Considering a Health Savings Account

One of the major ways insurers and customers have adjusted to the high costs of health care is to come up with ways to turn over more control of insurance plans to consumers themselves – if they’re willing to foot the extra out-of-pocket costs and accept the financial risks that this method entails.

Federally regulated Health Savings Accounts are the latest big vehicle for so-called “consumer-directed” care, and have taken over from an original concept called Medical Savings Accounts.

Here’s a guide to evaluating whether a Health Savings Account (HSA) is the right route for you and your business:

Understand the HSA concept

Health Savings Accounts combine a high-deductible health-insurance policy (minimum annual deductibles of $1,000 for an individual and $2,000 for a family) with a tax-free savings account. The high-deductible policy covers major – so-called “catastrophic” – medical bills. You pay for all costs until the deductible is reached.

You can deposit money tax-free into the account up to a certain amount each year, as of mid-2006 about $4,000. When the need arises, you withdraw the money tax-free to pay for medical expenses that aren’t covered by insurance – including routine costs that aren’t covered until you’ve met your high deductible. The account belongs to you, and at the end of the year you can roll over unspent funds. The account earns untaxed interest and continues to grow tax-free until retirement, when you can withdraw the money, use it however you like – and pay the normal, lower tax rates that are in place for retirees.

Decide if you can handle the routine costs – and risks

The biggest issue for most entrepreneurs is whether they can accept the idea of paying routine medical expenses out of pocket and, at the same time, running the risk of having to shell out as much as $4,000 or $5,000 for a medical emergency or extreme new condition before their insurance coverage kicks in.

For most healthy people in most years, the financial equation is heavily weighted in their favor. HSA premiums typically run only a few hundred dollars a month for an individual and are much less than premiums for conventional health-insurance policies. Even factoring in $1,000 or more a year for routine medical expenses, you’re still way ahead.

But the lack of reimbursement until your high deductible is met can be annoying – and financially draining. Even an emergency-room visit for a sliced finger will cost at least a few hundred dollars. Add doctor visits if you’re fighting an infection, and there’s another few hundred dollars. Routine X-rays and lab work get expensive, fast. Hit age 50, schedule a colonoscopy, and suddenly you’re into thousands of dollars in expenses that your HSA policy doesn’t cover.

“Many business owners don’t have the ability to sustain themselves should there be a medical event,” says Mechell Clark, a marketing executive at Aflac, the Columbus, Ga.-based insurer.

Evaluate the unique advantages of HSAs

More than any other insurance policy you could obtain, an HSA maximizes your personal control over health insurance.  One thing is certain - you’ll be much more on top of medical expenses than you might otherwise be. You’ll likely find, for instance, that with an HSA you won’t waste money on office visits for a cold or sniffle. You’ll be more cautious about agreeing to tests that might not be necessary and simply allow a doctor to cover his bases. You’ll be more likely to challenge charges that seem too high.

“One of the best aspects of HSAs is that they allow you to monitor costs in a way that health insurance simply doesn’t,” says Kristie Darien, legislative director for the National Association for the Self Employed.

Another major advantage of HSAs is that, because premiums are low and there are tax benefits, they could be a good way for an entrepreneur to start offering health insurance to employees. “They are uniquely beneficial to small businesses,” Darien says, “because, typically, small companies can’t afford to offer health-care coverage – but HSAs are a way to offer some health benefit to employees. And the owner can contribute to their HSAs like he would to a 401(k).”

Be sure to capitalize on the tax advantages

In the early going, analysts are a bit confused about one clear trend in the usage of HSAs - many holders simply aren’t putting money into the tax-free accounts that are a major part of the plan, or are only putting in a little money.

As of January 2006, about 3.2 million Americans were enrolled in high-deductible insurance plans, but only about 820,000 of them – some 26 percent -- had opened and funded HSAs, according to data from Inside Consumer-Directed Care, an industry newsletter. Experts are interpreting this gap as a lack of awareness on the part of HSA holders and a lack of cash to put into the savings account.

As an entrepreneur, you should be certain to make every effort to capitalize on one of the biggest advantages of HSAs: the ability to pile up savings tax-free, just as with an IRA.

Christopher Cameron is CEO of Main Street Insurance.

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