Even with all of the changes in the United States to make health care more affordable for every citizen, many Americans still deal with expensive medical bills. Some people pay high monthly premiums so that their deductibles are lower and their medical coverage kicks in faster. Some people pay high deductibles to reduce the cost of monthly premiums. Many people face medical expenses that their health insurance plans only partially cover or fail to cover at all. When these events take place, the extra costs can go so high that some patients must take out loans to cover their medical expenses or file bankruptcy.
The HSA Concept
A Health Savings Account (HSA) is a savings account designed to provide tax benefits to a patient that agrees to sign up for a High-Deductible Health Plan (HDHP) where they pay higher than average out-of-pocket amounts for medical care before their primary insurance coverage kicks in. Patients with HSAs and HDHPs do not have to wait for insurance to approve appointments or procedures. As a result, they have more control over non-emergency medical expenses.
The HSA concept also offers broader benefits to individuals and families. A commonly held belief in the U.S. is that patients receive a lot of unnecessary or sub-optimal health care. Additionally, many Americans believe that doctors, hospitals and laboratories are allowed to charge far too much for services because of arrangements with insurance companies and low transparency in medical billing. Lastly, there are not enough patients paying out of pocket to force doctors, hospitals and laboratories to bring down their costs because of limited competition. After all, there are more patients that need medical attention than doctors in most geographic regions.
Health Savings Accounts level the field by forcing the health care industry to become more like the rest of the economy with consumers driving competitive behavior between product and service providers. When patients use actual cash to pay for their health care, they are more likely to spend that money carefully and shop around for service. Some experts believe that this type of behavior will force down prices as medical practitioners that charge higher-than-average rates or offer substandard care begin to lose business. Another belief is that unnecessary health care is the result of standard insurance patients failing to understand medical billing. Patients that have HSAs and HDHPs ask about and negotiate product and service rates more than those that have standard plans where insurance companies pay for almost everything behind the scenes.
People with a lot of health problems and/or chronic health conditions that also live on budgets do not usually benefit from Health Savings Accounts because they have limited money to invest. Patients in these situations also typically benefit more from standard insurance plans because of the high cost of health care. Additionally, standard insurance plans with regular yearly costs associated with preventative care make it far easier for patients to budget because they only have to estimate their co-pays and partial pays based on clear insurance billing information.
Patients that have HSAs and HDHPs might experience dissatisfaction because of local health care providers that refuse to negotiate costs or provide transparent upfront lists of costs. Some health care providers claim that they can't provide their costs because patients have different health care needs and their billing practices involve bundling some types of care. Many providers roll up standalone service costs for certain health conditions into bundled service rates. Another cause of concern by experts in regards to HSAs is that some people that have these accounts hesitate to get medical care when experiencing symptoms because they believe that they need to save the HSA money for emergencies.
Setting Up HSAs
Although you can set up your own Health Savings Account through an authorized provider, employers also offer HSA payroll options that go along with employer-offered High-Deductible Health Plans. Some employers also offer matching dollar options where you invest a specific dollar amount into your Health Savings Account and then your employer invests the same amount. The best part about employer-based plans is that you keep the money even if you switch jobs.
You can make contributions on a pre-tax or post-tax basis in the form of payments or as a lump sum. With pre-tax contributions, your employer makes the contributions during the payroll process. The money can come out of a company account set up for this purpose as part of your employment benefits or from your paycheck before the removal of federal, state or local taxes related to income, Medicare and Social Security. With post-tax contributions, you make the contribution out of your paycheck after your employer removes the applicable taxes. At tax time, you can find pre-tax and/or post-tax contributions reported on your W-2.
Important points to keep in mind: In the pre-tax scenario, you immediately enjoy the benefit of not having to pay income tax on dollars used toward HSA contributions. In the post-tax scenario, since you pay taxes on the money you then use for contributions, you can deduct those contributions on your yearly income taxes so that they are not counted as part of your taxable income.
Contributions into an HSA do have a maximum limit. For example, as of 2016, you and/or your employer can only contribute up to $6,750 into a family HSA and $3,350 into a self-only HSA.
You can't have any additional primary insurance coverage other than your HSA and HDHP except for in cases when the insurance covers a specific severe illness, fixed amount hospital stay or worker's compensation, tort or ownership liabilities. Although you can continue to have dental, vision, accident, long-term care and disability insurance plans at the same time, you can't have a Flexible Spending Account.
Once you reach retirement age or have a permanent disability, the use of a Health Savings Account becomes a bit more complicated because the IRS penalizes people that contribute to an HSA who also receive Medicare coverage and/or Social Security benefits.
A new retiree that applies for Social Security benefits six months or more after reaching retirement age usually receives six months of Social Security back payment and back Medicare coverage. Any contributions into an HSA during those six months can result in an IRS tax penalty. The best way to prevent the penalty is to end your contributions soon enough to prevent any sort of overlap.
If you are newly retired, you can continue to use the remaining money in your HSA. You simply can't make additional contributions. If you work and you want to keep making contributions into your HSA, you must not sign up for Medicare. If you already receive Medicare and/or Social Security and you work or go back to work, respectively, you must repay any money paid by Medicare for your health coverage and Social Security payments. It is important to keep in mind that spouses and children are not affected by any of these issues as long as whoever receives HSA and HDHP coverage does not receive Medicare coverage or Social Security benefits.
Beyond the tax benefits involving contributions, you also do not have to pay any taxes on money that accrues interest in a Health Savings Account or that you remove from your HSA to reimburse yourself for medical expenses or to directly pay for expenses. The tax-free nature of an HSA applies to anyone attached to the HDHP including a spouse and children. Any remaining money also rolls over to the next year without penalties. This means that you do not have to use the money in your HSA except for when you need it. If you withdraw any money for non-medical purposes, the IRS requires that you pay income taxes and usually charges a 20 percent tax penalty.
To maximize benefits, you should do one or more of the following:
- Make electronic contributions pre-tax through your employer or post-tax through your checking account so that you do not have to waste time and money with manual contributions.
- Use the money for IRS-approved medical expenses so that you are never penalized.
- Deduct all HSA contributions you made on your yearly taxes.
- Shop around and negotiate the price of health care whenever possible.
- Select low-cost health care facilities, products and services, such as urgent care centers and walk-in clinics over ERs and doctors' offices, generic instead of brand name prescription drugs and independent diagnostic labs instead of hospital labs.
A Health Savings Account and High-Deductible Health Plan can't prevent high emergency medical costs, but they may give you more control over the cost and quality of health care and provide you with tax benefits.