Should I sign up for a Health Savings Account?

One of the joys of starting a new job, is wading through the benefit enrollment process. Unlike at my old job, I now have the option of signing up for a Health Savings Account.

A Health Saving Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the US who are enrolled in a High Deductible Health Plan. The funds contributed to the account are not subject to income tax at the time of deposit and the funds may be used to pay for qualified medical expenses at any time without tax liability.

HSAs encourage saving for future health care expenses and make consumers more responsible for their own health care choices. These plans require that the consumer take greater financial control over their health care than in a traditional health plan. Day-to-day expenses come out of the health savings account, while catastrophic expenses are covered by insurance.

For example, an individual might have to choose between a $200 brand-name medication and a $20 generic medication. Under traditional health insurance, the generic drug might have a $5 copay, while the brand-name drug might have a $15 copay. In this case, the individual might choose the brand-name drug, costing the health insurer $185. With many people making the same choice, the insurer would need to recoup by charging everyone higher premiums.

An individual with a high-deductible health plan would likely make the economically efficient choice by choosing the generic drug. This would in turn translate into lower premiums for participants. By giving the consumer a choice and proper incentives, money is saved. If a truly catastrophic event happens, like a heart attack, health insurance is there to cover expenses over the deductible.

HSA plans can clearly benefit two groups of people, those who are healthy (me) and those who are very unhealthy or have large monthly expenses for medications. This is due to the fact that everything one spends on medications and office visits are credited towards the deductible. Once the deductible is met, HSA plans will pay for medications with the same copay as all other medical expenses. This could limit the maximum out of pocket costs in some cases.

Unlike many other tax-advantaged accounts, there aren’t any income limits on HSAs. Anyone under age 65 who buys a qualified high-deductible policy can open an HSA. You can’t be covered by another health insurance policy that isn’t a qualified high-deductible plan, although you can still have other disability, dental, vision and long-term care insurance policies.

In 2007 you can contribute up to $2,850 for individual coverage or $5,650 for families. And if you leave your job, you can keep the money in an HSA account, similar to a 401(k). Your HSA balances can roll over from year to year and continue to grow tax-deferred.

HSAs also give the flexibility not available in some traditional health plans to pay on a pretax basis for qualified medical expense not covered in standard or HSA insurance plans. This may include dental, orthodontics, vision, and non-prescription medications.

In my plan, there is an exception for preventative care, which is covered at 100% with no deductible. And, my company matches my contributions, up to $1,200 depending on the plan I sign up for. The money is invested in an interest-bearing money market account until the balance reaches $2,000. At that time, I have the option to invest the money in a variety of investment options.

Consumer satisfaction results have been mixed. A 2005 survey by the Blue Cross and Blue Shield Association found widespread satisfaction among HSA customers, but a survey published in 2007 by employee benefits consultants Towers Perrin found that employees currently enrolled in such plans were significantly less satisfied with many elements of the health benefit plan compared to those enrolled in traditional health benefit plans.

My wife and I are pretty healthy. In all my time at my last job, I never made a medical claim, which makes all those automatic withdrawals even more painful. As we are young, healthy, and childless, now seems like the perfect time for us to be enrolled in a HSA. The monthly premiums on the high deductible plans are a fraction of the regular plans, and we still have insurance for what it’s really meant for, to cover us in the case of a catastrophic expense. It sounds like something worth trying out.