Insurance Shopping
HMO, PPO, meet the new kid on the block: HDHP, or the high-deductible health plan, and its twin, HSA, health savings account. Created as part of the Medicare bill that President Bush signed in December 2003 and put into effect Jan. 1, 2004, HSAs are intended to combat the high costs of medical care and create a consumer approach to healthcare while giving the patient more control of their healthcare dollars.
"It's making consumers out of health insurance users," says Mark Davis, chartered financial consultant and president of Davis Benefits Group in Sarasota. "It's making you shop for healthcare providers like you would for groceries, houses, movie tickets or gasoline."
There are two parts to the plan. In order to get an HSA, you first have to get an HDHP, which is often referred to as a catastrophic insurance plan. These are plans with low premiums but high deductibles: a minimum of $1,000 per individual per year and $2,000 per family per year, and a maximum annual out-of-pocket expense for individuals of $5,100 and $10,200 for families.
Here's how it works. Say you had to visit the doctor to see whether the sniffle your child has is the flu. Under an HMO or a PPO, you would pay a $15 or $20 co-pay, and your insurance company would handle the rest. Under an HDHP, there is no co-pay. Instead, you would pay the full cost of the visit, but that cost would be negotiated by your insurance carrier and lower than the cost for an uninsured person. You would continue to pay the full costs of your visits until you reach the $10,200 maximum deductible per family for that year (if that is the amount you opted for), after which the insurance company (and most of the big ones, such as United Health Care and Aetna, offer HDHPs now) will pick up the tab.
So how will you pay for your doctor visits? Here's where the HSA comes in. An HSA is a sort of savings account for health expenses. With all the money you save by paying low premiums for your HDHP, you can open an HSA and put dollars into it. You are allowed to contribute no more than your annual deductible; if your deductible is the minimum of $1,000 per year, for example, you (or your employer, or both you and your employer) can put $1,000 per year into your HSA. You can withdraw money from your HSA to pay your deductibles-the doctor who examined your child and the lab fees for the tests they ran to check whether the child's cold was due to allergies. As long as the money you take from your HSA is going toward a legitimate medical expense, you will not be penalized for taking it out. If, however, you just wanted to take some cash out of your HSA to pay for a vacation, you'll take a 10 percent hit from the IRS.
What if you don't get sick all year and never have to see a doctor? Or what if you decided to pay a $200 dentist's bill, for example, with a personal check from your checking account rather than dipping into your HSA? The money you put into your HSA will simply roll over into the next year. You can keep paying into it and watch it grow tax free until you reach the age of 65, after which you can withdraw it and enjoy it for any purpose, not just medical, without paying taxes on it. If you are above 55 years, you can make additional "catch-up" contributions per year. For 2005, that amount is $600.
For people who are lucky enough to stay pretty healthy and not have to take a bite out of the HSAs as the years go by, the money will add up to a nice nest egg in retirement. And if there is a big medical emergency one year-Davis gives a real life example of the birth of premature triplets at 19 weeks-the full tab after the high deductible is picked up in its entirety by the insurance carrier; in this example, close to $1 million.
For the business owner who provides employees with insurance, opting for an HDHP and HSA combo over a traditional PPO or HMO can mean big savings, Davis says. With his clients, Davis has seen employers save between 20 percent and 30 percent on premiums on their employees' health plans.
The HDHP and HSAs have their drawbacks. Davis says HSAs are not a good fit for the low-income worker or hourly wage earner. For someone like this, high out-of-pocket deductibles could make just one of two doctor's visits in a year impossible to recover from financially.
But for someone who can afford the deductibles, the benefits of an HSA go beyond getting a good tax break, says Davis. It changes the entire mentality of a patient. When it's their own money they are using to pay a medical cost, Davis says people are more likely to think twice before making an unnecessary doctor visit, for example, rather than when they think in terms of simply making a $15 co-pay, which adds up to hundreds of dollars within the system down the line. They are more likely to save for medical expenses, shop around for drugs and services, and less likely to waste money on unnecessary medical costs. Says Davis, "If people become more cost conscious, instead of using the drug they see on TV during Monday Night Football, they will ask for the generic product."
START SHOPPING
Here are a few links to help get started researching HSAs:
http://www.treasury.gov/offices/public-affairs/hsa/