Today’s show is very timely considering how much health insurance has been in the news lately. It is a topic that affects every man, woman, and child in this country and is not always a straight-forward and easy thing to understand.
Because I have done extensive research on the topic in trying to select which plan I will use for my family, I wanted to share what I’ve learned. If you have been paying attention, then you have probably noticed that there has been a progression as to what type of health insurance plans are popular. In recent memory, we have transitioned from PPOs to HMOs. Individuals liked the idea of co-pays and being able to visit their doctor and then the insurance company would cover the rest.
Two new players have recently entered the scene, however. These new types of plans (Health Reimbursement Accounts and Health Savings Accounts) now make you a more active participant in your healthcare. These plans have become popular now because they charge a lower premium, but you have to cover more of the cost up front. This is great because it provides the incentive to not treat healthcare as an “all you can eat buffet”. With these plans you now have some skin in the game.
As you listen to the show, I describe the differences between these two types of plans:
HRA
- Your employer primes the pump by allocating free money into your HRA account
- You cover 100% until deductible is reached (you could very well save this amount with the lower premiums)
- Once you’ve met the deductible, you’re responsible for co-insurance (i.e 85/15) until you reach your out-of-pocket limits
- If one family member is the main use of medical, then HRA is better than HSA when considering the out-of-pocket limit
- Under this type of plan, you may want to consider using a Flexible Spending Account to cover the donut hole, co-insurance, or uncovered items such as dental exams.
- These plans usually offer some sort of incentive for good behavior (annual physical)
HSA
- These plans have significantly lower premiums
- You pay everything until deductible is reached (no co-pay or donut hole)
- You get above the line tax deductions (direct decrease to income) for contributions made to this type of plan
- Co-insurance is even more favorable than HRA (i.e 90/10)
- This plans offer the potential to save for the future with Uncle Sam funding part of the bill through tax savings
- You probably won’t use an FSA with this type of account
The most important thing you can do when selecting an insurance plan is to understand how the plan works and what your responsibilities are under the plan. If you can understand this, it becomes much easier to select the plan that is most advantageous to your particular situation.
As you listen, I go very in depth to explain the inner workings of each of these plans and why one or the other may or may not be suitable for you. If you do elect to use the HSA plan, you can use this website to research the various custodians that offer HSA accounts.
To close out the show, I share a new venture that Cheryl Holland and I have created called Advisor Skills. If you are in the financial industry, or are thinking about one day entering into this industry, or are maybe just curious about this industry, you should definitely check it out!
Brian,
Great podcast as always. I don’t think I’ve ever nodded my head so much in agreement while listening. My employer FINALLY began offering HSA’s last year and I was so giddy and excited I was literally foaming at the mouth to sign up. I immediately began educating and preaching to my co-workers (almost to the point of annoyance) of the benefits of the HSA. I was able to convince a few to risk the upfront exposure and take the leap because the back end upside is so great. I’m still amazed some people just don’t get it. I often wonder if they’re a “pay check to pay check” household and just can’t take the initial risk. Who knows? I, however, look forward to my later years when my wife and I will have a sizeable amount of money to fall back on if any medical needs ever arise (baring any major changes from our almighty, all-knowing Congress, ~rolls eyes~).
Thanks again for pointing out how great these savings vehicles are. HSA’s give you such peace of mind.
~Josh
Hello Brian,
In California there are SERIOUS issues with HSA. We wanted to use the HSA and it did not work for us – here are the reasons:
1) If I want to see a chiropractor once a month – it is not covered. So I have to cover this 100% as it will not reach my deductible.
2) THIS IS CRAZY – A spouse cannot use the common HCSA if the other spouse is using an HSA! Are you kidding me! What if HSA is not an option for the other spouse – too bad! So I would have to be under my spouse’s HSA/HRA and not use my company’s benefits.
3) CA taxes my HSA!!!! I love California!
4) HSA cannot be used in advance! So if I put aside 1000 bucks for HCSA for the year, I can use it starting January 1st – not the case with an HSA!
There are a few other issues – but in the end these issues kill the idea for me!
I was wondering if you would be able to reccomed a HSA account service provider. I have had a HSA account for 2 years- which I think is great, but the HSA account I have with Bank of America is expensive $4.50 per month and their webiste is very confusing.
PS –love the postcasts!
I need to add one thing that was left out of this show. This was brought to my attention by Gil, so Gil, thank you!
While I mentioned that nonqualified distributions from an HSA will be subject to tax, I neglected to mention that these distributions are also subject to 10% penalty (similar to an IRA). In 2011, this penalty goes up to 20%. Be sure to keep this in mind when choosing which plan is best for you and your family.
The industry is trying to make health care insurance more like car and home owners insurance. They want you to use the plan for major things and pay for the little stuff yourself. If your kid throws a ball through your window, you don’t file a homeowner’s claim, you pay for it yourself. If a tree falls on your house, you file a claim. That is they way they want health insurance to be. The low copay HMOs encouraged people to run to the doctor for every little thing, when most of the time you just needed to take it easy and/or take an OTC medication and things would get better on their own in a few days. That really is a waste of healthcare resources to be running to the doctor all the time. Sure, some things could be serious and should be looked at immediately, but most of the time you know when a medical condition is really serious and when it is just an inconvenience.
Like other types of insurance, you would expect the premiums to be lower in exchange for a higher deductible, but that isn’t always the case with HDHPs. My wife’s 600+ person company is switching everyone to an HDHP next year (no other plans will be offered). The premium for the HDHP next year is going to be higher than the premium for the HMO this year, AND the company is not contributing anything to the HSA. So in exchange for accepting more risk, we are also going to have higher premiums and a $4000 deductible. The HDHP is guaranteed to cost us more than the HMO, even if we never go to the doctor, and will cost us MUCH more if we do get sick.
The other problem with HDHPs (but probably not for your listeners) is that they can be hard on some workers. When my previous employer introduced an HDHP it had a $3000 deductible. I mentioned to a co-worker that one downside is that if something really bad happens early in the year, you might have to front most of that $3000 since your HSA contribution was taken out throughout the year. But, I said, “it’s only $3000 so it’s not that big a deal.” Well, they looked at me like I was crazy. Some workers just don’t have enough saved to deal with large medical expenses like that and prefer the regularity of a defined copay even if it costs more in the long run.
The real problem with health care costs is that it’s not a true free-market system. I can’t really shop around for someone to fix my broken leg, or wait until there is a sale on prostate exams. The insurance companies have fixed the costs for everyone so it doesn’t really matter who you see or where you get a procedure done (from a financial perspective). If we as a country want to offer basically unlimited health care on demand to everyone who can afford it, then we are free to make that choice, but we need to understand that is an expensive choice. If we want to decide some procedures aren’t worth the expense or some people are too old/young/sick/frail/etc to make it worth the expense, then we can make that choice too. But we can’t continue to offer unlimited health care on demand to everyone and expect it to cost $200/month. The only way to spend less on health care is to perform less health care and perform it on fewer people.
It’s like the difference between leasing and buying a car. Leasing a new car every few years costs more in the long run than buying one and driving it into the ground. But if you’re the type of person who likes to drive a new car and wants to spend your money on that, that’s your choice. As long as you understand it’s more expensive than other options. What you can’t do is expect to lease a car and have the monthly cost be the same as the amortized monthly cost of buying a car. The savings come from changing your behavior and expectations.
Brian,
Great podcast. Enjoyed immensely. Couple of things that I wanted to point out. I believe you mentioned if you have an employer who offers HSA, you’d be responsible for finding an HSA Acct service provided. I’m fortunate, my company (GE) does all the legwork and sets up an acct. with Optimum Bank (no monthly charge). Also, you stated HSA’s offer a 90/10 co-insurance rate. Unfortunately, I’m still at the 80/20 rate. Other than those 2 snippets, very informative show. I’m glad I switched to the HSA option last year and will put in the full $6150 this year. Laslty, 1 item to be careful of is if you go the investment route, be careful of redemption fees. Make sure you have enough money in the HSA that is liquid to cover any unforseen expenses.
Mike/Colorado
Quick question!
I have an HSA with an HDHP from Aetna. My deductible is $3,500. To meet the deductible, can I include all of my medical expenses: doctor visits, OTC drugs, chiropractic services, optometrist. Or do they only count actual medical services, such as doctor visits, broken arms, etc.
If the latter is the case, if I go to clinics for all my doctor work and pay cash, since it is much cheaper, do I just save all my receipts and then send them to Aetna? Or do I have to go to only in-network doctors to be counted as hitting my $3500 deductible?
Does anyone have actual experience with this?
This podcast got me thinking about going with an HSA. Thing is, my employer doesn’t offer one. In general terms, is this option only cost effective if it’s offered through an employer? I’m healthy and in my 20’s so I can’t imagine it would be overly expensive to go out on my own but I’m just wondering if the benefits of HSA’s dissolve if you end up getting one that’s not offered through an employer.