In comments last week, Mayken expressed a fairly common sentiment on Health Savings Accounts (HSAs)
My husband’s job is offering a HSA and he’s actually considering it. Scares the crap out of me frankly. As a person with a few chronic issues including asthma and a ridiculous number of meds plus a child under 10 at home, I can’t see how it can be good for us.
HSAs and High Deductible Health Plans (HDHP) to which they are attached to are not inherently scary. They may not be the optimal plan for everyone but they are a logical choice for some groups of people.
An HSA is a savings account that has incredible tax advantages:
- Deposits are tax free
- Growth is tax free
- Withdrawals are tax free if used for qualified medical expenses
An HSA can only be opened if an individual is covered by a HDHP which is a plan that has a deductible of at least $1,350/$2,700 (individual/family) with a maximum out of pocket of no more than $6,750/$13,500 (individual/family). A HDHP covers nothing before the deductible is met EXCEPT for the key no-cost sharing preventative services (mammograms, flu shots etc). There are high deductible plans which are not qualified high deductible plans as those plans will cover some services pre-deductible. The actuarial value of a HDHP ranges from 60% (Bronze) to 86% (Platinum) . It is more a benefit design and tax designation than an actuarial value designation.
The HDHP/HSA theory of change is that old style plans with low or no deductibles encouraged people to be price insensitive and to be willing to say yes to anything as they bore no immediate cost. Shifting the plan design so that an insured individual or family is on the hook for a significant chunk of the initial because of the deductible would lead to better shopping for either lower priced care for the same services or the elimination of low value services entirely.
That is not the reality. Brot-Goldberg et al found that HDHP/HSA plans led to a significant reduction in spending. That reduction was solely through the indiscriminate reduction in services and not through better shopping or elimination of low value or wasteful care. Haviland et al have found that HDHPs don’t produce snap-back spending three years out. We’re bad shoppers of complex goods and services where being wrong has potentially infinite costs.
From here, the theory of change extends a bit. Using a lifecycle model where most people are mostly healthy/cheap when young (pregnancies excluded), the idea is that people would build up big balances in HSAs during their 20s, 30s and 40s and then use those balances to pay high deductibles in their 50s and 60s. This is problematic for people who either hit their out of pocket maxes in most/all years at which point the HSA mainly acts as a tax washer on money and the HDHP acts as a permanent income tax based on disease burden/bad luck. It is also problematic for people who can’t put significant net sums into an HSA because they don’t earn enough. On average, it probably works but there are a lot of people left behind.
However, that is theory and general population insight; let’s talk specifics.
HDHPs/HSAs can be a good deal for some people.
The calculation people need to make is whether or not the Premiums + Deductible (realized) -Tax Advantages (Deductible spend (realized)) is greater or less than a similar calculation for other plans. Companies will often offer HDHPs with lower employee premium shares than non-HDHPs so there are plenty of situations where an HDHP/HSA combination can make sense.
However, even if the math makes sense over the course of a year, there are some caveats.
- Credit/consumption shifting has to happen in the first year
- Initial services require cash payment
- First few months of the year are likely to be all cash if you modest chronic conditions (asthma, diabetes etc)
- You see full contracted price
- More record keeping
HDHP/HSA are not panaceas. They are also not anathema.
Depending on your circumstances, risk tolerance and your ability to float a fairly large payment out of regular cash flow or other assets, they can make sense.
On the Road and In Your Backyard
dr. bloor
As an HDHP customer who makes max contributions to our HSA every year (and who cleans the HSA out every year), a Gold/Platinum plan NEVER makes sense after the tax benefits of the HSA and deductibility of premiums are taken into account. The decision between silver and bronze for us is based on a guesstimate of how many in the family will be hit by a bus in any particular benefit year. If it’s just one of us, the bronze is best; if it’s more than one, silver is the way to go. Even then, as a percentage of total outlays, the difference between the two is pretty trivial.
Tl;dr: They’re getting all your monies, you just get to choose the manner in which they get them.
Auntie Anne
I always tell people that if they have enough cash on hand (in a savings account, etc) to meet their deductibles, HDHP plans w/HSAs are the way to go. The premiums are less expensive, and the tax savings from the HSA are considerable. But if you don’t have the cash on hand, don’t select an HDHP plan.
The other “gotcha” can be in-network vs. out-of-network. Typically, the OOPs/coinsurance are a lot higher than the in-network amounts. That should be factored in to your cash on hand amounts.
Blue Galangal
But if cash flow is a problem – as it was for me as a single mom with two kids – I would avoid the HSA like the plague. No illness is covered until you meet your deductible, not even the plague. (Well visits were covered.) Going to the doctor with a 103 degree fever and a diagnosis of strep throat with antibiotics – not covered. Had to pay out of pocket (and don’t get me started on the prescriptions). It seemed to me that the point of an HSA was to keep people from going to the doctor. Yet I could have ended up in the emergency room had I not gone to the doctor, and that would have been covered. HSAs seem as counterintuitive as the rest of the Republican approach to health care.
daveNYC
The HDHP/HSA combo reminds me of Reverse Mortgages. It’s a product that is useful for people in a very specific set of circumstances, but available and marketed to everyone.
Plus I’m generally not a fan of how it ‘hides’, so to speak, some of the cost; since the premiums are X, but by design you’re supposed to put Y dollars per-month into the HSA. I wouldn’t go so far as to say it’s deceptive pricing, but it’s not exactly clear and up front about things either.
Kylroy
@daveNYC: If you have good cash flow and are relatively healthy, HSAs are a good move. Which is to say that if you BARELY GODDAMN NEED INSURANCE, they’re a good idea.
Let me add “401ks” to the list of overused solutions they resemble – another thing that improves the lot of people who are already doing alright, but is touted as a solution for everyone.
frosty
I didn’t have a choice. The company put everyone into a HSA/HDHP with a $5,000 deductible that they contribute $1K to each year. When I fan the numbers I could put $4K in the HSA and cover the premium for 15 bucks more per paycheck so it wasn’t too bad. We’re older but still reasonably healthy and this should get us through til we switch to Medicare.
frosty
ran, not fan.
ETA I don’t think we’ve spent more than the deductible yet after a couple if years.
daveNYC
@Kylroy: Given the stuff I hear about HSAs working as a good way to backdoor some extra savings for retirement, there is definitely a strong resemblance between the two products.
HDHP/HSAs probably work well enough (or at least you can run the numbers to find out) if you’ve got some serious chronic issues, so you’d know that you’re blowing through the deductible.
satby
I hated my HSA, but that was because it didn’t roll over year to year and you couldn’t use it to help pay premiums, so if you didn’t need it you could lose the money. That was years ago, so no idea if those rules changed.
And this guy sums up what a crock the whole “shopping for healthcare”is.
john b
@satby: that sounds more like the FSA that my company offers, not HSA.
Villago Delenda Est
Health care financing in this country sucks. If Rethugllicans advocate anything, avoid it like the plague.
joel hanes
@Blue Galangal:
It seemed to me that the point of an HSA was to keep people from going to the doctor.
That is exactly why they were devised, and how they function for most people who are not dr. bloor
dr. bloor
@joel hanes: Point taken, but the impact on our family is a little of both. Mrs. Dr. Bloor is going to hit her individual out-of-pocket max when she has some surgery done in December, so right now she’s running around having all sorts of healthcare odds and ends tended to like she won a supermarket sweepstakes because Blue Cross will be picking up the tab. At the same time, however, we’re still well below our family deductible, so I’ve been wearing a knee brace for the past two months hoping my subluxed patella or meniscus tear or termites or whatever is going on in there heals spontaneously.
American healthcare, best in the world.
gvg
i was very healthy except for some minor sinus allergies for the first 49 years of my life. then I got cancer. No warning signs. some other less serious but not quickly diagnosed had me doing a bunch of tests to find and instead, found early stage serious cancer that is normally found too late. I went to the various specialists to find the cause of my increased menstrual cramps with $40 copays and saved my own life by luck and good insurance. I had a $200 surgery fee and a lot of 20 and 40 copays but i didn’t pay enough to benefit from itemizing my insurance that year and I didn’t have to “shop” or argue while I was really sick. chemo is bad enough you really can’t be calling billing departments or read and make sense of bills that are full of jargon that doesn’t make sense to non health professionals.
All this is to say insurance isn’t just about the costs. Its about how much work it is to use it when you are really sick and possibly affected mentally (such as medicine or injury impacting your brain). My Doctors office had specialists who help people apply for medical grants and insurance aid. I didn’t need it, but people with other insurance do. Every ACA fight I think about this. I don’t make the most money but I have safe insurance. If i was counting cost till deductables, chances are I would have put up with the non related pain a few years longer, and died. I am not sure this is the best example because that means I am one of those non price sensitive insurance users, but my pain issue was caused by fibroids which do end up causing enough pain for surgery. the hysterectomy for cancer solved the fibroids too.
Someday you may get seriously ill. A factor to consider is how easy is your insurance to use when you are overwelmed.
Ella in New Mexico
Sorry, HDHP’s/HSAs are crap and I have witnessed first hand how they can wreak financial havoc on even solid middle income folks.
My brother’s a senior engineer for a company only offers this option and he and his wife struggle to pay their medical bills from three years ago for their son who had an unexpected and bizarre diagnosis of a venous sinus thrombus blood blood clot in his brain and spent a great deal of time in ICU. Should have maxed out their deductible and out of pockets, you say?
Well, it happened in early February which was an issue because they’d only just started contributing to their HSA. That was a huge issue in which they had to plead to get an advance to pay bills with. Then they were still paying the out of pocket costs for his medications and follow up appointments, multiple MRI’s, and ongoing care. Not to mention their own health care.
The hospital waited all of two months after his discharge before they began sending their bills–still unpaid by Cigna although eventually covered–to collections. So did any other provider in the hospital who hadn’t gotten the word that they were covered by the hospital bill but decided they were an independent provider, from the specialists they consulted to the Radiologist reading the MRI in the ED from the first day they presented. For the first time in their lives, their credit score dropped to the mid-600’s, after years of it being close to or above 800.
His Lovenox (blood thinner which is most recommended treatment for teens) injections twice a day for 6 months maxed out their credit cards that year. Because they also were paying as much as possible into their HSA to pay back what they would need to withdraw to pay bills.
My brother (who’s in his mid 50’s and at the peak of his career earnings) and his wife made over 180K in income that year, and for the first time in my life I actually was helping HIM pay for medications and helping with other expenses.
Thing is, once the year was over it didn’t get much better. They still pay a lot out of pocket into that HSA, as well as for their own health costs. Both have had surgeries in the past two years that could not be delayed or “shopped around”. Both have chronic but well controlled conditions requiring specialty care. Those costs don’t stop while you’re paying the bills due three years ago. They’re trying to save for retirement and pay for their two kids college costs, too.
No, I’m sorry, but HDHA’s and HSA’s are for the same people who could afford to pay for all their out of pocket medical costs up front. The rest of us with mortgages and saving for retirement and putting our kids through college and helping their their weddings and just trying to enjoy our lives need good old fashioned insurance plans.
dlw32
Is it still true that any excess money put in an HSA is lost at the end of the year? That’s still a serious problem and why I wouldn’t consider using them.
Kelly
We’re an edge case at the edge of the subsidy cliff.
We’re on an Obamacare Bronze HSA plan this year. Our monthly payment is a trivial $31. Deductibles $6550/ $13100. The handy thing for us is the tax free money funding the HSA also does not count toward our Obamacare subsidy cutoff. In our case a Gold plan with hi payments/lo deduct ends up about the same as our Bronze lo payment/hi deduct. As prosperous folk close to the subsidy cliff we see the HSA as moving the same amount of money out of our MAGI.
The first couple times we paid hundreds of dollars out of the HSA was a bit of a shock but we have yet to have a month where the deductible payments are more than the Gold or Silver monthly payment would have been. Most months we don’t go to the doc so those add up the savings. We’ll most likely do Bronze HSA for 2019.
Kelly
@dlw32: My HSA rolls over. I’m 62 and will be able to use any roll over to pay Medicare in a few years.
satby
@dlw32: @Kelly: it didn’t used to roll over, but it does now.
Kelly
Another thing with HSA is if you’re over 55 you’re allowed an extra $1000 contribution, but each spouse must have their own account. We have the bigger family account in my name so I can pay Medicare with it in a few years. My wife is 4 years younger so she has the smaller one. We can pay her stuff out of the family one.
sam
@dlw32: No – you’re thinking of FSAs. HSA money is “yours for life”, and if you accrue a high enough balance, it can be invested like a 401K (that can be good or bad depending on your view of such things).
As the person who sometimes chimes in to talk about how I’ve had an HDHP and an HSA for a few years now, and don’t hate it as much as I thought I would, I’ll note a few things for the post – the big differential at my company was that the “cost to employee” for premiums of the HSA vs a “traditional” plan were significantly reduced. I went from having my share of premiums be approximately $120/month to about $8/month (this is for an individual plan – everything gets more expensive, on both sides of that calculation, if you have to pay for spouses/dependents).
So it was fairly easy to take that ~$100/month that I had been paying in “premium” support and just convert that into HSA contributions. Obviously, my out of pocket costs changed significantly at the doctor and the pharmacy, and it *is* definitely harder to get over that psychological hump of having to “pay” for services that were previously just invisible because insurance paid for them, but at the end of the first year, I had money left over in my HSA. Which meant that money that would have just been a “sunk cost” in premium payments was still available for me to use the following year. It was also helpful for me to see that even though each visit to the doctor cost more out of pocket, it still wasn’t equaling what I had previously been spending in premiums, whether or not I went to the doctor at all.
I think every person’s needs are different, and you have to sit down and figure out what is going to work best for you, but at least some of the hurdles with HSAs/HDHPs, (if they are employer paid!! – all of this is very different if you’re paying all the premiums yourself), are more about getting past the immediacy of spending more money out of pocket “now” – because often the employee-side premium support is a paycheck deduction that we don’t “feel” in the same way. I still have to constantly remind myself of that difference.
If you have a serious medical issue or chronic condition, that may affect your math – I have one colleague with type 1 diabetes, and she switched back to a ‘traditional’ plan as soon as one was offered again, despite the significantly higher premiums, because of the nature of the expenses related to that condition.
cthulhu
@dr. bloor: Yes, we are in the same boat this year in that, since we’ve hit the deductible, what other stuff can we do? Get a third arm sown on? Otherwise it is does work out for us for a few reasons. A) we are lower upper income so we can max the tax savings. B) we are given $1500 up front to cover the deductible and have enough assets to cover the rest C) the montly contributions for the other plans offered are substantially higher with increasingly limited networks. – that is what finally moved us of the HMO option (certainly the intention of our employers). D) we are the rare consumers who can shop around and make our own well-informed medical decisions because we both work in medical science. E) we have generally been healthy up until now, mostly getting preventative care,
If one or more of the above 5 points don’t apply to you, I would say HSA HDHP plans are not a good option. Thus they are rarely a good option.
gene108
I was arguing with conservatives, on another forum, about how this can never work in our healthcare system, because so much of the cost of healthcare is opaque from the customer’s point of view.
And I don’t see service providers bothering to shed any light on making the financial end of their business more transparent. Frankly, I don’t think many service providers could be more transparent, as so much of what they get paid, what they charge, etc. is all tied to insurance contracts and they may not be aware of how or why those prices are set.
gene108
@dlw32:
HSA’s are your personal account. They will roll over. Even if you change employers, you can set up an HSA on your own, with a provider. Think of it like a bank account or 401k.
When you are 65 or older, you can take money out of it tax free.
Alex
@sam: I think of my FSA as a gamble every year— overestimate out of pocket expenses and lose money when it doesn’t roll over or underestimate and lose money by paying with after-tax dollars. A sensible system pools this sort of actuarial risk. I think they call it “in-sewer-ants” or something like that. Best healthcare system in the world!
randy khan
It’s worth noting that you can pay long term care insurance premiums out of your HSA. That makes it worth it for us.
But the cost/benefit of an HSA really does vary from household to household. It might not make sense for us if we didn’t have the long term care insurance.
Raoul
Hey David,
Since we’re talking healthcare, what do you make of the thread that starts with
His final item seems major.
artem1s
the issue with HSA’s is that they are attached to high deductible plans. They would make far more sense if they were available to everyone. It’s the tax benefit that makes them worth while. there is no change in the total cost of care. I have opted for a high deductible plan and an HSA account and it hugely affects my adjusted gross income and means less income tax paid. Most years I save more than I spend in health care. But I would still benefit tax wise even if I was only breaking even.
I have had to have some extra care this year, but after my deductible, I will still have had a co-pay for this treatment even with a low deductible plan. But because I have had an HSA for 5 years now, I have money in the bank to make the co-payments – tax free income as long as I use it for paying for health care. If there is any left when I retire, I can roll it into my IRA or 401K. HSA’s aren’t for everyone but imagine if you could set money aside or even just pass it thru a separate account as you were using it, tax free, and that pass thru meant you paid less income tax, wouldn’t you try to take advantage of that? HSA’s aren’t supposed to be an insurance supplement. They are a pass through mechanism that can help you manage payments and lower your tax liability.
Mayken
Thanks for addressing my concerns more fully! Both this and your earlier reply are very helpful.
Soapdish
I kind of feel that the $100 extra a month for my PPO is worth it just so I don’t have to mentally stress over choosing another plan or what it’s actually going to cost to go to the doctor. Plus the tax deductibility is only at the federal level; in a high tax state like NJ where I live that really cuts into the “savings”.
David Anderson
@dlw32: HSA’s money can roll over for a life time. Flexible Spending Accounts (FSA) are in a “Use it or lose it” situation.
David Anderson
@Raoul: I’m not too surprised —
LongHairedWeirdo
Frankly, I consider HSAs to be a very Republican idea.
There’s a non-problem: presumably, people might overuse medical services since they’re insulated from price shocks, because of insurance; because, after all, medical services are *fun* and *pleasant* and aren’t drains on time and resources! Still, one could imagine that there are some savings that could be wrung out by people who are trying to save money. So they use that, to craft an argument, so that they can set up a valuable tax shelter for the wealthy and well-to-do (and possibly even some lucky, healthy, less well-off people).
I would like to be all civil and assume that the reasoning you lay out is sincere,and the goal _isn’t_ just to create a tax shelter for the well-to-do, but I’m assured we don’t have to be “politically correct”, so screw civility, I think the entire idea is just a way to carve out another tax shelter, and the flexibility in the use of the funds for retirement or estate planning is pretty much all I need to conclude that it’s “screw science, we want this tax shelter!”
Kent
We use a High Deductible (HD) plan with an HSA and it works out splendidly for us. But that is because our employer/provider has tilted the playing field in favor of the HD/HSA plan.
My wife works for Kaiser Permanente HMO and gets a choice of Kaiser plans for family coverage. She can elect for the standard Kaiser plan with no deductibles for about $50 per pay period or $1300 per year or she can elect for the HD plan with $4000 deductible and zero premium costs. To sweeten the deal, Kaiser deposits $2000 per her into her HSA and the Kaiser HSA is quite good with minimal fees and a variety of investment options with Vanguard index funds.
So we start out each year with a $4000 family deductible but also and extra $3300 in our pockets due to the reduced premiums and employer HSA contribution. We put in an additional $5000 into the HSA each year which earns us a $1200 tax deduction at our current tax bracket. So we start out each year $5500 ahead of where we’d be with the normal no-deductible health plan and even if we hit our $4000 family deductible we still come out $1500 ahead. After we hit the $4000 deductible the plans are basically identical which isn’t always the case.
When I look at our annual medical expenditures (which are easy enough to track because we put everything on the HSA debit card and can see the totals online) I see that we are spending between $500-800 per year out of pocket costs over the past 5 years. Basically it some acne related dermatology visits for the teens and some prescriptions for them. The annual preventative care visits are always covered 100% as are preventative care prescriptions like statins. Also all telephone consults and online consults with Kaiser doctors are free. My wife is also a family doctor so obviously she can take care of more kid stuff at home than the usual parent so we have avoided office visits that way too.
At this point the HSA balance is well into the 5 figures and the stock market gains on the bulk of the HSA which is invested in Vanguard index funds exceeds what we are spending each year. So we are just treating it like a “Stealth IRA” and emergency fund should we ever have some catastrophic medical issue.
I realize not everyone’s experience is the same. I think we are lucky in that we have a good employer and good health plan that is really trying to incentivize employees to go the HD/HSA route so they don’t get so many trivial office visits. For us it is working out splendidly, although we have been lucky. But even if we had a chronically sick child and were going through the full deductible each year we’d still be coming out ahead.
I realize this is yet one more way that the playing field is tilted in favor of the well off. But it would be silly not to take advantage of it.
Kent
@LongHairedWeirdo:
Yes, HSAs are most certainly a nice tax shelter for the wealthy. No question about that. But talk to any primary care physician and they will tell you that “frequent flier” patients are indeed an issue with a small percentage of the population. Especially older lonely patients. As are overprotective parents who run to the clinic for every cough and sniffle and minor rash their child gets. But a huge number of them are medicare/medicaid patients for whom HSAs and HD medical plans are not an option. So the utility of HD/HSA plans in limiting overuse of medical care is probably limited anyway.
Yutsano
The FEBHP has been pushing HSAs like mad this open season. I have too many health expenses that need to be covered to go for a HDHP plan. So I’ve been ignoring the squaks. I think I’m good to do so.
azlib
HSAs are fine if you have reasonable cashflow and can set aside money for them. I always thought of them as a SOP to the upper middle class family who has disposable income.
sam
@azlib: I generally agree with this, but as I noted before, you also have to do the math on that “reasonable cash flow” to count any premium payments that your employer expects you to contribute (in an employer based plan) for a ‘traditional’ plan vs a HDHP/HSA plan. For the first year of my HDHP/HSA plan, I basically converted what had been my premium contribution into my HSA contribution, so there was zero difference to my take-home pay, but at the end of the year, I still had half the money sitting in my HSA (whereas I would never see the premiums again).
Obviously if you get hit with a major medical expense before you have a chance to accrue significant HSA savings, you’re going to end up in a much worse short-term situation than if you were on a traditional plan, but for many people, even those who aren’t necessarily “upper middle class”, it’s worth sitting down and at least doing the math on your different plans to see which one is actually the most sensible in the long run (my boss actually put a whole bunch of excel spreadsheets together, because we are nerds)
Spike
When you get sick, HSAs provide a financial incentive to not seek treatment. How messed up is that?
SP123
Our company is pushing us to HSAs by making the math a no-brainer. Deductible + premium on HSA = premium on PPO. Then the company provides $1k/year in the HSA towards the 20% coinsurance on the next $5k of spending. Then OOP max (in network, which is a wide network) kicks in after only $300 more of OOP spending ($1500 expenses), so annual max spending in HSA is well below max PPO possible spend. They have one of those on-line scenario advisors and I can’t find any situation where the HSA is not better.
PPO:
Premium: $5500
Copays: $15/$50/$75/$10/$20 office/specialist/ER/generic drugs/brand drugs
OOP Max: $2000 ($4000 out of network)
Total possible spend in-network: $7500 (premium + OOP max)
HSA:
Premium: $2800
Deductible: $2700
Coinsurance: 20% after deductible
Company contribution: $1000 (we can contribute an additional $6000)
OOP max: $4000 in-network ($8000 out of network)
Total possible spend in-network: $6800 (premium + OOP max)
We are high income so can cover the out of pocket. The HSA is a way for us to launder money into another tax-free retirement account, essentially- we’d max the HSA, leave everything in it to grow until retirement, and pay OOP costs from post-tax dollars. We’re too high MAGI to contribute to Roth IRAs so this is a substitute.
My only concerns are these two:
– Out of network shenanigans like you hear about with facilities vs doctors. It wouldn’t bankrupt us but it would make the math less attractive with that $8000 OOP max. I’ve never heard of that happening in our area with our insurance company network, though.
– How does the OOP max work? I’m fairly certain we’ll hit it, have a kid on moderately expensive drugs. Do we have to pay everything out of pocket and the insurance company will reimburse us? Or do providers have some way of knowing in the back half of the year that we don’t owe anything? I’m not confident in their ability to do that, we have one provider who bills through a hospital office, we always pay the copay then get overdue bills from the hospital because the doctor’s office can’t seem to talk to the hospital billing, every time we have to call back and forth to get them to realize we paid the copay at the office. Even if we get reimbursed later we could float it unless it’s super catastrophic, but my worry is that we have to keep dozens of receipts and end up in an argument with the provider and insurer about what and when we really paid, and the reimbursement never comes (or only with legal threats.)