Your Health-Care Woes: Solved

April 25, 2006
HSAs are smart business.

A quarter of large employers now offer a consumer-driven health plan. And almost 70% are thinking about introducing one.

Why? Because this innovative approach to health insurance -- increasingly popularized by Health Savings Accounts -- is one of the most effective ways to control costs. In fact, a 2006 survey by Deloitte Consulting just found that cost increases for consumer-driven plans in large firms will average only 2.6% this year. Meanwhile, other plan types will see their costs increase from 6.6% to 7.5%.

So when are you going to get on the bandwagon?

Maybe you're an entrepreneur just starting out and you need to insure yourself. Maybe you're a small business owner and you need a good insurance plan to attract top-notch employees. Maybe you run a multi-million-dollar company and are looking to provide better insurance for your team -- and cut costs.

A Health Savings Account just might be the perfect solution for you. HSAs are just two years old, but they're already transforming America's insurance landscape. Over three million have been established so far, and more and more savvy folks are coming on board every month.

A Health Savings Account? What's that? Millions of otherwise intelligent people still don't have a clue. They're really not so complicated. A HSA makes health coverage more like, well, insurance. After all, the reason you buy car insurance is to protect yourself in the event of a catastrophe. Routine things like maintenance and minor repairs you take care of yourself. You don't "insure yourself" against a flat tire or a new turn-signal bulb.

An HSA is actually a tax-free bank account that works in tandem with a high-deductible health insurance plan. That plan is far cheaper than traditional insurance, which is vastly over-priced because it covers every nick and scratch. A high-deductible plan protects you from serious medical bills.

To be precise, the insurance kicks in after you've paid the first $1,050 to $2,700 in expenses, depending on your plan.

Part of what makes HSAs so revolutionary is how you pay for those routine "carwash" expenses. The Health Savings Account is sort of like a 401(k). You don't pay taxes on the money you contribute or withdraw, so long as the expenses are health-related.

HSAs can be funded by either an employee or an employer. The savings roll over into subsequent years, earning interest. So you can build up a nice nest egg over time. If you're an employer, you can offer your employees an HSA for much less than traditional insurance. And if you're an entrepreneur, you don't need an employer to open one.

So how exactly does an HSA work?

Let's say you deposit $100 per month into your HSA, and your company matches with an additional $100, but you only spend $300 each year on medical expenses. Within a year, you'll have saved $2,139 tax free, at 4% annual interest. Keep it up, and after 30 years -- right about the time you retire if you start young -- you'll have $121,459 socked away.

And here's the best part: Once you're 65, there's no penalty for dipping into your HSA for any expense whatsoever, not just health-related ones. So in your golden years, you can use the HSA as a tax-deferred retirement account, like an IRA. You can even pass the money on to your children.

An HSA is an incredible savings opportunity. The average monthly premium for an HSA-eligible health plan is around $111. Meanwhile, the average monthly premium for an employer-provided plan is $308. So switching to an HSA would save you $2,364 each year. If you own a business, imagine the savings over a whole group of employees.

And it's your money. You don't have to fork over $200 each month to a big insurance company for services you're probably not really using. With HSAs, you could sock that money away tax-free.

There's a lot less paperwork involved with HSAs, too. Instead of dealing with co-pays, navigating the terms of what's really covered, submitting forms for reimbursement, and wondering how much you'll get back, you just pay out of your HSA. Most HSAs come with ATM cards or checkbooks.

Also, more medical expenses can be paid out of HSA funds than traditional insurance plans cover. Contact lenses, dental care, prescription drugs, even psychoanalysis can all be paid out of your HSA.

Most important, you, not a remote bureaucracy or insurance company, take control of your health care. Maybe you're a traditionalist who wants to spend your money on doctor visits and prescription medicines. Or maybe you'd rather visit an acupuncturist and chiropractor. An HSA suits any health care personality.

This return of control to the consumer may be why people with HSAs pay more attention to their health. McKinsey found that, compared to their colleagues with traditional plans, employees with HSA-style accounts were 30% more likely to get an annual physical, 25% more likely to engage in healthy behaviors, and 20% more likely to follow their doctors' recommended treatments.

The other thing that's so innovative about HSAs is their portability. With HSAs, your health coverage is no longer tied to your employment. If you change jobs -- and who doesn't these days -- or lose one unexpectedly, your HSA savings go with you. Who wants to switch doctors and figure out the new rules each time you move on or up?

Not surprisingly, HSAs are now making a dent in the numbers of uninsured. As many as 40% of individual HSA buyers were previously uninsured. And about half of those signing up earn less than $50,000 a year.

This low-cost, tax-free alternative to traditional insurance is the biggest change to health policy in decades. Seize the HSA opportunity. Because taking control of how you or your company spend health care dollars is just smart business.

Sally C. Pipes is president and CEO of the Pacific Research Institute, a non-profit think tank based in San Francisco. The Institute promotes individual freedom and personal responsibility and believes these principles are best encouraged through policies that emphasize a free economy and limited government. She is the author of "Miracle Cure: How to Solve America's Health Care Crisis and Why Canada Isn't the Answer."

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