Your Cost-Benefit Analysis Deductible Levels
Higher deductible levels generally come with less costly premiums than lower deductible levels. You should take this into account when deciding whether or not to choose an HDHP/HSA option. While it may seem intimidating to take on a high deductible, remember, the plan should cost significantly less and the money you save can be used in reaching that higher deductible. Take the time to think about your personal ability to balance these benefits with potentially more financial exposure in the event of a high-cost year. If you need family coverage, balance individual deductibles (if required) with the umbrella deductible (Chapter 1: Health Savings Accounts—A New Approach) to get the right savings level.
Coinsurance and Co-payment Levels
Another way for you to balance the benefits and risks of an HSA is to understand the coinsurance levels.
Coinsurance or co-payments determine what you pay once you or your family reaches your plan’s deductible.
Different coinsurance and co-payment levels can affect the premium price and the additional amount you may need to pay out of your HSA or out-of-pocket once the deductible is met. For example, if your coinsurance level is 100 percent, meaning your plan pays 100 percent after the deductible; your premium will most likely be higher than one with a coinsurance of 80/20, meaning the plan pays 80 percent and you pay 20 percent until you meet your out-of-pocket max.
Out-of-Pocket Maximums
Maximum out-of-pocket costs to qualify for HSA eligibility for individuals ($5,600 for 2008) and families ($11,200 for 2008) are set by law. However, HDHP plans can vary as to whether this is for all claims or for those that are only in-network as allowed by most health plans. Your out-of-pocket maximum level can affect your exposure and your ability to go out-of-network to receive expensive care.
Determining the Right Amount of Money to Contribute to Your HSA
The short answer is you should contribute the most money the law allows, and you are financially able to contribute, on an annual basis to your HSA. Why?
Because HSAs have some of the best tax benefits of any savings accounts including traditional IRAs, 401(k)s and Roth IRA accounts. Only with an HSA can the owner contribute tax-deductible deposits, enjoy tax-free growth through interest or increasing investments, and spend this money on most health related services and products without paying taxes. Furthermore, unlike most other medical spending accounts such as FSAs or HRAs, the money in your HSA is yours to keep. It can also be used for non-health related costs by paying only your income tax, with no penalties, when you reach age 65. So keep contributing!
The Longer Answer
The reality is that most people, including those who have HSAs, are on a tight budget and may not be able to
fully-fund the account. The good news is that the government allows you to increase or decrease your contributions throughout the year up until tax-day (April 15th of the following year) and still receive the tax benefits. The HSA can also be fully-funded in advance at the beginning of the year, providing you stay covered by the qualified HDHP for the entire year.
Example: The Jensen family is expecting the birth of their second child in July and their HDHP plan year began on Jan 1, 2008. They are in a
$5,000 family deductible plan with no embedded deductible. Their plan has maternity coverage and 100 percent coinsurance once the deductible is met. Expecting out-of-pocket expenses in July
associated with the birth of their child, they increase their contributions to $800 per month so that by July 1 they have deposited $4,800 into their HSA for the year. For the 2008 IRS tax year, the Jensens can deposit up to $5,800 into their account, so they may still contribute $1000 over the next six months assuming that they remain eligible to contribute to the HSA for the entire year. When they receive their bills in August for the childbirth, they will have money in their HSA to satisfy these claims up to $5,000. Cost exceeding $5,000 should be paid by the HDHP.
Permitted Insurance Coverage That Protects You A gainst High Expenses
The law allows you to use other types of insurance with your HDHP that can help offset the risk that comes with a higher deductible level. These policies include
homeowner’s insurance, automobile insurance, dental and vision care plans, accidental injury insurance,
workers’ compensation benefits, hospital indemnity plans that pay a fixed amount per day of hospitalization, and specific disease policies that pay a fixed amount for the designated disease. The permitted plans help preserve your HSA balances and protect you against out-of-pocket expenses.
Case Studies
As you become familiar with the covered benefits, deductibles, contributions and out-of-pocket exposure associated with your HDHP, you can begin to understand and plan how to make your HSA work for you. Please see the below examples of real-life scenarios and how HSAs can work by decreasing insurance premiums and helping to change behavior.
Jake—25-year-old healthy male
•
Sadie—58-year-old woman (pre-retiree)
•
Holly—35-year-old mother of 4, new-onset
•
diabetes
Bill—48-year-old with hypertension,
high-•
cholesterol
These studies will illustrate how to get the most out of your HSA by:
Understanding and selecting the best HDHP
•
design for your situation; and
Determining the right amount of money to
•
contribute into your HSA.
Case 1
Jake is a 25-year-old healthy male who works for a small construction business. Jake makes $40,000 per year and has health benefits covered by his employer. Jake is married to Jackie; they have one child and hope to have a second child. Their health care costs are typical for a young family and include:
Occasional office visits
•
Occasional prescriptions for minor illnesses
•
Traditional plan: $500 family deductible plan that includes:
80/20 coinsurance once deductible is met
•
with out-of-pocket maximum $2,000 Office visit co-payments = $20
•
Prescription drug co-payments = $20
•
Proposed HSA plan: $5,000 family deductible HSA-qualified HDHP with:
100% coinsurance once deductible is met
•
No co-payments
•
No “permitted insurance”
•
$300 monthly contribution to HSA by Jake
•
and his employer
Year 1—Current Plan Compared to Proposed HSA Plan
Traditional Plan HSA Plan HSA
Contribution N/A $300 x 12
months $3,600
$300 All pre-tax $400
Year-End
BalanceHSA N/A $3,200
In Jake’s second year in the plan, his wife had a complicated pregnancy requiring a lengthy hospital admission and his son required a hernia repair under general anesthesia.
Complicated pregnancy—$15,000 in hospital
•
and physician bills
Uncomplicated hernia repair—$5,500 in
•
hospital bills for operating room, surgeon fees and anesthesiologist fees
Year 2—Current Plan Compared to Proposed HSA Plan—
Contributions N/A $300 x 12
months $3,600
Office Visits 12 x $20
co-payment $240
12 x $50 (office visit at
fair market price)
$600
Prescription Drugs 15 x $20
co-payment $300 15 x $40 (avg.
$1,500 Already met
deductible $0
Total Expenses $4,540 $5,000
Adjusted Expenses
(post-tax effect
25% Fed, 7.5% FICA,
7.5% State $7,567 All pre-tax $5,000 Year-End HSA
Balance N/A $1,800*
*Had these expenses occurred in year 1, Jake would have had to pay $1,400 in addition to using all of the funds in his HSA ($3,600 pre-tax and $1,400 post-tax for a total of $5,000), compared to having post-tax, out-of-pocket expenses of $7,567 in his traditional plan. Jake could reimburse himself the additional $1,400 from his HSA when the balance rebuilt in the following year.
Case 2
Sadie is a 58-year-old single female who is an early retiree. Her former employer offers no health benefits for retirees. Sadie is paying the entire cost of her individual policy. To save money, Sadie elects to purchase a high-deductible plan that qualifies for HSA contributions. Her premium savings allows her to put
$1,500 per year in her HSA.
Previous Plan: Low deductible plan that includes:
Office visit co-payments = $15
•
Co-payments for prescriptions ($10 Generic,
•
$15 Brand, $20 for Non-Preferred)
Sadie suffers from high blood pressure, hyperthyroidism, and mild depression and is taking hormone replacement therapy (HRT). The actual costs for brand-name drugs and the co-payment are listed below:
Condition Actual Cost Co-payment High Blood Pressure $48.89 $10.00
Hyperthyroidism $14.69 $10.00
Depression $72.43 $15.00
Hormone Replacement $55.42 $20.00
Total Monthly $191.43 $55.00 Total Annual $2,488.59 $660.00
The cost to the insurance company is $1,828.59 ($2,488.59 actual cost less $660 in co-payments) New Plan: HSA/HDHP
$2,500 deductible
•
$1,500 annual contribution to the HSA
•
No co-payments
•
Incentive + Health Support Services
Sadie utilizes resources offered by her HSA administrator to find less expensive, equally effective alternatives for her name brand prescription medications. She is motivated to switch to the alternatives since she has
$1,500 in her HSA—money she keeps if she doesn’t spend it. This money was the result of changing to a higher deductible plan. The actual costs of the generic alternatives are listed below:
Condition Actual Cost High Blood Pressure $20.33
Hyperthyroidism $7.49
Depression $26.48
Hormone Replacement $17.36 Total Monthly $71.66
Total Annual $859.92
The Result
Sadie discussed her findings with her physician and he agreed to change her prescriptions to the less-expensive alternatives. Because she had incentive, education and access to information, Sadie was able to save money and maintain a high-level of medical care. Below is a table showing Sadie’s savings by participating in an HSA plan:
Previous
Plan HSA Plan Change with an HSA
HSA Annual Deposit $0 $1,500.00 +$1,500.00
Sadie’s Annual Expenses $(660.00) $(859.92) -199.92 Change with an HSA $(660.00) $640.08 $1,300.08
Not only is Sadie better off by over $1,300 dollars by having an HSA, but in addition, she did not have to pay taxes on the money that went into her HSA, which could potentially save her hundreds of additional dollars in taxes as well.
The insurance company was also able to save money.
Rather that paying the difference between the actual cost and the co-payment, which was $1,828.59, they didn’t have to pay anything since all the expenses were below the deductible. These savings will allow the insurance company to continue to offer HSA-qualified HDHPs for competitive prices.
Case 3
Holly is 35 years old, married and a mother of four, with newly diagnosed insulin-dependent diabetes. Holly’s husband has recently left one job that offered health benefits through a low deductible, traditional plan. His new employer offers an HSA plan.
In Holly’s own words:
“In a health insurance plan with a consistent co-payment of $10, I never had a reason to ask any questions
regarding the services rendered and their respective costs. I simply paid the co-payment and felt grateful to have insurance pay the rest— or so I thought…
Under my traditional HMO insurance plan, the
pharmacy simply filled the prescriptions written up by my doctor for my insulin and diabetic supplies and I felt no need to research more cost effective, competitive prices. I was happy to pay my $35 co-payment for insulin.
When introduced to health savings accounts, I was worried that I would not enjoy the same benefits. I learned, however, that not only did I receive comparable care, but also I learned to be a careful “shopper” and save money. I began to ask questions about such things as lab work, blood tests and examinations. I learned how to save money by switching to generic medications, buying a less expensive blood glucose monitor and test strips. I found out that the typical blood work done at my doctor’s office cost anywhere from $55-$70. I learned that I could purchase my own hemoglobin A1C test at my local pharmacy for about $24. I did the test at home and phoned in the results to my doctor. I also learned to watch for coupons at the pharmacy and rebates on diabetic products.
I have become more of a researcher for myself and for my children. Before taking them to the doctor or to the urgent care, I go first to the informative resources on-line, to learn more about diagnosis and suggested medical care.
I have discovered that by being in control of my medical dollars I am much more conscientious about my health care consuming habits and my family and I have been able to save money on medical expenses.”
Case 4
Bill is 48 years old, recently divorced and has several medical conditions. His employer is offering an HSA plan. Under his current plan, Bill has significant monthly expenses including co-payments for:
Regular office visits
•
High blood pressure medication
•
Diabetes medication
•
Acid Reflux medication
•
Annual Comparison of Previous Plan and HSA Plan
Previous
Plan HSA
Plan
Beginning Balance N/A $1,200
Office Visits (10 visits x $20
co-payment) $200 (10 x $50) -$500
Prescription
Drugs (30 prescriptions x $20
co-payment) $600 (30
prescriptions x
$40) -$1,200
(10 prescriptions x $40
co-payment) -$400 (10
prescriptions x
$90)
Lab Work -$150 (met
deductible) -$0
Total Expenses -$1,350 $2,600
Plus HSA
Account 15% FICA, 7% State
28% Fed $0 $1,200
Ending Balance
(post-tax effect) (deductible, coinsurance) -$2,700 All pre-tax -$1,400 Additional
Exposure (deductible, coinsurance) $2,500 $0
Under this scenario:
Bill saved $1,300 by using an HSA plan
•
versus his previous low deductible plan.
Bill has 100 percent coverage for other
•
medical expenses because he has already met his annual deductible and his HSA plan will pay 100 percent for all in-network expenses he accrues in any year that are above the deductible.
He has an additional $2,500 risk with a
•
traditional plan due to the fact that his co-payments do not apply against his previous plan’s $500 deductible or his coinsurance, which can total up to $2,000 per year if he has a higher level of care.
Keep in Mind
You need to understand the details of your
•
HDHP plan design including the deductible levels, coinsurance and co-payment levels and the amount you can contribute to your HSA in order to balance the risks and benefits of the plan. Much of this information is available by studying the HDHP summary of plan benefits provided by the insurance company.
You may find some benefit in purchasing
•
additional “permitted insurance” policies to help limit your financial exposure while gaining the benefits of a tax-advantaged
savings account.
Careful planning and management of your
•
HSA is necessary to gain the most tax-free benefit. You need to become familiar with and use health support tools that can help you get the most for your HSA dollars while maintaining a high level of care.
HSA administrators should be able to
•
provide information on your medical claims as well as the health support tools that are necessary to make better decisions.
Up Next
This chapter has explained how to make an HSA/HDHP work for you. Chapter 7 will discuss everyday challenges you will face when using your HSA/HDHP.
Chapter 7
Previous chapters have explained how the HSA and HDHP work. This chapter examines how the HSA/
HDHP can help you through various real-world and family situations: