HSAs: Reducing the cost of remaining healthy

If you're like most practitioners, you're fighting what sometimes looks like a losing battle against the paperwork and onrushing tide of rising healthcare costs.

While this problem isn't likely to disappear entirely, the Health Savings Account (HSA) legislation signed into law by President Bush a little over a year ago offers you and your patients the possibility of making a dramatic reduction in your costs for staying healthy.

In their first year on the market, HSAs attracted thousands of individuals and business owners eager to escape the runaway costs of health insurance. About 1.5 million people are now enrolled in HSAs. William Boyles, publisher of an industry newsletter, predicts that 20 million people will be enrolled within five years.

The new law makes Health Savings Accounts (HSAs) permanent and available to everyone. Here's how they work:

In conjunction with the insurance policy, you open a dedicated savings account into which you make tax-deductible deposits to pay for your medical care. Each year, you may deposit up to the amount of the deductible on your insurance policy. You then use the money in the account to pay for your medical care. Once your expense reaches the amount of your deductible - if it does - the insurance policy kicks in.

Consider this example: Mark enrolls himself and his family in a plan with a $5,250 deductible policy. He then deposits $400, tax-deductible, per month in his HSA savings account. This year, his family's out-of-pocket medical expense, paid from funds in his HSA account, comes to $3,200. Since his total deposits for the year are $4,800, the balance of $1,600 rolls over in the account. It compounds tax-free (as long as it is used to pay for qualified medical expenses).

As the money in the account grows, it becomes a resource available to cover the cost of routine or future medical care. This is an important feature that makes HSAs far more attractive than their predecessors.

In another example, Tom enrolls in a similar plan with the same deductible. He also deposits $400 per month in his tax-favored HSA account. However, one of Tom's children needs expensive surgery, raising the family's total medical expense for the year to $15,500. Once Tom's out-of-pocket reaches the family deductible of $5,250, the insurance pays the balance of $10,250. In this case, the HSA protects the family against a catastrophic medical expense.

In addition to their tax incentives, HSAs offer control over choice of doctors and eliminate the often annoying referral requirements of some health plans.

Current law requires a health insurance policy with a deductible of at least $1,000 for individuals and $2,000 for families to open an HSA. The law also limits the maximum out-of-pocket expenses to $5,100 for an individual and $10,200 for a family. Therefore, if there is a health insurance plan with no co-insurance, the deductible can be as much as $5,100 or $10,200 for individuals and families, respectively. Of course, the higher the deductible, the lower the premium.

Who's buying?

Golden Rule Insurance Co. was one of the first providers of HSAs. Today, one out of every three plans purchased from them is a Health Savings Account.