Wednesday, October 14, 2009

Health Savings Account (HSA)

Child and I have been looking into health insurance options. With a new baby, our rates are about to go up, and it's hard paying all the money we do when all of us are healthy as far as we can tell.

The option we've decided on is a Health Savings Account (HSA).

The idea is that instead of paying full premiums for regular health insurance, you pay a smaller premium for health insurance with a high deductible (high-deductible health plan, or HDHP). Along with that, you open a special health savings account (HSA) where you can deposit money (such as the money you saved by paying smaller premiums). This money is used to pay for any medical expenses.

There's a few pros and cons.

Pros:
If nothing ever happens to you, you're not out the money as you would have been if you'd spent it on insurance premiums. It just builds in your savings account.

Any money you put into the savings account is untaxed if you eventually use it for qualified medical expenses.

"Qualified medical expenses" are defined very broadly. Things like acupuncture, chiropractors, even lasik eye surgery are acceptable, as well as the more usual things like medications. You're still paying for the chiropractor, but if you'd be paying anyway, it's better to pay with untaxed money.

After age 65, you can take the money out for non-medical expenses without penalty, although it will still be income taxed if used for non-medical expenses. (In other words, it will be tax-deferred.)

Cons:
You have a very high deductible; usually $3,000 to $10,000. This means that if something big happens, you have a very large out-of-pocket expense before insurance kicks in.

This also means that for smaller things like doctor visits and prescription medications, you'll be paying for everything since it's doubtful you'll reach your deductible.

Any money you put in the savings account is supposed to be used for medical expenses only. Before age 65, if you take it out for something other than medical expenses, the government hits you with a 10% penalty plus income tax.

3 comments:

Andy Lemmon said...

You may have thought of this already, but do you plan on taking Squeakaboo to all the recommended well child checkups and getting the vaccinations? (2 weeks, 1 month, 2 months, 4 months, 6 months, 9 months, 12 months, 15/18 months, 24 months, and then once a year after that) That can add up fast.

AC said...

So from dealing with health insurance-ness, what is your view on healthcare reform? would you support a public option? do you think health insurance should be mandatory, like it is will car insurance?

The Writer said...

Andy: vaccinations are cheap. Well-baby visits run under $100 for us. Since we're paying about $300 less per month for insurance by going the HSA route, $100 of that every two or three months will pay for the well-baby visits.

Yes, it adds up fast, but our savings add up faster. :)

Rough calculations show that we break even if we have a major incident ($6,000+) once every two years.

Worst case scenario (i.e. something catastrophically bad happening every day), we shot ourselves in the foot to the tune of $3,000 per year.

Best case scenario (i.e. nothing happens), we save $3,000 per year.

AC: I know it's bad, but I haven't really done any research at all on what the current healthcare reform wants to do. I'm not even sure what the implications are of a public option, or how it would work, so I don't want to speculate on that.

I don't think mandatory health care would work. What will you do to people who can't afford it? They'll still go to the ER if something happens, and the ER will still be required to treat them. It's not like car insurance where people have the option of not driving.