How Health Savings Accounts Work
We recently blogged about health insurance. which garnered some thoughtful comments on both sides of the debate. Solving our healthcare challenges is certainly beyond the scope of our blog. On the other hand, we agreed to provide a little bit more about the HSAs and how they work. So we offer the following with the caveat that future posts will deal more directly with finance.
Health savings accounts (HSAs) are tax-protected savings accounts connected with a high-deductible, low-premium plan. Most HSAs provide for a fully covered annual physical and then a high deductible for any other medical needs. The HSA account carries over year to year and can be used tax-free to pay for any medical, dental and most alternative medicine treatments. Upon retirement HSA funds can be withdrawn without penalty for retirement (however funds used for expenses other than medical are taxed as income).
Setpoint (Joe’s company) adopted a HSA plan in 2004. While this type of insurance takes some getting used to, it has been a real benefit to Setpoint and to Setpoint’s employees. For example, Setpoint had two very serious medical issues with employees and/or spouses. With a traditional plan, Setpoint’s medical costs went up dramatically. When they switched to the HSA, they worried about how the plan would affect the two employees. (One of the arguments against HSAs is that they cost less for the healthy but more for those with serious illnesses). For Setpoint, both of the serious cases saved thousands of dollars with the HSA plan. These are the reasons why. First, Setpoint was able to save on premiums and was able to contribute those savings to the employees’ HSAs. Second, the employees no longer had to contribute as much to insurance since the premium was lower. Third, Setpoint chose a plan in which employees have 100% coverage once the deductible is met. Taking all of that together, the HSA saved those with health challenges thousands of dollars on an annual basis.
With the HSA, Setpoint’s premium increases stabilized and
the healthy employees are saving for the future. Clearly, every plan is different, and our sample size is small, but we felt this was worth a discussion.
The financially intelligent message here comes from Joe’s personal experience. When he or someone in his family needs medical care, he lets the provider know that they are on an HSA, and they pay cash. This usually leads to discounts. Joe and his family always ask for and understand the costs of procedures. One of the many problems with the economics of healthcare is the lack of transparency of costs. In our current system we typically pay a fixed co-pay, so consumers (and sometimes the providers) of healthcare have no sense of the real costs. It seems to us that one of the many first steps in controlling costs is that consumers must understand the true costs of their care.
In Joe’s first year with the HSA his son needed a simple surgery. He asked for a cost estimate and the response was, “Why does it matter? You have insurance.” After explaining why they needed the information, the administrator still could not come up with a price (although he finally did after several phone calls). That was in 2004. Today costs are easier to get, and the transparency issue seems to be improving.
We believe that free market based plans like HSAs are our best chance to control medical costs. As medical costs become more transparent and providers become better equipped to give estimates, consumers will become more aware of and concerned with the true cost of medical procedures. Then providers will innovate and find ways to deliver services at lower costs.
We also believe that providing for the poor and uninsured should be a priority of healthcare reform. HSAs are only part of the equation.
Karen Berman is founder and co-owner of the Business Literacy Institute, with Joe Knight. Joe is CFO at Setpoint Companies. The revised edition of their classic Financial Intelligence will be published in February.Source: hbr.org
Category: Personal Finance