How does a high deductible health plan with a Health Savings Account really work

June 18, 12:47 PMHealth Care ExaminerSheila Guilloton

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Many consumers can take control of their
health insurance costs.  Some can't.
 

Health insurance buyers are afraid of the consumer driven health plans.  They don't understand how they work.  They think there will be large gaps in their coverage. The do not understand the tax advantages of the plans.  A little education will go a long way toward easing these fears. 

Consumer driven health plans put the insured in control. A growing number of consumers are beginning to recognize the tremendous advantages of keeping control of their own health services.

In 2003 Congress approved the legislation which created the Health Savings Account. Unfortunately generally misunderstood, the Health Savings Account is finally becoming a viable and popular option for health insurance.

The biggest deterrent to the concept of the Health Savings Account is that is has to be combined with a High Deductible Health Plan (HDHP). Just the words high deductible strike terror in the hearts of many people. But with both group and individual plans raising deductibles to save on premium costs, a high deductible is becoming ever more common.

But don’t be afraid.  The deductible amount is controlled by the IRS  and it’s not as high as most people think is it.  Another recent improvement, especially in the individual market,  came when the major carriers began to pay for preventative services as part of the insurance plan without making the preventative services subject to the deductible..

What is not clear to many is that when an HSA is fully funded, that is,  if you deposit the full amount of your deductible in your HSA,  you have 100% health insurance coverage.

The best way to understand how the HDHP and the HSA work together is to give an example.  Joe, a 42 year old single carpenter who lives in in Connecticut, was paying $475 per month for a PPO with co-pays of $35 and a hospital deductible of $2500.  Joe was basically healthy and saw a doctor only 2 or 3 times a year. Joe decided to enroll in an HDHP coupled with an HSA.

Joe was able to get a HDHP from a major carrier for $254 a month with a $1100 deductible.  Joe saved $221 a month which he deposited into his Health Savings Account.  Under the IRS guidelines for 2009, Joe could deposit up to $3000 in his HSA. Joe plans to deposit his full savings of $221 a month into his account.

At the end of the year, Joe will have $2652 in his Health Savings Account. His deductible is only $1100 so Joe actually has 100% health insurance coverage. His plan has a five million dollar cap, so even if Joe suffers a catastrophic health event, he is fully protected. 

If Joe has a heart attack and is hospitalized and requires by-pass surgery, his bill may be as much as $100,000. Joe will pay the first $1100 out of his HSA using pre-tax dollars.  The balance of the bill will be paid by the insurance company.  Assuming Joe used a network doctor and hospital, which should be no problem because his plan is underwritten by a major carrier with a huge network,  there will be no gaps in Joe's coverage and his only liability will be the deductible.

It should be noted here that if Joe had that heart attack when he had his PPO, he would have paid $2500 as his hospital deductible plus all his co-pays.

If Joe does not suffer a catastrophic event and only has a few routine visits to the doctor, he will still be financially  much better off then he would be with his old, and expensive,  PPO.  His  HDHP will pay for his annual physical, so Joe will only have to pay for any doctor’s visits, lab work or prescriptions.  Assume that Joe has the same number of doctor’s visits as last year,  Joe will probably spend $750 out of his HSA to pay for doctor’s visits and a couple of prescriptions.

At the end of the year Joe will still have $1902 in his account and this will roll over into next year and earn tax deferred interest. In addition, Joe will be able to deduct $2652 off the top of his taxes. (Assuming that Congress does not take away this benefit as some are suggesting).

Because Joe still has money in his HSA, next year he may choose to elect a higher deductible, say $2700, which will reduce his premium even more.  As his savings account grows, Joe can also use that money to pay for other qualified medical services even if they are not covered by his medical insurance.  For instance, Joe can pay for dental expenses or eye glasses or a wide range of qualified medical expenses.

This concept works. Why doesn’t everyone do this?  Two reasons stand out.  First, the majority of people don’t understand how the HDHP and HSA work together to give maximum coverage at the least cost.   Many people looking at an HDHP and HSA for the first time will say, "but it only costs me $20 to see the doctor now, with this plan I would have to pay the  whole cost of the doctor visit."

That's both true and not quite true.  You will have to pay for the doctor's visit.  But the true cost of your doctor's visit is not just the $20 co-pay, it is the co-pay plus the amount of your monthly premium.  In Joe's case,  a doctor's visit cost him $35 plus the monthly premium of $475 or a total of $510.

The HDHP with an HSA is growing in popularity even in the group market.  Many major companies like Whole Foods, Boeing, Target and Best Buy now offer a HDHP with an HSA to their employees. Because in the case of the group market, the employer may contribute to the employee’s HSA, the benefit becomes even sweeter.

The second and more  important reason why more people don’t use this kind of plan is because of accessibility.  In the individual market, the issue of pre-existing conditions rears its ugly head.   Joe was basically healthy and had no problem medically qualifying for an individual HDHP.

But for the people who are not completely healthy, there is an issue of accessibility.  Individual plans, in most states, are medically underwritten. That means, if you have a health condition that the insurance company does not want to insure, they can decline to cover you.

This is the issue that Congress needs to address.