Health Savings Accounts: A Sensible Solution for High Healthcare Costs

Rising healthcare costs are raising concerns among Americans hoping to find lower-cost healthcare solutions to meet their needs. One solution garnering more attention in recent years is the Health Savings Account (HSA), which can lower consumers’ overall healthcare costs while increasing their control and flexibility over healthcare choices. In an era of diminishing choices and rising costs, that may sound too good to be true, the HSA, which has been around since 2003, now counts more than 38 million insured Americans as believers.

What is a Health Savings Account?

HSAs are tax-qualified accounts that are very similar to IRAs, except that the funds that accumulate inside the account must be spent on eligible medical expenses. In 2024, individuals may make tax-deductible contributions up to $4,150 ($8,300 per family). There are no current taxes on earnings inside an HSA, and withdrawals are tax-free when used for eligible expenses. Any funds remaining in the account at the end of the year are rolled over into the following year. Once the insured turns 65, the accumulated funds can be used for any purpose on a taxable basis.

The one requirement is that an HSA must be linked to a high-deductible health insurance plan (HDHP). HDHPs are catastrophic insurance plans that must have a minimum deductible ($1,600 per individual and $3,200 per family in 2024), and maximum deductibles can range as high as $8,000. Insureds must pay medical expenses out of pocket up to the deductible, before coverage is available. There is also an upper limit on out-of-pocket expenses individuals and families must pay.

Although HDHPs are designed to cover catastrophic medical needs, they may also provide preventative care benefits without a deductible.

How an HSA Can Lower Your Health Care Costs

There are three ways an HSA can lower your overall healthcare costs:

• Because of the triple-tax advantages of a current tax deduction, tax-deferred earnings, and tax-free withdrawal, you’re using much cheaper dollars to pay for health care. It’s like getting a discount every time you pay for services.
• The premiums for HDHP are typically much lower than premiums for standard PPO or HMO insurance plans. It’s the tradeoff for higher deductibles.
• Because you are using your own cash to pay for medical expenses, you can shop and compare prices on any medical service, and even then, you are in a position to negotiate the cost of care. That’s the way to bend the healthcare cost curve down.

The HSA in Action

John and Susan established an HSA to cover themselves and their two children. The premium for their HDHP, with HSA and $5,000 deductible, is $600 per month, about $400 less than the HMO plan they left. They are using the monthly savings towards their contribution to their HSA, and they contribute an extra $150 towards their maximum contribution of $6,550. The tax savings they realize from deducting the contribution from their income will offset the additional $150 monthly contribution.

Within nine months, they will have accumulated enough in their HSA to cover their deductible costs, so their only cost going forward will be the co-pays. If they don’t use all the funds in the current year, they will have a head start on covering their deductible in the next year.

With the freedom to choose any medical provider they desire, they could shop, compare, and negotiate prices, enabling them to save as much as 50 percent on many medical services. Those savings are left in their HSA to accumulate tax deferred.

HSAs Put You in Control

Aside from rising health care costs, the angst felt by most people over health insurance stems from their lack of control and flexibility over basic health care decisions. HSA owners control everything about their health care, from which providers to choose to how they invest their HSA funds, and it is another way to get control of your taxes and overall budget. And, because they are individually owned, it’s yours for as long as you want to keep it. *

HSA/HDHPs are easy to establish, easy to understand, and simple to manage. If your current health insurance plan seems too costly or inflexible, a Health Savings Account may be the solution you’ve been looking for.

*To be eligible for an HSA, you must maintain a qualified, high-deductible health plan (HDHP), and you cannot be covered by any other health plan (including Medicare). Also, you cannot be claimed as a dependent on another person’s tax return. You must have a Social Security number and a primary residence in the U.S.