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Health Savings Accounts: Why They're Priced Just Right

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If I’ve heard it once, I’ve heard it a thousand times: “I like HSAs, but they’re just not priced right.” As someone who sells health savings accounts for a living, I respectfully disagree.

An HSA is a tax-advantaged account that allows individuals to set aside pre-tax dollars to use for eligible medical expenses. The only catch is that you must have a specific type of health plan, called a high-deductible health plan (HDHP), in order to set up and contribute to an HSA. Don’t let the name fool you — the deductible isn’t really that high; in fact, it’s often lower than the deductibles on traditional PPO plans.

The real difference between an HSA-qualified plan and a traditional plan is that with an HSA, the policyholder can make copayments before their deductible is met. Instead, the member pays the contracted rate — the amount the insurance company has negotiated with the provider.

That’s the bad news. The good news is that the member actually gets credit toward the deductible for such services as doctor visits and prescriptions that were previously covered by a copayment — a pretty good deal, since copayments typically don’t count toward the deductible or out-of-pocket maximum on a PPO plan.

Do the math
So how much of a discount do we need in order to make the numbers work? Not as much as you might think. While it’s true that your clients will pay more for routine services under a high-deductible health plan, premium savings will help offset this increase – they’re buying less insurance with an HSA, and therefore will pay less for it. Since the average American spends about $500 per year on medical services, even a modest premium savings may be enough.

And best of all, your clients can pay for covered services with tax-free dollars — a significant but often overlooked benefit. For someone who earns between $34,000 and $82,000 per year ($68,000 to $137,000 for couples), for instance, the federal income tax rate is 25 percent. That means that an individual who contributes the IRS maximum of $3,050 to their HSA could save as much as $762 in federal income taxes plus an additional $233 in Social Security and Medicare taxes (7.65 percent) if they make those contributions through payroll. Together, that’s almost $1,000 in tax savings.

What are you talking about? A case study
Let’s say that Shirley is trying to choose between two health plans offered by her employer: a traditional PPO plan and an HSA plan. Both have a $3,000 deductible with no co-insurance, so this really is an apples-to-apples comparison — the only difference between the plans is that one has copayments and the other does not. The copay plan is priced at $347 per month, and the HSA is $297 — a difference of $50 per month, or $600 per year, which would be available to contribute to the HSA.

If Shirley goes to the doctor three times a year, once for her annual physical and twice when she’s sick, she’ll pay nothing for the preventive care and $30 for each sick visit on the traditional plan. With the HSA, she’ll pay more: While the preventive care is still free, the other appointments will cost about $80 for a 10-minute visit and $120 for a 15-minute visit. Let’s say she has one of each. Suppose she also takes Lipitor for high cholesterol. She would have had a $60 monthly copayment under the traditional plan, but will now have to pay the contracted price of $90 under the HDHP. Multiply that by 12 and add the doctor visits, and Shirley’s looking at out-of-pocket expenses of $1,280 on the HSA versus $780 on the copayment plan — a significant difference.

Unfortunately, that’s where most people stop, concluding that the HSA is too expensive and that it therefore makes sense to stick with the copayment plan. But remember that Shirley had $600 in premium savings on the HSA plan that can help pay for these additional expenses, plus she’ll save another $418 in taxes (assuming she is in the 25 percent tax bracket and contributes the full $1,280 to her HSA through payroll). When we subtract the premium and tax savings from the $1,280 in eligible expenses, Shirley’s true out-of-pocket cost is $262 -$518 less than the copay plan.

And guess what — if anything unexpected comes up, she’s already satisfied $1,280 of her deductible; her remaining exposure is only $1,720. On the copay plan, where she gets no credit for doctor visits and prescriptions, she still has the full $3,000 deductible to meet.

The numbers don’t always work when comparing an HSA to a copay plan, but they usually do — we just need to be sure to use all the numbers.

Eric Johnson is a regional sales manager with First Horizon Msaver, an HSA administrator. He can be reached at 817-366-7536 or [email protected].

>> Health Savings Accounts for Frequent — and Infrequent — Health Care Users

In the previous example, Shirley was a medium utilizer — somebody who uses her benefits but doesn’t have a lot of big expenses. You might be wondering how employees at the far ends of the spectrum — the very low utilizers and very high utilizers — would do on an HSA. The answer for both is: surprisingly well.

The low utilizers
Let’s start with the low utilizer — someone who doesn’t use their benefits very often and who may not even know what their plan covers. This type of employee frustrates business owners who are paying a lot of money for their benefits packages.

Low utilizers who are covered by a copay plan are actually over-insured — the employer is paying for benefits the employee is unlikely to take advantage of. If, on the other hand, the employer would offer an HSA-qualified plan, the premium savings might be significant enough to allow the company to make a small contribution to the employees’ accounts. This money could be used to pay for other eligible expenses such as dental and vision, or any unused funds could roll over to the next year, reducing the employee’s out-of-pocket exposure in future years.

The high utilizers
High utilizers, on the other hand, benefit from an HSA because whatever they pay for doctor visits and prescriptions will count toward the plan’s deductible and out-of-pocket maximum, both of which they’re likely to meet. Once the out-of-pocket max has been met, the insurance pays 100 percent for all covered expenses, including doctor visits and prescription drugs. Throw in the premium and tax savings, and somebody with very high medical expenses could make out like a bandit on an HSA.