Health Savings Accounts - A Solution to the Health Care Crisis

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.

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.

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.

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.

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.

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.

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.