Health Insurance (HSA, Health Spending Account)?????

Question

My Company wants all employees to switch over to a HSA (health spending account). does anyone know if these are better than a PPO, and how does this work? Any other information on them would be great also.

Answer 1

The acronym HSA is being tossed around quite a bit nowadays especially since the tax advantages of owning an HSA  and a corresponding qualified HDHP (Deductible Health Plan) have been significantly increased under the former Bush  administration. Effective December 20, 2006 President George W. Bush signed the Health Opportunity Patient  Empowerment Act of 2006, enhancing Americans' access to tax-advantaged health care savings. The law, part of the  Tax Relief and Health Care Act of 2006, provides new opportunities for health savings account (HSA) participants' to  build their funds. To read about the new adjustments   Click here: http://www.treas.gov/press/releases/hp209.htm   For the 2009 IRS H.S.A. COLA Adjustments click:    http://www.treasury.gov/press/releases/hp975.htm
The 2010 IRS H.S.A. COLA Adjustments were announced on 05 14 2009. They can be viewed here: 2010 IRS HSA COLA

HSA stands for Health Savings Account, more commonly referred to as a "Medical IRA". HSA qualified HDHP's are one of  several relatively new Health Insurance concepts that fall under the heading of "Consumer Driven Health Insurance".  Health Savings Accounts are a unique way to attractively manage your health insurance costs. They were  originally named MSA's or Medical Savings Accounts designed by Senator Bill Archer (R) of Texas. Bill's project was to  find a way to reduce the cost of health insurance for the self employed without sacrificing quality coverage for a  major medical illness. Bill's brilliant idea was to eliminate the parts of a Traditional Health Insurance Plan that cost the consumer the most money. These expensive benefits include outpatient doctor "co pays" and outpatient prescription "co pays". Bill approached Congress with a proposal that stated in essence that if you remove those two features and keep the major medical coverage in place you could conceivably cut the cost of your health insurance premium considerably. He was absolutely right!

To illustrate how Bill's idea works in the real world. We will use a real world example. Tony & his wife are currently paying $1,134 a month for Cobra continuation coverage from a previous group plan. In comparison, the monthly premium for an HSA qualified HDHP (High Deductible Health Plan) which covers each insured family member up to $5 million dollars is less than half of the premium that they are paying now ($481.64 monthly to be exact). This is a yearly savings of $7,828.32 or a monthly savings of $652.36. This is a significant difference. However the insured has to give up all of their outpatient co pays. Is this worth it? This was the question posed to Senator Bill Archer (R) when he approached Congress back in the late 1990's. His answer to Congress was simply "make it worth it".

In other words, he asked Congress to make it worth it to the insured. Their response was two fold. And it is these two primary reasons that make HSA's a "no-brainer" for every self employed prospective insured and for their corresponding employees. The first thing Congress did was to state that if a policy holder buys a major medical health insurance policy (HDHP) with a yearly family deductible between $2,200 per family (not per person) or as high as $5,800 per family we will call that an HSA qualified health insurance plan (HDHP).

They further said that in order to make giving up outpatient co pays more attractive to the insured we will allow anyone who has an HSA qualified health insurance plan (HDHP) the option to open a tax favored HSA (Health Savings Account) with their local bank or financial brokerage house. Since the insured is saving a considerable amount of money each month by giving up their out patient co pays, we will allow them to take that extra premium that they would have normally given the insurance company for the "privilege" of a co pay and put it into a 100% tax deductible account that will grow tax deferred at an interest rate adjusted by the Fed.

In addition to depositing the amount you save in insurance premiums, you may also deposit in your HSA an amount equal to what the IRS allows for that given year. For the year 2009 the maximum contribution a family can make to their HSA account is $5,950. In addition, any family member who is 55 years of age or older can deposit an additional $1,000 annually (more on the age 55 allowance below). This means that the total amount that Tony and his wife (in our example above) can deposit per calendar year is $7,950 and they can take a 100% tax deduction for that contribution similar to an IRA.

Furthermore, if they do incur medical expenses that arise throughout the course of the year that are subject to the deductible (i.e. prescriptions, doctor's office visit charges, etc.) the IRS will allow them to pull out that money that they put into their optional tax deductible, tax deferred HSA savings account to pay for those expenses. When they use their HSA money to pay for those expenses the IRS will allow them to write those expenses off at a 100% tax deduction. The list that the IRS allows them to spend their HSA money on is very liberal and includes things like dental, orthodontics, eyeglasses, radiokeratonomy (Lasik corrective eye surgery), alternative medicines etc. Click the hyperlink to see the list of allowable expenses and disallowed expenses on the HSA section of the IRS web site here: http://www.irs.gov/publications/p502/index.html

Arguably the most attractive tax advantage to owning an HSA is the fact that the money left over in the HSA account that was not used on medical expenses at the end of the year is "rolled over" into the next year and awarded a higher rate of tax deferred interest. The insured also has the option to roll those unused funds into no load mutual funds, thereby building an extra tax deferred retirement account with money they would have normally given to the insurance company each and every year whether or not they had any claims that year!

It should also be noted that with not having a "co pay" with your plan does not mean that your outpatient doctor visits and outpatient prescription drugs will not be a covered expense. With most HSA qualified HDHP's these charges are a fully covered expense just as they would be with a Traditional Health Insurance Plan. The only difference is these charges will be subject to the "aggregate" family deductible.

Being "subject to deductible" does not mean that you will pay full price for these charges either. If you stay within the vast PPO network that most reputable carriers offer (www.phcs.com) your outpatient doctor office visit charges will be discounted by as much as 40%. Your prescriptions will also be discounted significantly as well by staying within the Rx prescription network.

Let's break that down in plain english. Let's say your doctor's office charges you $100 for a "sick visit". If you use a PPO provider (typically PHCS or MultiPlan) those office charges will be "re-priced" down to roughly $60. Now compare that to a Traditional plan which provides you with a $25 "co pay". The difference to you is $35 out of pocket for that doctor's office visit. But is that all you are really saving?

Not if you add in the monthly premium savings between the two plans. The typical monthly premium savings between a Traditional plan and an HSA qualified plan for a family is $200 to $300 monthly or more. Let's split the difference at $250 less monthly. This equates to an annual savings of $3,000.

Now let's take that $3,000 annual savings and deposit it into a tax deferred, tax deductible interest bearing Medical IRA (HSA). Let's go a step further and imagine you find an HSA account that bears you NO interest AT ALL (which is not that hard to imagine in this economy). You're still saving $3,000 annually and you're deducting that amount from your adjusted gross income. This means less reportable income, which means LESS TAXES!

Now lets imagine you have no major medical claims in year two and you deposit the same amount. Now in year three you have a worse case scenario occur. Now you have $9,000 to help pay your "aggregate" family deductible. Moreover, since deductibles with HSA qualified HDHP's include only one "aggregate" deductible for the entire family there will be no other risk to any other family member for the rest of that year. Unlike Traditional Health Insurance Plans which typically require each of three separate family members to pay their own calendar year deductible if they end up in the hospital (or need an MRI, CT, Nuclear Medicine Scan etc.)

The best way to explain the unique advantages of these types of plans is to look at the maximum out of pocket risk you are exposed to compared to that provided with the "Next Generation" HSA qualified HDHP (for example). Below is a  comparison between the two most typical maximum out of pocket risk per person and per family with the average  Traditional Health Insurance plan and the maximum out of pocket risk   per person and per family that you would have with the "Next Generation" HSA qualified HDHP (more details on this unique product below). The out of pocket assumptions below assume that your Traditional plan requires each of three family members to satisfy their own deductible and coinsurance out of pocket expense each calendar year. Some plans only require two family members to satisfy their own deductible and coinsurance out of pocket expense each calendar year. Either way, for the same premium, your out of pocket risk will reduced significantly with any HSA qualified HDHP available on the market today.

Current Maximum Annual out of pocket risk with the average Traditional Health Insurance Plan                    
Annual deductible:                 $2,500 (for one family member)
                                                +
Annual deductible:                 $2,500 (for 2nd family member)
                                                +
Annual deductible:                 $2,500 (for 3rd family member)  
Total Family Deductible:      $7,500 (Total Annual Deductible Risk per family per year)

Annual coinsurance out of pocket     $2,000 - (20% of the first $10,000 in bills) for one family member.
                                                          +
Annual coinsurance out of pocket:    $2,000 - (20% of the first $10,000 in bills) for 2nd family member.

Annual coinsurance out of pocket:    $2,000   (20% of the first $10,000 in bills) for 3rd family member.
Total Family Coinsurance Risk:       $6,000    (Total Annual Coinsurance Risk per family per year)
                  
By adding  $7,500 in total deductible risk per family to
the extra   $6,000 in total coinsurance out of pocket risk per family. We arrive at a total per family risk of:           $13,500 each calendar year.

The average monthly premium to maintain a Traditional Health Insurance plan like this after 07/01 is $743.72.

In contrast, if we compare that total calendar year per person and per family annual risk to that included with the "Next Generation" HSA qualified HDHP with a $7,000 total annual deductible per family with the "Embedded Individual" deductible option (e.g. $3,500 per person deductible x 2 family members maximum) Here's what that looks like:

Annual "Embedded Individual" Deductible: $3,500 (for one family member)
                                                                            +
Annual "Embedded Individual" Deductible: $3,500 (for second family member)
Total Deductible risk:      $7,000 (Total Annual Deductible Risk per family)

Annual coinsurance out of pocket risk:     $0  (100% coverage after the deductible has been satisfied)
                                                                +
Annual coinsurance out of pocket risk:     $0  (100% coverage after the deductible has been satisfied)
Total Family coinsurance:                      $0  (Total coinsurance risk per family is $0. Plan pays 100%)

By adding     $7,500 in total annual deductible risk per family to
the extra           $0  in total coinsurance (nothing since the plan pays 100% after deductible) We arrive at a total family risk:  $7,500 There would be nothing more to pay for the entire family for the rest of that year.

The total monthly premium for the Next Generation plan with the above design as of 07/01/09 would be $545.77

The premium savings per month between both products is $197.95 or $2,375.40 annually. And we actually reduce the total annual per family risk by almost HALF.

In addition, once you have an HSA qualified Health Insurance plan. The IRS allows you to open the aforementioned "Medical IRA", more commonly referred to as an "HSA" (Health Savings Account) if you choose to do so. This is an option. It is however a very good option to select because not only can you deposit the premium difference between both plans ($2,735.40) in to the optional Medical IRA (at the bank of your choice). But you can also add an additional amount of $3,214.60 this year (even more if your over the age of 55)  in to a 100% tax deductible, tax deferred, interest bearing Medical IRA. It behooves you to do so for the following reasons:

1.) Unlike any other IRA, a Medical IRA (HSA) allows you to withdraw funds at any time with no penalty for "qualified medical expenses". Most importantly, when you withdraw your HSA funds to pay for any of the qualified medical expenses on that list, those expenses themselves become 100% tax deductible.

2.) Here's the key point though. If you have just ONE year without any significant claims and you even partially fund your Medical IRA, then if the worse case scenario occurs, you will have those funds available and be able to withdraw them with no penalty and use that money to pay your $3,500 deductible for one family member or if you fully fund your Medical IRA you will have enough money to nearly satisfy your $7,000 deductible just incase two family members have a major claim in the same year. In fact, no other kind of Health Insurance actually allows you to lower your risk the longer you own it by hedging money you would have otherwise given an insurance company for a Traditional plan.

I say this because, there is no other kind of IRA that you can withdraw from at any time with no penalties. This being the case, the longer you fund a Medical IRA (HSA), the lower your risk becomes by owning an HSA qualified Health Insurance plan. Simply due to the fact that each year you fund the Medical IRA, the more money will be there if the worse case scenario occurs. In fact, the longer you own an HSA qualified HDHP, the lower your risk becomes since the more years that pass, the larger your balance in your HSA account becomes. This is so because each year your remaining balance rolls over and continues to earn tax deferred interest.

The longer you look at HSA qualified HDHP's the more sense they make. This is why they have caught on like wildfire and will continue to do so. The only inhibitor to the spread of HSA's is lack of education (as is the case with any other financial vehicle). The "Whole Foods" supermarket chain chose HSA qualified Health Insurance. It worked so well for them that they were recently featured on the ABC 20/20 episode entitled "Sick In America" hosted by John Stossel:
http://www.youtube.com/watch?v=Xsp_Jh5EIT0&eurl=http%3A%2F%2Fwww.sbisvcs.com%2Fhsa_qualified_hdhp.htm&feature=player_embedded

Now you can help fund your HSA account by purchasing every day items! Click www.myhsarewards.com

To learn more about HSA's and the recent federal legislation that has made them even more attractive to people over the age of 55 click: http://www.treas.gov/offices/public-affairs/hsa/about.shtml to read all about them on the Federal Governments HSA educational web site. To learn more about H.S.A.'s in a power point presentation format please click here: http://www.hsacenter.com/ and click on the informative videos on the right.

If you are an employer and are considering HSA qualified plans for your employees consider this. An individual's employer can make contributions that are not taxed to either the employer or the employee. The combined income and payroll tax deductibility leads to discounts for health insurance of over 40 % in some cases relative to other forms of insurance. For more details for the employer http://www.treas.gov/offices/public-affairs/hsa/faq_employer-participation.shtml

Beginning in 2007 one company - American Community Mutual (www.american-community.com) introduced a truly unique HSA qualified HDHP. It is called the "Next Generation" HSA (see the first brochure pictured below). This HSA qualified HDHP has four unique features that make it superior in design over all other individual HSA qualified HDHP's on the market today.

The first of the four benefits is called the "embedded deductible feature". As aforementioned, the typical HSA qualified HDHP does not start paying anything until the entire family deductible has been satisfied. This means that whether one person gets sick or multiple family members get sick the insurance company will not pay anything until the entire family deductible has been satisfied. If your plan has a $5,450 family deductible this can feel unfair if only one member of your family gets sick.

In stark contrast, the American Community Mutual "Next Generation" HSA qualified HDHP eliminates this problem by offering the "embedded deductible feature." This benefit (for a few dollars more per month) requires the insurance company to start paying after only one family member has satisfied their individual deductible (half of the family deductible). This significantly reduces the out of pocket expense to the family if only one  person gets sick. This is a valuable benefit since statistically speaking only one family member (if any) will incur medical claims in any given year. This benefit is not unique to the "Next Generation" HSA qualified HDHP. It can be found on other HSA qualified HDHPs on the market today. However, the next 3 benefits are unique to the "Next Generation" plan.

The second and more valuable benefit is the $10,000 "stop loss" number that is included when the 80% coinsurance option is chosen. According to IRS Doc 5305-B (http://www.hsacenter.com/2008-HSA-Contribution-Limits.php) the new (2009) adjusted maximum annual out of pocket expense that a family will pay that owns an HSA qualified HDHP with the 80% coinsurance option is $11,600 regardless of the deductible chosen.

Although this is the maximum allowable out of pocket expense that a family will experience if they choose the 80% option with any other HSA qualified HDHP American Community Mutual decided to reduce the maximum out of pocket a family can experience per year on their "Next Generation" plan to only $2,000 in addition to the chosen deductible. See page 11 benefit description box number 6 of the Next Generation HSA qualified HDHP brochure below.

This quite simply means that after a family has satisfied their chosen calendar year family deductible the insurance company will pay 80% ($8,000) and the family will pay 20% ($2,000) of the first $10,000 in medical bills that are incurred. Afterwards the insurance company will pay 100%. This first $10,000 is known as the "stop loss number". The Next Generation plan is the only HSA qualified plan on the market today that offers this type of co-insurance arrangement and it is much better than the typical HSA qualified plan that offers an 80% option because it results in significant out of pocket risk reductions to a family.

To illustrate this further, we will use the $5,450 family deductible for example. With the typical HSA qualified plan, if an 80% option is chosen then this would subject the family to an out of pocket expense of $11,600. In stark contrast, the Next Generation plan would subject the family to only $7,450 before American Community Mutual would pay 100% of the family's medical bills for the rest of the calendar year. This is $4,150 less out of pocket than any other HSA qualified HDHP on the market today and the Next Generation plan is priced the same or less than most plans!

The third unique benefit is the unlimited "Accident Medical Expense" benefit. This benefit will waive the entire deductible if an accidental injury occurs and pay for all the charges related to the accident at either 100% or 80% depending on the coinsurance you chose. This benefit will kick in each and every time an injury occurs to any family member. This benefit is only available with the "Next Generation" HSA qualified HDHP.

The fourth unique benefit is the "Benefit Period". All other HSA qualified HDHP's restart the calendar year deductible on January 1st of each calendar year. This design prevents many consumers from purchasing their health insurance late in the calendar year. For example, if an insured has had no claims for the entire year of 2009 and then a sizeable claims occurs in December of 2009. The insured would have to satisfy their 2009 calendar year deductible before benefits would be paid. The danger here would be if the insured had another claim in the month of January 2010. Since it would then be a new calendar year, the insured would have to satisfy the new 2010 calendar year deductible before benefits would be paid.

The "Next Generation" HSA qualified HDHP eliminates this problem by starting your benefit period on your requested effective date. The next benefit period would not begin again until 12 months after that date. So with this design, if you were to purchase your "Next Generation" HSA qualified HDHP on December 1st, 2009, then you would not be required to pay another deductible until 12 months later on December 1st, 2010. This is a very attractive benefit for anyone considering buying an HSA qualified HDHP late in each calendar year. It is a much better "Benefit Period" design than the typical calendar year design. This benefit is only available with the "Next Generation" HSA qualified HDHP. Please “Contact Us” with questions about HSA qualified HDHP's. If you have a C.P.A. or tax advisor please feel free to ask he or she about the advantages of owning an HSA as well.