Health Saving Accounts or HSAs, also called Consumer Directed Health Plans (CDHP) or High-Deductible Health Plans (HDHPs) have been popping up everywhere and why not? They are great for the employers, almost always a great deal for you and me and certainly a good thing for the health care system in general. So what are they and how do they work?
As opposed to a typical insurance plan where you pay a $20 or $30 co-pay every time you go see a doctor, with HSAs you pay the retail amount as if you don’t have insurance. That is, the insurance company does not come to the rescue until you have paid say about $3,000 out of pocket for a typical family in a given year. Once that is exhausted, an out-of-pocket maximum (say another $2,000) kicks in where you split the cost with the insurance company for that year. And once that $5,000 total limit is reached, you have no more healthcare related expense for that year. The insurance company picks up the entire tab from that point on.
Since quite a bit of the cost to insure your family is borne by the employer, they definitely like it because their cost to insure you goes down and sometimes by a lot compared to the traditional options.
You benefit in many ways;
– Your premiums are most likely lower than what it would cost for alternative choices and oftentimes enough to make back any potential out of pocket expenses you might incur in a given year.
– There is usually some kind of an employer match with these plans so your effective cost reduces even more.
– This is the best money you could ever have working for you – pre-tax contributions in the plan (like a 401k), tax-free growth over the years and tax-free withdrawal for healthcare-related expenses down the road (like a Roth). Our advice – any costs you incur for healthcare while you are enrolled, you want to pay out of your pocket and not touch the money in the plan. You want to let this money grow over the years and decades and use it later when you are done working and when you will not have an employer chipping in for your healthcare costs.
The system benefits because you as a consumer are now put in charge of making pricing decisions, at least for the first few thousand dollars. And that we think has been a problem with healthcare all along. What other product do we buy in our daily lives that we have no idea how much it costs before we buy? Only after the fact do we get to know what the “true” price of that doctor visit you had was. And we usually ignore that bill because it’s the insurance company footing the bill. Ha, you wish!!! It’s you and me who end up bearing that cost.
So the next time open enrollment rolls around, look into this option. Oftentimes, it would turn out to be the best choice. Need help deciding…let us know.
Image credit – Chris Potter, Flickr