A new way to lower your health care costs

The new law makes HSAs permanent and available to everyone — individuals, business owners and employees. And don't confuse HSAs with their predecessor, the Flexible Savings Account. HSAs are the next generation of tax-favored medical insurance. Here's how they work.

HSAs come in two parts. First you purchase a low-cost, high-deductible health insurance policy available through a growing number of providers including such giants as Aetna, UnitedHealth Group, Blue Cross, Golden Rule Insurance and many others.

In conjunction with the insurance policy, you open a dedicated savings account in which you make tax-deductible deposits to pay for your medical care. Each year, you may deposit up to the amount of the deductible on your insurance policy. You then use the money in the account to pay for your medical care. Once your expense reaches the amount of your deductible — if it does — the insurance policy kicks in.

Consider this example: Shop owner Mark enrolls himself and his family in a plan with a $5,250 deductible policy. He then deposits $400 per month (tax-deductible) in his HSA. That year, his family's out-of-pocket medical expense, paid from funds in his HSA, comes to $3,200. Since his total deposits for the year were $4,800, the balance of $1,600 rolls over in the account. It compounds tax-free (as long as it is used to pay for qualified medical expenses).

As the money in the account grows, it becomes a resource available to cover the cost of routine or future medical care. This is an important feature that makes HSAs far more attractive than their predecessors.

In another example, Tom enrolls in a similar plan with the same deductible. He also deposits $400 per month in his tax-favored HSA account. However, one of Tom's children had expensive surgery, raising the family's total medical expense for the year to $15,500. Once Tom's out-of-pocket reached the family deductible of $5,250, the insurance paid the balance of $10,250. In this case, the HSA protected the family against a catastrophic medical expense.

In addition to the tax incentives, HSAs offer complete control over choice of doctors and eliminate the often annoying referral requirements of some health plans.

Current law requires a health insurance policy with a deductible of at least $1,000 for individuals and $2,000 for families to open an HSA. The law also limits the maximum out-of-pocket expenses to $5,100 for an individual and $10,200 for a family. That means the deductible can be as much as $5,100 or $10,200 for individuals and families, respectively.

Golden Rule Insurance Co. was one of the first providers of HSAs. Today, one out of every three plans purchased from Golden Rule is a health savings account. "Our customers have accumulated more than $116 million in their tax-advantaged savings accounts," says Golden Rule spokesperson Ellen Laden. "As to who's buying, self-employed men and women, families with children and early retirees are leading the way. We feel the reasons why are clear: premiums typically 45 to 55 percent lower than traditional plans, discounted healthcare costs through preferred networks, one annual deductible per family and the four percent annual interest that Golden Rule pays on its health savings accounts."

Golden Rule's current deductibles for HSA policies are $1,000, $1,750 and $2,650 for singles and $2,000, $3,550 and $5,250 for families. "Our Golden Rule HSA 100 pays 100 percent of covered medical expenses once the deductible is met and there is no co-insurance," says Laden. The policies of other providers offer similar, but not necessarily the same, provisions.

The tax advantages of health savings accounts along with control over choice of doctors makes them appealing to small business owners and the self-employed as well as the uninsured." Nearly all of the policies I sell now are HSAs," says Tom Rogala, Custom Benefit Solutions, Northville, Mich. "All of my plans provide 100 percent coverage after the deductible. I can't imagine why any business owner or individual would want to go any other route."

Rogala, an independent health insurance broker, says many of his clients are small business owners who need coverage for themselves and would like to make coverage available to their employees at little or no cost to themselves. HSAs make that possible.

"A business owner can sign up for an HSA for himself and make them available to any employee on a voluntary basis," says Rogala. "That way, the employee deals directly with the provider. The employer is not involved and makes no contribution.

The employer can also sign up for a group plan in which the company pays a portion of the cost for each covered employee." The required employer contribution for group plans varies by state. In Michigan, employers are required to contribute a minimum of 25 percent of the cost of the high deductible insurance policy. "That's still a lot less than it would cost the employer for any other type of plan," says Rogala.

He tells the tale of one client, a small business owner, who was paying $900 per month for coverage for himself and his family. "With his HSA, his cost is $250 per month for the high deductible insurance policy. Plus, he deposits $295 tax-deductible in his health savings account to pay for medical care as needed. If his costs for the year exceed the amount of his deposits, the insurance kicks in with 100 percent coverage. If his costs are less than his deposits for any year, the balance will roll over, accumulating a kitty to pay for future care."

Business owner Steve Sclater, Saline, Mich., signed up for an HSA for himself and three employees. "I've been paying about $2,600 a month for health coverage for the four families," he says. "My new HSA will save me at least 25 percent and we'll have better coverage than we have now."

Sclater bought his policy from Golden Rule. "I researched it on the Internet and found that they have a better rating than my present company. Also, I'll now be able to offer the insurance to other employees who may not have been eligible under my old plan."

As might be expected, not everyone is enthusiastic about health savings accounts. Skeptics argue that the high deductible policies will deter some from buying an HSA plan and that others will be reluctant to dip into their HSA savings to pay for medical care with what amounts to their own money. At a congressional hearing in 2004, Rep. Pete Stark (D-Calif.) said he believed high deductible plans are not consumer driven. "They simply shift costs to so-called consumers who pay more out of pocket," he said.

"That's ludicrous," argues Tom Rogala. "My files are full of examples of individuals who are thrilled with the savings and the service they're getting through their HSAs. Knowing what I know after 15 years in this business, I just can't imagine that there is a better deal available to consumers today."

One disadvantage for some prospective enrollees is the reluctance or refusal of some insurance providers to issue policies to people with serious pre-existing medical conditions.

Still, despite the reluctance of some to jump on the HSA bandwagon, there is no denying the rapidly growing popularity of this new approach to healthcare insurance. Employees like the way HSAs give them more choices and more control over their health care. Small business owners say they like HSAs because they help to control spiraling healthcare costs, putting more money on their bottom lines.

As a business owner, you may well benefit from a comparison between an HSA and your present health insurance for you and/or your employees.

William J. Lynott is a retired management consultant and corporate executive who writes on business and financial topics for leading trade publications as well as consumer magazines, including Reader's Digest and Family Circle. You can reach Bill at [email protected] or through his Web site: www.blynott.com.