As part of my recent trip to the emergency room I’ve had an occasion to use my Health Savings Account (HSA) to pay for some of the services. I thought it might be nice to cover the basics of an HSA while we patiently wait for my insurance company to process Bayfront Medical’s $11K claim. Remember I was told it could take 30 to 45 days and that clock started ~40 days after I was discharged due to when Bayfront submitted the claim.
So for those of you that aren’t familiar with HSAs these are essentially tax-deferred savings accounts that you can use to pay for most medical expenses. There is a list of eligible expenses that is maintained by the IRS so not everything that you might think is a medical expense is actually eligible to be paid for by your HSA. For example, you can use your HSA to pay for your office visit co-pay to see your primary care physician but you typically can’t use your HSA to pay for alternative treatments like colonics or acupuncture. If you’re interested in what is eligible you can visit my favorite pharmacy Walgreen’s – they usually print a little FSA next to all the eligible items on the shelves and/or you can check out their online tool that allows you to browse and search. Some of you may be confused at this point because I switched between HSA and the FSA or Flexible Spending Account. These are two different types of accounts but they share the same eligible expense list.
So back to the story.
I’ve been saving money in my HSA for several years now and I have a nice little balance built up. My health plan has a $2,900 deductible and I have about double that saved up. How did I do it? Well I started with a simple plan called premium differential investment. It sounds fancy but it’s really quite simple. If you take the difference between what you used to pay for a rich benefit HMO plan and what you now pay for your high deductible PPO plan and put that in your HSA, the amount of money you pay each money remains the same but you’re actually saving for the future. Simple, right?
“Well how much could that really be?”
I did a quick survey of health plans available in the state of Alabama on healthcare.gov and I found that for an individual you can get a platinum plan that has a $100 deductible and very low co-pays for about $300 per month – or $3,600 per year. You can get a bronze plan with a $6,350 deductible for about $150 per month of $1,800 per year. So right out of the gate you’re saving $1,800 a year in healthcare costs just by picking a plan with a high deductible.
“But what if I need to go to the doctor?”
That’s always the question. Selecting a high deductible plan has it’s risks of course – that’s the point of the plan. In exchange for a high deductible you get to pay a lower monthly premium. The thought being that you’re bearing more of the risk so you get to keep more of the money you used to pay for the more traditional HMO type plan you were probably in. Now remember, by taking the difference in what you pay in premiums and contributing that to an HSA you can at least save $1,800 a year in the scenario I mentioned earlier. It’s also important to remember that preventative care is almost always covered on what is called a first-dollar basis, meaning you don’t have to pay out of pocket for it. Things like your annual physical would fall into this category. The idea there is that you are generally healthier if you establish and maintain the habit of seeking preventative care.
There’s a bunch of data available for what people spend on health care each year and there are even some studies that talk about how many people actually meet their deductible each year. I think it might surprise you that the average across the three I just read puts the number of people that actually have to spend the full deductible each year is less than 30%. That means 70% of the folks out there spend less than that. So if you’re relatively healthy you can start saving now while you ARE still healthy and by the time you may need it, you will be like me potentially and have a war-chest of money to cover your costs.
A few interesting facts about HSAs:
- They belong to you – unlike a FSA which belongs to your employer. Sure in the FSA it’s your money going in but if you don’t spend it you can lose all but $500 at the end of each year and if you quit before spending it, you forfeit it back to your employer. Your HSA money is yours from day one – even the money your employer might contribute to it.
- You contribute pre-tax – you can have your contributions taken right of your paycheck pre-tax saving you an average of 30% on your income tax. You can also make post-tax contributions and claim them at the end of the year on your income taxes.
- You can invest your HSA dollars to earn even more – Most HSAs offer an investment option that allows you to invest your funds in mutual funds or other securities. Just like any investment you can also lose money but any money you earn is earned tax free. You also typically earn interest on your cash balance as well, that too is earned tax free.
- You don’t necessarily need to spend it on healthcare – once you reach retirement age, if you don’t need the money you’ve saved in your HSA for healthcare costs you can withdraw money penalty free and spend it on whatever you want. The only catch there is that you would need to claim it as income for that tax year and pay the appropriate income taxes.
So why is my HSA my hero? I guess it’s really not my hero – I guess I am my own hero because while I was healthy I started saving and now that I had an incident it didn’t cause me an financial stress and I get to continue to save for the future and pay lower premiums. If you would like to learn more about HSAs please feel free to connect with me directly by clicking on the contact me page on my website.