Health Savings Accounts - A Solution to the Health Care Crisis

A Way to Lower Health Insurance Costs

Health Savings Accounts (HSAs) are special savings accounts, usually in banks or credit unions, that are created in combination with a high deductible health insurance plan. Like traditional IRA (Individual Retirement Account) plans, money contributed to a Health Savings Account can be deducted from the individual's income taxes and interest earned on the account is tax free. Currently the contribution limit for 2009 is $3,000 for an individual account and $5,950 for a family account.

Health Savings Accounts have to be set up in conjunction with a high deductible medical insurance plan. For 2009 a qualifying medical insurance policy for an individual must have a deductible of at least $1,150 and $2,300 for a family plan. Deductibles can be higher but not lower than these amounts.

Deductibles refer to the amount which an insurance company requires the insured to pay out of their own pocket on claims. Thus, an individual with a $1,150 deductible on their medical insurance would pay the first $1,150 worth of qualifying medical expenses (as defined by the insurance policy) each year and the insurance company would then pay any additional qualifying medical expenses incurred during the year. Of course, the individual can use the money in the Health Savings account to pay for these deductible amounts.

Deductibles refer to the amount which an insurance company requires the insured to pay out of their own pocket on claims. Thus, an individual with a $1,150 deductible on their medical insurance would pay the first $1,150 worth of qualifying medical expenses (as defined by the insurance policy) each year and the insurance company would then pay any additional qualifying medical expenses incurred during the year. Of course, the individual can use the money in the Health Savings account to pay for these deductible amounts.

In addition to paying any medical expenses resulting from the deductible amount that the insurance company does not cover, owners of Health Savings Accounts can also use them to pay for qualifying medical expenses (as defined by the IRS) that are not covered by the medical policy at all, such as doctor visit co-pays, vision and dental expenses if these are not covered under the regular medical plan as well as other qualifying medical expenses not covered by most medical insurance plans.

A Form of Self Insurance

The one medical related expense that cannot be paid using funds from the HSA account is the premium payments for the medical insurance.

Health Savings Accounts are a form of self insurance. Despite the rethoritic in the media and from politicians, only a small portion of the population is hit with astronomical medical expenses. For most people, most of the time, medical expenses are relatively low. However, there is always the possibility of an expensive accident or illness that can bankrupt a family which is why medical insurance is so important. However, since such expensive accidents and illnesses are rare, insurance companies can afford to provide coverage for catrastropic accidents and illnesses at a very low cost since few people end up incurrring these expenses. It is the every day doctor visits for minor illnesses and accidents that, while somewhat expensive, are not budget busting for families.

With Health Savings Accounts people can set aside funds to pay for unplanned, but small medical expenses and then purchase low cost insurance to purchase protection in the unlikely event they are hit with a major medical expense that would bankrupt them.

Money in HSA Account Belongs to the Individual

Unlike health related Flexible Spending Accounts (FSAs), unsused funds in a Health Savings Account can remain in the account and allowed to build up, whereas funds in a Flexible Spending Account must be spent on approved medical expenses by the end of the term year or forfeited.

Allowing funds to build up in a Health Savings Account enables the holder to take advantage of lowering insurance premiums in the future by increasing the size of the decuctible on their medical insurance. The larger the balance in their Health Savings Account the more insurance risk they can assume themselves and the less insurance they have to pay for.

Like traditional Individual Retirement Accounts (IRA) there are tax penalties if funds are withdrawn for purposes other than paying for qualifying medical expenses. However, when a person with a Health Savings Account reaches age 65 they can roll unspent funds in the HSA to their Individual Retirement Account and use the money for retirement.

For individuals, especially younger and healthier individuals, Health Savings Accounts are a great way to obtain sufficient health insurance coverage at an affordable cost. In some cases they can also offer better coverage than many employer plans. One of the ways that many employers are using to limit the expense of providing health care for employees is by providing generous first dollar coverage (i.e., offering plans with little or no out of pocket medical expenses for employees) but have a cap on the total amount of coverage.

Both Individuals and Society Save with HSAs

As I described above, most people do not find themselves in situations where they incur multi-million dollar medical expenses. However, most people do have a doctor visit or two per year which means that almost all employees will benefit from a plan that pays for these doctor visits while few will experience a medical medical emergency costing $900,000 or more of which their insurance will only pay the first $500,000.

In addition to providing substantial savings to individuals (and companies that elect to offer Health Savings Accounts as their medical benefit), Health Savings Accounts also have the potential to reduce health care costs overall in two ways.

People Are More Careful When Spending Own Money

The first way is that, with Health Savings Accounts, even if they are provided by and funded by an employer, the money in the savings account portion of the plan belongs to the individual and individuals tend to spend their money more wisely than they spend other people's money.

When medical bills are being paid by an insurance company, individuals have no incentive to either shop for the best deal or to question errors and overcharges. While people don't intentionally waste the funds of third party payers, they don't have any incentive to be as careful with it as they would with their own money.

Also, as I pointed out in my Hub Including Health in Retirement Planning, Health Savings Accounts provide an incentive for people to practice healthy habits in order to avoid health related expenses in the future and thereby avoid having to spend the money in their HSA.

This, of course, is but one incentive and its effect will vary from individual to individual, but it will cause some people to take at least some steps to improve and maintain their health thereby reducing overall health care costs for themselves and the nation.

Eliminating Bureaucratic Waste

A second way Health Savings Accounts will reduce overall health care costs is the payment system itself. Currently, when one visits a doctor or other health care provider they present their insurance card and the insurance company is billed for the visit. If a co-payment is involved that is often collected in cash on the spot but the bulk of the charge for the office visit will be billed to the insurance company.

For Medicare and other insurance company billings the medical provider will have to rely on highly skilled and well paid coders who convert the physician's notes to code readable by the insurance company's computers and electronically bill Medicare or the insuranace company. This can be time consuming and complex. In addition to delays at the front end as the coder frequently has to clarify things with those who provided the service, any errors in the coding of the billing will result in Medicare or the insurance company refusing to pay. It is not uncommon for months to pass before the billing is submitted and finally accepted by the insurance company.

During this time the medical provider has to continue to meet payroll and pay their own bills, usually by borrowing from lenders and paying interest. Also, for procedures where the patient is required to pay part of the cost, either instead of or in addition to a co-pay, the provider has to wait until the insurance company pays their part and then, often month's later, bill the patient and wait another 30 days for that part of the payment.

With high deductible policies and the patient paying for routine medical services, this expensive bureaucratic billing process could be greatly reduced as patients pay at the time of the visit with a credit card or even a debit card linked directly to their Health Savings Account.

A Good Alternative to Present System

Health Savings Accounts provide a way in which individuals can regain the freedom and responsibility for managing their own health care rather than having their employers assume the role of a nanny managing and making decisions for them in this area.

Health Savings Accounts offer an excellent way to solve the current health care crisis which is not a problem with the quality of health care itself but with the financial nightmare that has resulted from the present system which has developed as a result of the Federal Government treating medical insurance premium payments by employers as tax deductible expenses to the employer and a non-taxable benefit to the employee while denying this tax benefit to people who pay their own medical insurance premiums with their own, after tax, dollars.

© 2009 Chuck Nugent

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Comments 15 comments

maggiemae profile image

maggiemae 7 years ago

Even with these proposed HSA plans huge numbers of people will fall through the cracks or be unable to pay co-pays. There is no way the average working family can afford even the deductibles and co-pays on a serious illness. Bankruptcies will still occur. In my view, as a Canadian with sons and family living in the US, the only plan for a just and stable society is to have a one payer universal health plan. That means that you eliminate the strangle hold of the insurance companies and the AMA.

As far as the poor people buying cigarettes, raise the price. It worked here. Over $70 a carton for cigarettes is a big incentive to stop smoking. Cheap vodka that costs over $23 a 5th gets pretty expensive too.


Hub Llama profile image

Hub Llama 7 years ago from Denver, CO

Unfortunately, you have a fundamental misunderstanding of how this works. As you said, in order to use a HSA you have to have a "high deductible" health insurance plan. You are also correct that you get zero insurance coverage until you have met the deductible.

You are wrong that you are covered at 100% for any expenses above your deductible. HSA plans, like other health insurance, only cover a PERCENTAGE of your remaining expenses. Common numbers are 80% to 90% for good group health coverage depending upon what medical services are provided. For non-group policies those numbers can sometimes be 60% or 70% in order to make the policy affordable.

A simple, out-patient surgery can easily cost $10,000 even with all of the insurance company's discounts and charge offs. In your example, an individual would pay at least $1,150 to meet the deductible. If he had 80% coverage after the deductible, then he would also be liable for 20% of the remaining $8,850.

So for this one non-catastrophic procedure, this person would pay $1,150 + $1,770 for a total of $2,920. That wipes out the HSA for the year.

So, basically, this person pays approximately $3,000 for this one health care event. Plus, at least $2,400 for a year's worth of premiums (way more if this person is unlucky enough to be a entrepreneur without group coverage). Assuming this person is responsible enough to handle their health care like this, they are probably also going to be saving for their retirement. Let's figure $5,000 for the year.

So, all told, this person will need to set aside $10,000 of their income. That is 20% for someone making $50,000 per year, or 1/3 of their total income for someone making $33,000 per year. How many people can forgo 20% to 30% of their income?

HSAs are great on paper, but in real life there are plenty of pitfalls:

1) You have to build up your HSA before it can be used for "self-insurance". What happens if you get sick or break your arm during the first or second year? What do you do after a single event cuts your balance in half?

2) You have to have an extra $3,000 per year in order to be able to put $3,000 per year into an HSA. A married couple saving for their child's college, their retirement AND an HSA is going to have a tough time making it work. We aren't talking about poor people or "extremely low income people" here either. Six-figures is the minimum income needed to make this model fly.

3) HSAs still do nothing for the people who are supposedly so important to the economy, small businesses, who don't have enough employees to get a nice group plan. There is not a single insurance plan available in this country that covers maternity and delivery at anything above 50% for less than $1,000 a month. So, if you take over the family business, you better not want your own family because then, the math is $12,000+ per year in premiums + $5,950 for your HSA account + your share of having a baby in a hospital...

It's a nice idea on paper, and it works great if you are very fortunate. Otherwise, it isn't going to really help much.


Chuck profile image

Chuck 7 years ago from Tucson, Arizona Author

Legacy Wellness - thanks for you comments.

I totally agree with you that Congress and special interest groups will do everything they can to limit or eliminate Health Savings Accounts.

First, it goes against their belief that American citizens are not capable of making decisions and need self appointed "experts" like the politicians and professional Nanny State public and private bureaucrats to make decisions for them.

Second, if HSAs ever became easily available to the population at large and the masses began using them the whole health care management industry (which includes private consultants and companies that handle the paperwork for insurance companies and make decisions as to which treatments are allowed and which are not, along with the the thousands working in the Federal and state health care bureaucracies as well as numerous Congressional aides whose job is to write more incomprehensible health care bills for their Congressional superiors to vote on without bothering to read them. Eliminating this useless public and private bureaucracy would go a long way toward reducing the cost of insurance and health care costs in general.

Thanks again for your comment.

Chuck


Legacy Wellness profile image

Legacy Wellness 7 years ago from Katy, Texas

Health Savings Accounts are a great idea, but the Congress and the special interest groups in Washington will continue to resist it. We need to clean house in Washington.


OneStopWriteShop profile image

OneStopWriteShop 7 years ago from Newark, Ohio

This is a great topic for discussion, in fact, I'm writing a journal on it currently. From the perspective of individuals who live with a pre-existing medical condition, and those who have one who are also on SSI, Social Security Disability.

People who were injured before they had a chance to pay into social security are stuck with only $674.00 per month, and approximately $200.00 a month in food assistance.

When you - the average cost of only one person to buy insurance at say -- with a pre existing condition, it cost approx $300.00 per month - from the $674.00 = $374.00 then rent = - already into the negative amount.

A plan for "all of the people" must be one that "all of the people" can do.

This is more about people, then it is about R & D, Repubs and Demos.

Take it from a person who has to pay $400.00 a month on prescriptions alone. Can you image how much it cost "me" to get a procedure called RFA every 3 months: Approx $7500.00

That is over $30,000 a year, every year, and every year.

Why don't people have the option in their health care providers to have their conditions corrected (when there are treatments or procedures to do so?) $$$

That same savings to the community, to society and to the insurance company is actually costing everyone because a community who cannot contribute, cost us all.

I don't have an answer, but I do know from personal experience that people who cannot afford to save, and who cannot afford a deductible, will need still health care, no matter what. And if they don't receive it, who pays then?

We all do.

We all do.

Great hub.

But, I would bring up topics that also focus on people with are living with limited budgets or who has a pre-existing condition, to make the hub seem less biased and more of informational.

I did feel that the hub was written quite well.

Hope you don't mind me adding my little message here.

It becomes almost too much to deal with, when you wake up and know that you have to make a choice, "Food, Rent or the medicine."

I was laid up in a hospital for two weeks, failed one college quarter all because I only had enough funds for gas to commute back and fourth to campus, but I needed my medication to survive. What was I thinking? Easy --> An education would get me a better job, more income, less worry about buying medication. And, instead of getting ahead, I received a hospital bill of over $16,000 dollars that was for three days at The Ohio State University Medical Center in Columbus, Ohio.

Imagine if none of us could afford our medication.

Who would pay for the funerals?

All of us would, through taxation.

And by the lack of people to keep our world running.

This is a time to focus on solutions not just for the upper class, or the lower class, but one that can help, (maybe not solve everything right away). A plan only works if it is tried, nothing gained -- but all can be lost.

Good luck to everyone who is in need of health care. I for one am grateful we finally have a president who has the audacity to take on tough issues, its about time. He may not have all the answers or the "right ones" yet. But I think its time for us to give our feedback and do our part as well. The world won't fix it self, and the health care problem didn't come over night, or be non-working by the results of only one man or one president.

The war in Iraq has contributed to so much of our current economic situation, and I'm afraid we may be heading to a civil war before its all over with.

*I'm really venting*

Sorry -- Katina

President of The One Stop

Write Shop, LLC

Advocate for People with Disabilities


Awesome Writer profile image

Awesome Writer 7 years ago

Wow, you have covered so much information on all of your articles about insurance. I always believed in rewarding the insurers for taking care of themselves as well as giving them options to shop around for themselves instead of being forced to accept an insurance coverage the employer is offering. Thanks for sharing - I got a lot of info from your articles.


wendypolisi profile image

wendypolisi 7 years ago from Atlanta, GA

This is great information! Obviously HSA are not for extremely low income people, but for those who can afford it I think it is one of the best ideas going. I NEVER go to the doctor, (as in, last time I saw a doctor I was in the hospital having my second son)so a plan like this is very attractive to me!


christigmc profile image

christigmc 7 years ago from Riverside, CA

I really like this plan. It actually treats health insurance like insurance. Plus it forces the patient to shop around.


cashmere profile image

cashmere 7 years ago from India

This system in very different from what is followed in India. In fact health insurance is in its nascent stage here. Most people just don't believe they need it. And they would rather save money in other forms so as to be able to afford health care at a later day.


eovery profile image

eovery 7 years ago from MIddle of the Boondocks of Iowa

A lot these people who can't afford health seem to be able afford cigarettes at the same time the hand in their food stamps. Seems like their priorities are a little backwards.

Keep on hubbing!


Chuck profile image

Chuck 7 years ago from Tucson, Arizona Author

vmassey120 - Thank you for visiting and for your comment.

As to affordability, my experience with high deductible ($2,500 deductible) has been that the insurance is about half the cost of a full coverage with little or no deductible. A few years ago I insured my wife, twenty year old daughter (who was a college student at the time and eligible for the family plan), and two teenage sons on a family plan for $400 per month which was half what I would have had to pay if I had added them to the employer provided plan that covered me at work. We could not have a savings account with it because we filed a joint tax return and I was covered by a separate employee plan with no deductible.

After my wife got a job and got coverage from her employer and our daughter graduated and got a job with insurance benefits, I took separate high deductible plans for each of my two sons which cost $75 each per month - the cost of each son's plan is about $25 more than our cable TV bill. Again there is no savings account with these because they are still claimed as dependents on my income tax and therefore not eligible for the savings account under IRS rules.

These plans are not free and may not work for everyone but they are considerably less expensive than most regular plans and give us considerably more control and freedom over our medical care.


vmassey120 7 years ago from Fayetteville GA

I have never understood how someone would think a health saving account would help someone who could not afford health insurance. If you cannot afford to pay for health insurance where will you get the money to contribute to a health savings account. Also, if you do not have a large income you really can't afford the high deductible.


eovery profile image

eovery 7 years ago from MIddle of the Boondocks of Iowa

Makes a lot more sense than our idiots in Washington is pushing!

Wait a minute, I already have a health care saving account through work. Don't let the libs know it, they will want to tax it.

Keep on hubbing!


lyricsingray 7 years ago

Well written, thanks, Kimberly


harrisdy profile image

harrisdy 7 years ago from New York

great tips...

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