Tuesday, August 4, 2009

Are Health Savings Accounts - HSAs - Right for You? The Rules. The Truth.

Increasingly more Americans are being offered health savings accounts (HSAs) either from their employers or when choosing individual insurance plans.

What are they?

What are their advantages?

What are their disadvantages? (There is no free lunch after all).

Definition - Health Savings Accounts were enacted under President George W. Bush and allow individuals to save money tax-free for medical expenses. Unlike previous medical savings accounts, money not used within a particular year can be rolled over. In other words, the "use it or lose it" problem no longer applies.

HSA funds can be invested like retirement accounts into various mutual funds, bonds, savings accounts and those earnings are tax-free.

When the funds are spent on appropropiate medical expenses as defined by the IRS, the transaction is also tax-free.

In other words, HSAs are the only financial vehicle that essentially never gets taxed when done correctly. Set aside money tax-free (like your 401k), invest (if you want to) and earnings are tax-free, and finally spend money tax-free on medical expenses. You aren't obligated to use HSA funds to pay for medical expenses if you have other dollars available. In fact, after age 65, you can take out the money from the HSA, pay some taxes like your 401k, and voila use it like your other retirement accounts. There are NO income restrictions on who can get a HSA.

Sound too good to be true? Is it right for you? Depends.

The catch are at least a couple, not major, but you must know.

First to have a HSA it needs to be paired with a high deductible insurance plan. Unlike health insurance policies that you may have had in the past, you now have to pay a deductible before the insurance policy kicks in. Very similar to your auto insurance policy. Consequently, doctor office visits won't be the small copay, but potentially a hundred or two hundred dollars. The same may apply to prescription drug coverage.

Despite a higher cost when you use healthcare services, you still may have more take home pay. A high deductible insurance plan typically has lower monthly premiums. If you set aside money for your HSA you have less taxable income. Just be prepared for a little sticker shock. Of course, you can use the money you set aside in the HSA to pay for these expenses.

The second, which is far more important, is will you know when to seek medical care and when to safely skip? Unlike your car which many of us will defer repairs for damages in fender benders, will you know when you must spend money?

Research already shows that patients often skip important needed preventive care, medications, and doctor visits when copays go up. Should you pay for the colonoscopy, which is easily a few hundred dollars, to screen for colon cancer at age 50 even if you feel perfectly well and have no family history (Yes). Finding cancer early is far less expensive than waiting and needing abdominal surgery as well as chemotherapy, which costs tens of thousands of dollars and not only drains whatever other savings you have, but will be unlikely to extend your life. If only you had done the right thing.

HSAs favor those who will be proactive in taking care of themselves and knowing when to go seek medical care, when to invest money to stay healthy, and not "wing" it. Perhaps it isn't surprising then that doctors and accountants are people most commonly enrolled in HSAs. The former know when to get medical care and when to safely skip. The latter know all about the major tax savings as well as the ability to use a HSA as a retirement account.

For the rest of us, this is why I wrote my book - Stay Healthy, Live Longer, Spend Wisely - Making Intelligent Choices in America's Healthcare System - which gives you all the information you need to know to use the HSA wisely.

  • How to make the most out of your office visit (after all each visit will cost more).
  • The truth about prescription drugs (is the marketing really worth the hype?)
  • What tests you must have to stay healthy and well (saving money by being uninformed will cost more in the end don't be ignorant).
  • Assembling the right team of doctors.
  • How to pick a health insurance plan and hospital.
  • Websites that are free and excellent references (far better than simply Googling).
  • Body scans, herbal dietary supplements (buyer beware).
  • Much more and all for less than a price of a copay or a date to the movies! Your health is worth far more. What you don't know might kill you sooner!

Are HSAs good for you? As a doctor and someone who studied accounting at business school, I would have no problem enrolling. If I wasn't a doctor, I would always have some uncertainty about whether I was doing the right thing.

No need to worry, my book is written in an easy to read language that anyone can pick up. It's an insider guide just for you and your friends who will now have the knowledge I give my loved ones all the time.

So go ahead and save some money on healthcare, but make the right choices, be informed, be educated, and be empowered. Save money and stay healthy.

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