The Haze

Overview:

The cost of health care is driving a difficult dilemma — Few of us can take the risk of a major illness or injury which can often be many thousands of dollars, yet health insurance that offsets this significant financial risk can be very expensive. The combination of a High Deductible Health Insurance plan along with a tax favored Health Savings Account (H.S.A.) can be a sensible middle path; Health Insurance for major medical situations while the Health Savings Account allows you to set aside your own money for routine or future medical costs. If you are self-employed and are paying for your own health care insurance coverage, this can be a path to affordable medical insurance that still provides important financial protection. An H.S.A. qualified High Deductible Health Insurance policy still has the substantial protection of a major medical plan, just not the “low-end” benefits. Don’t be fooled by “Cheap” Health Insurance or “Affordable Healthcare” plans that limit benefits that you might need and still leaves you vulnerable to catastrophic medical expenses.

Two Parts:

Health Insurance Component. A High-Deductible H.S.A. compliant health insurance contract.
Savings Account Component. A tax advantaged “Health Savings Account.”
It is important not to confuse the two components.

The High-Deductible Health Insurance: It is your backstop to protect you from the financial risk of a major illness or severe injury. The health insurance contract completely stands on its own but is a prerequisite for the tax advantaged Health Savings Account. These insurance contracts are really misnamed. You can indeed have a H.S.A. compliant health plan with a range of deductibles and maximum out-of-pocket limits. Insurance companies offer a range of “H.S.A. compliant plans” with different features within the IRS rules — just find a plan that makes sense for you. Be sure that any plan you select is labeled as H.S.A. compliant or compatible. Very few of us can afford the health care costs of an illness such as cancer, heart attack or a severe injury. These costs can run into the hundreds of thousands. My older brother’s struggle with Lymphoma, for instance, resulted in over $500,000 in health care costs over two years. A High-Deductible Health Insurance is often lower cost because you are not buying the “low-end benefits” but it still offers financial protection similar to any “Major Medical” health insurance plan beyond the maximum out-of-pocket. This is a critical component to this overall health care finance strategy.

The Health Savings Account: An optional, tax advantaged savings account that you can use to set aside your own funds toward future medical costs. You are required to have a High-Deductible Health Insurance plan to take advantage of this exceptional tax deal. In 2009, the maximum contribution to your H.S.A. is $3000 for an individual account ($5950 for a family account) plus a “catch-up” contribution of an additional $1000 for people age 55 or more. This contribution limit is adjusted for inflation by the IRS each year. One of the very important advantages of the Health Savings Account is how broadly you can use the funds for health care expenses while retaining the tax savings. Examples are over-the-counter medicines, eye glasses, dental expenses and more. A second important advantage of a Health Savings Account is the tax impact. Essentially, the money you set aside in a tax year in this special account and then either retained or spent for qualified medical costs is reduced from your taxable income. A third very important benefit is with a Health Savings Account, if you don’t spend the money contributed, you keep it. What you contribute this year and don’t spend is retained for future health care expenses. Don’t confuse the H.S.A. with a “Health Reimbursement Account” (H.R.A.) which you may have had with an employer sponsored plan.

Core Advantages:

Lower health insurance cost. Why pay for benefits you don’t use?
Insurance protection for a major injury or illness. The “major medical” insurance protection of the High Deductible Health plan is a critical component.
Tax Savings. Optional but productive tax deal with the Health Savings Account.
Broad Eligible Expenses. Your H.S.A. funds can be spent for many different qualified health care costs.
Use it or Keep it! Money you set aside in your H.S.A. can be spent for qualified medical bills but is retained if you don’t use it.
Is it a Good Fit?

This health care financing strategy, a High Deductible Health Plan paired with the Health Savings Account, is a good fit for many folks but not everyone. Here are the criteria that I want my clients to consider:

Can I qualify? Normally, you have to be in good health before the health insurance company will make you an offer.
Can I save? This strategy is better for folks that are willing to save for future health care costs.
Can I decide? This strategy is better for folks that want to make choices on what to buy with their health care dollars.
Can I spend? For this strategy to work safely, you have to be willing to spend your money when you need to for necessary health care expenses.
Summary:

I purposely have not focused on the tax rules, plan details, etc. Most folks get caught up with this extensive detail and become completely confused. The big picture is what I want you to see — This can be a great deal! — Buy health insurance for the catastrophic risk only and self-insure your normal health care costs with contributions to a Health Saving Account. You save on your insurance costs, save on your taxes and have an overall better outcome.

When one engages in any type of insurance as a policyholder, he or she is doing what economists call risk management. In order to hedge oneself from a certain risk-fortuitous or otherwise-a premium is paid to another entity that will indemnify when it does happen by pooling together resources. Such events can come in the form of contraction of an illness, a debilitating disease, and a disabling accident. Individuals who wish to be shielded from the heavy toll of these events, not just on the body, but also on the resources, acquire one or two health insurances or medical plans.

In principle, the fee or the premium is determined by the risk severity and frequency. The premium is likely to be higher for those whose health risks are assessed to be serious, probable, and recurring. This explains why health insurance premiums tend to be more expensive for those who are buying at their old age. People who smoke, drink, and take drugs may have difficulty securing a medical plan, or, they pay a large sum for a premium. Sometimes, those who are engaged in extreme sports or hobbies are unable to get one, unless their activities are excluded from the insurer’s list of accidental losses.

The US government will have medical plans for those with disabilities, as well as for those who are already 65-years-old, above. Since social health insurance works around the principle of resources pooling in order to provide coverage, the person insured will have the advantage of lower premiums despite predictable and probable losses. A certain degree of stability is also guaranteed, because the risk is shared both by the government and the citizenry. Of course, health insurance of this type also provides a wide range of accredited physicians and clinics, extending to all states.

However, the limited coverage of the public health insurance may be appealing to many. There are those who go for private medical plans that have wider coverage in terms of health risks, to include chronic and debilitating diseases, which may require prolonged hospitalization and treatments. Some insurers allow their clients the flexibility of choosing their preferred and trusted doctors and hospitals, an attractive feature of this health insurance. Inclusion of health of the immediate family members in the coverage is also possible, for an extra fee. As one may have already observed, private medical plans are costly, and perhaps a luxury these days.

While insurance has been highly commercialized, evolving into many forms to suit every person’s needs, there is still the old school of self-insuring. To manage risks and possible losses in the future, people are satisfied with just saving their money in the bank, instead of paying health insurance premiums. But factoring into the equation the rising inflation ever year and the minuscule interest that the bank gives, the funds deposited will decrease in value over the years. Like investment, it is wise to not put all the eggs in one basket. Self-insuring may be continued, but alongside, an insurance policy must also be secured and enforced for a better hedge in the years to come.