Thursday, June 14, 2007

Health Savings Plans

One of the most heavily promoted new health insurance products is the health savings plan. It's becoming increasingly popular with employers because it costs them less. That's nice for them, but what about the employees and their families (also known as the "patients")? Is a health savings plan good for them?

First, let's look at the basic features of this plan. It combines a high deductible health insurance policy with a tax advantaged savings account. The patients are expected to pay the first few thousands of dollars of health care expenses they have each year. They save pretax dollars in the health savings account (as much as $2,850 for individuals and $5650 for families). If the account is part of an employer-sponsored plan, the employer may contribute money to the account as well. The account is portable--if the employee changes jobs, he or she can take the account along (including the employer contributions). Your health savings account may be invested in stocks, bonds or mutual funds. Otherwise, the money will usually be put into a bank account that pays relatively low interest.

You can pay medical expenses out of account. In effect, you'd be paying your health expenses with pretax dollars. But you don't have to pay medical expenses from the account. You can save it for future medical expenses, and build up the amount of the fund with future contributions.

As for the insurance part of the plan, that's where the high deductible insurance plan comes into the picture. After you pay a substantial deductible (which can be thousands), the insurance plan begins to pay. Some high deductible plans pay all expenses (i.e., there's no copay). Others require a copay.

The theory behind these plans is that by requiring patients to pay the initial few thousands up front, the plan motivates them to seek out lower cost providers and use their health dollars more efficiently. Supposedly, less money is wasted on needless or high-cost health care. For example, patients might choose an inexpensive generic prescription drug rather than an expensive name brand. The employers benefit because the premiums are lower.

Consumer advocates have complained that health savings plans are difficult for consumers to use because price-shopping for health care is difficult. It you have a broken wrist, you head for the first available emergency room. You don't call several hospitals and ask them to fax you their price lists. If you're diagnosed with cancer, you look for the best physician you can find, not the cheapest. Few patients have the medical sophistication to decide whether or not they need a CT scan, an MRI, an ultrasound, or some combination of the three. Patients required to pay full freight may defer health care when they initially have a problem, and then seek help only when it's gotten worse--and probably more expensive to treat.

If your employer switches totally to a health savings plan, you don't have any choice but to open an account. Do so because it gives you a tax advantage.

If you have a choice, a health savings account is a good idea if you are quite healthy. That means most younger people are more likely to benefit. But some young people have significant health problems and some older people are quite healthy, so focus on your personal situation. If you don't need a lot of health care, the money in the account can accumulate and compound into a nice medical care nest egg for the future.

If you need a fair amount of health care, a health savings account may do little or nothing to make you better off. Indeed, you may be better off with a traditional plan. Remember that with a high deductible health plan, you might have to pay full freight for the first few thousand dollars. That means that a prescription that you're used to getting for a $20 copay may end up costing you $100 because you don't get the subsidized price you used to get. One advantage of traditional plans is that professional plan administrators are bargaining with the pharmaceutical companies for discounts. With a high deductible plan, you could be on your own.

A recent study by the Georgetown University Health Policy Institute and the Kaiser Family Foundation found that in most pregnancies, a traditional health care plan appeared to be less costly than high deductible plans. For copies of this report, go to This is an example of how people who need significant health care often appear to be better off with traditional health insurance.

A person who is well off (annual income of $100,000 or more a year) and needs relatively little health care has a nice little investment gambit with health savings accounts. Stuff as much money in the account as you can, pay for your current medical expenses with aftertax dollars, and let the account balance build up. The money can always be used tax free for medical expenses. After you reach age 65, the money can be withdrawn for nonmedical purposes and all you need to do is pay state and federal income taxes (in other words, it's just like a traditional IRA or 401(k) account). If you withdraw the money before age 65 for a nonmedical purpose, you have to pay income taxes and a 10% penalty. Just beware of one thing: you won't always be healthy. Everyone suffers some deterioration in health eventually. Or they are hurt in a car accident. If that happens to you while you have a high deductible plan, your financial success may not glow as brightly.

Okay, so a health savings account will help the well-off become more well-off. How about everyone else? If your employer gives you a choice between a traditional plan and a high deductible plan, be very careful. Parents should keep in mind the substantial health care costs that kids sometimes have. People with ordinary or less than ordinary health should avoid creating disincentives to seek care. Many medical problems can be addressed fairly easily if you get to a doctor quickly. Wait a while, though, and you could be in big trouble.

The bottom line is that when you're thinking about health insurance, focus on the insurance part of it. Health savings plans tend to confuse things, because they mix investment with insurance. You might make a bad choice because you're trying to resolve too many conflicting considerations. Look at things from the standpoint of which plan gives you the best health insurance coverage. When you or your child is diagnosed with leukemia, you won't give a rat's left ear about investment options or tax advantages. All you'll want is the most comprehensive health insurance coverage possible, something that covers all possible treatments from sunup to sundown. Some high deductible plans are improving the scope and extent of their health insurance coverage, and maybe in the end, they will seem like the best option. But whether the best option is a traditional plan or a high deductible plan, make sure you're buying health insurance when you're considering health insurance plans. You've got 401(k)s, IRAs, mutual funds and plenty of other means to handle your investment needs.

Health News: To lose weight, turn up the lights.

No comments: