurance may not be an affordable option, since prior history causes rates to rise, sometimes out of reach. My conventional individual policy costs $480 per month, has a $1,000 deductible, and pays 80% once the deductible is met. So I'll pay $5,760 in insurance premiums this year, or $6,760 out of pocket (the cost of the insurance plus the deductible) before my insurance pays a dime.
There are other benefits, of course, since even before I meet my deductible, they'll reduce doctor bills to the contract rate. I've seen bills for a doctor visit come in at $750, only to be reduced to $150 by the insurance company. So just having insurance in place saves me money, even if I never use it.
There ought to be a better way. I recently priced a high decutible policy coupled with a health savings account (HSA). The policy was quoted at $133 per month, though with my prior history it'll likely be closer to $248 per month. Still, that's a substantial savings for the $480 I pay now. The policy has a $5,000 deductible, after which it pays 100%— meaning my out of pocket for the year is limited to $5,000 plus the cost of the insurance.
The HSA linked to the policy provides an added benefit: I can put money in pre-tax and, as long as I use it for medical expenses, withdrawals are tax-free. Currently the law limits my annual contribution to $2,900, far below the $5,000 deductible, so for the first year or two I could have to pay for my expenses with after-tax money. But it sounds pretty feasible. Any money I don't spend carries forward from year to year. And if I don't spend it on medical exdpenses, when I retire I can take money out as if the HSA was an IRA, paying income tax at my then-current rate.
The cost of the policy would be about $2,976 per year. The $2,900 HSA contribution is pre-tax; if I'm in the 20% tax bracket, my out-of-pocket cost for this contribution is only $2,332 (that's 2,900 less the 20% income tax I would have paid on that money had it not been contributed). So my base cost would be $5,302 (the cost of the insurance plus the net cost of my HSA contribution). That's cheaper than the $5,760 my conventional policy costs.
That's assuming I don't have any medical expenses. But let's compare scenarios between the two policies. With the HSA-linked policy, I've already made a $2,900 contribution to my HSA. So if I spend $2,900 in medical, my annual out-of-pocket cost is still $5,302. With the conventional policy, I'd spend $5,760 for the insurance, plus $1,000 for my deductible, plus 20% of the $1,900 balance, or $380— that's a total of $7,140, over $1,800 more than the HSA-linked policy.
Let's assume that I spend $5,000 in medical this year, the amount of my deductible under the HSA-linked policy. The HSA-linked policy costs $5,332 and pays for the first $2,900. I pay the remaining $2,100 out of pocket, for a total of $7,432. How does this compare with my conventional policy? I'd pay $5,760 for the insurance, plus my $1,000 deductible, plus 20% of the remaining $4000, or $800. That's $7,560— still $128 more than with the HSA-linked policy. (If I've got money in my HSA from prior years, the cost of care under the HSA-linked policy is even lower.)
What if I have a bad year like I did in 2007? Let's assume I need major medical care costing $25,000. The HSA-linked policy costs me the same $5,332 for the first $2,900 of expense, then I pay the next $2,100 out of pocket, and the policy pays 100% of the remainder. My out of pocket cost would be $7,432. With the conventional policy, there's a $5,000 out-of-pocket maximum, so my cost would be $5,760 for the insurance, plus my $1,000 deductible, plus 20% of the balance up to $4,000 more. So my maximum out-of-pocket would be $10,760— a whopping $3,328 more than with the HSA-linked policy.
With these costs and assuming a 20% tax bracket, it appears that the high-deductible, HSA-linked policy beats a conventional policy in virtually every scenario. The higher your tax bracket, the more you'd save. You'll want to run the numbers for your own situation, considering the cost of insurance and your actual tax bracket, along with any benefit you might receive from itemizing medical expenses on your tax return (we rarely have enough deductions to itemize). Still, if you're paying too much for health insurance, check out an HSA-linked policy— it could save you money.
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