Rethinking Health Insurance



The cost of health care is driving a 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 costly. The combination of a High Deductible Health Insurance plan and 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 pay 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 leave you vulnerable to catastrophic medical expenses.

Rethinking Health Insurance
Rethinking Health Insurance

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.

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 an 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 — 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 an illness’s health care costs, 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.” However, it still offers financial protection similar to any “Major Medical” health insurance plan beyond the maximum out-of-pocket. This is a critical component of 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 for 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. was $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 significant 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, eyeglasses, 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 significant 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 on many different qualified health care costs.

Use it or Keep it! The 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 makes 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 who want to choose what to buy with their health care dollars.

Can I spend it? For this strategy to work safely, you have to be willing to spend your money when you need to for necessary health care expenses.

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.