For my first "real" post, I have resurrected an article about health insurance I was working on late last year. It's been sitting on my hard drive for the past few months while I've pondered how to publish this.
Traditional health care expenses
I never thought much about health insurance as I had not seen a doctor since Bush Sr was in office. (I did visit a walk-in acute care center for a few drops of peroxide to clear out extreme wax buildup in my ear.) While I knew that it was important to be covered by insurance, I had no idea what kind of coverage I had or how much it cost. It was only after my wife's pregnancy (and son's birth) that all sorts of medical bills showed up at home. Every time I opened up a bill, I'd frown in puzzle -- doesn't insurance cover this and if not, what's insurance good for then?
Previously, I had talked in passing to our CEO about reviewing the benefits package (medical, 401K, etc) but neither of us had it as a priority on our to-do list. But after being harassed by this flock of medical bills, I took on the project as my personal hobby. Step 1: I looked through our current health insurance plan; my reaction after looking at the numbers: YIKES! For 90% coverage from Blue Shield, our company was paying $8K a month for 9 participants. (12 people total -- classified as "small group" so Blue Shield charges us an extra 10%.) To top it off, a 11% rate increase was scheduled. After payroll, this was definitely the biggest expense on the books. My specific premiums were $15,000 per year and I still had to cover $3500 in out of pocket expenses for the birth of my son -- this did not feel like a bargain.
The search for options...HSA?
Thus began my search for health insurance options. I had come across mentions of the HSA acronym in the past but my brain usually glossed over the descriptions thinking it was yet another variation on the use-it-or-lose-it FSA. Now that it was my job though, I finally read up about Health Savings Accounts and realized this is the best thing since sliced-bread! The quick low-down on HSAs:
Since a HSA requires a high deductible plan, the key question is rather simple: can the premium reductions from a high deductible plan cover possible out of pocket costs? With that in mind, I used the site HSAInsider to search for for HSA-compatible health insurance plans. If you enter the number of employees and average age into their search engine, HSAInsider will also return premium estimates. Those numbers were pretty close to the follow up quotes from our broker. Turns out we're not we are not experienced-rated (nothing special about workers sitting in front of computers) so our premiums are based solely on headcount and age.
The health insurance plans
So a week after a phone call to our broker, we got the following numbers:
Cost savings and benefit changes
With precise numbers in hand, we can now calculate what happens if we fund employee HSA accounts to the IRS max (7 family * 5650, 2 indiv * 2850) to offset the high deductibles/OOP max.
HSA account funding
With high deductible + HSA a win-win for all parties involved (except for insurance companies receiving lower premiums), the next phase was researching the implementation details. To make HSAs work, somebody has to administer the money. Why not a simple bank account you ask? Unfortunately, somebody has to report to the IRS that you made a tax deductible contribution just as if you contributed to an IRA. Hence a rather specialized industry has formed to meet this need.
A quick look at Vimo shows hundreds of HSA administrators (mostly banks) offering varying services, benefits and fees. On a lark, we decided to filter for local banks and Patelco Credit Union was 1 of 2 local administrators. 5.12% APY, $1/monthly fee, free bill review service, checks, debit card -- perfect for funding initial accounts. Vimo's HSA report shows Patelco has having the highest net (interest - fees) return so it looks to be a good choice.
Managing HSA money
For HSA account holders, managing money requires some extra planning. While you certainly shouldn't hold off treating life-threatening problems or emergencies, scheduling as many treatments as possible during a single plan year produces the best monetary result. For example, if you are planning to have a baby, most of the medical visits are clustered around the months before (for the mother) and after birth (for the baby). This means having a baby about 6 months into a plan year would use up all HSA funds for the year (and then get covered by insurance) but would leave most of the previous + following years untouched.
The idea of course is being a smart buyer for medical goods and services reduces expenses all around for everybody involved. Because our decision to switch health plans is so recent, I don't have a lot of experiences to share in this arena. However, some easy things I can think:
How much could you build up in your HSA account over time? My guess now is the average family could see HSA surpluses of about $3000 3 years out of 5 with a fully funded account. And a young single participant could probably bank almost everything 9 out of 10 years. This makes investing HSA surpluses important after a few years of buildup.
HSAs are personal accounts -- that means you have right to transfer money out of an employer funded account at anytime to another account of your choosing. Unfortunately, the investment options currently are sparse. You can't simply call Vanguard up and sign up for a HSA. Instead, you have to go through 3rd parties who will then pass on extra fees to you. Here are some of the better options I've been able to Google up:
Final thoughts
My personal experience with HSAs is just starting so I can't claim to be the ultimate authority on this subject. However, it does look to be be a great option for those who are responsible for their own health insurance premiums (self-employed, high share of premiums, money-back for not participating). My recommendations: If you work for a "nice" company currently offering a traditional plan, ask HR to look at HSA options. If you work for an "evil" company, I'd stay completely silent as they'll probably take the premium reductions and tell you to fund your HSA yourself.
Updates
Traditional health care expenses
I never thought much about health insurance as I had not seen a doctor since Bush Sr was in office. (I did visit a walk-in acute care center for a few drops of peroxide to clear out extreme wax buildup in my ear.) While I knew that it was important to be covered by insurance, I had no idea what kind of coverage I had or how much it cost. It was only after my wife's pregnancy (and son's birth) that all sorts of medical bills showed up at home. Every time I opened up a bill, I'd frown in puzzle -- doesn't insurance cover this and if not, what's insurance good for then?
Previously, I had talked in passing to our CEO about reviewing the benefits package (medical, 401K, etc) but neither of us had it as a priority on our to-do list. But after being harassed by this flock of medical bills, I took on the project as my personal hobby. Step 1: I looked through our current health insurance plan; my reaction after looking at the numbers: YIKES! For 90% coverage from Blue Shield, our company was paying $8K a month for 9 participants. (12 people total -- classified as "small group" so Blue Shield charges us an extra 10%.) To top it off, a 11% rate increase was scheduled. After payroll, this was definitely the biggest expense on the books. My specific premiums were $15,000 per year and I still had to cover $3500 in out of pocket expenses for the birth of my son -- this did not feel like a bargain.
The search for options...HSA?
Thus began my search for health insurance options. I had come across mentions of the HSA acronym in the past but my brain usually glossed over the descriptions thinking it was yet another variation on the use-it-or-lose-it FSA. Now that it was my job though, I finally read up about Health Savings Accounts and realized this is the best thing since sliced-bread! The quick low-down on HSAs:
- Tax-free contributions -- can come from employee or employer
- Annual contribution limit: $5650 for family, $2850 for individual -- individuals age 55+ can contribute another $700 per year
- Tax-free withdrawals for qualified medical expenses at any time
- After 65 1/2, withdrawals for non-medical purposes treated like a Traditional IRA
- Withdrawal for non-medical before 65 1/2 subject to tax + 10% penalty
- Money totally under employee control
- Requires high-deductible medical plan
Since a HSA requires a high deductible plan, the key question is rather simple: can the premium reductions from a high deductible plan cover possible out of pocket costs? With that in mind, I used the site HSAInsider to search for for HSA-compatible health insurance plans. If you enter the number of employees and average age into their search engine, HSAInsider will also return premium estimates. Those numbers were pretty close to the follow up quotes from our broker. Turns out we're not we are not experienced-rated (nothing special about workers sitting in front of computers) so our premiums are based solely on headcount and age.
The health insurance plans
So a week after a phone call to our broker, we got the following numbers:
| Plan | Premium | In Network | Out Network | Indiv Ded/OOP | Family Ded/OOP |
|---|---|---|---|---|---|
| Blue Shield PPO 250 (current plan) | $8978 | 90% | 70% | $250/$2000 | $500/$4000 |
| Blue Shield HSA 2600 | $3617 | 70% | 50% | $2600/$5000 | $5150/$10000 |
| Blue Shield HSA 3400 | $3128 | 70% | 50% | $3400/$4500 | $9000/$9000 |
| Blue Cross HSA 2400 | $3879 | 80% | 50% | $2400/$3600 | $4800/$5500 |
| Blue Cross HSA 3500 | $3412 | 100% | 50% | $3500/$4000 | $7000/$7500 |
| HealthNet HSA 20 | $3880 | 80% | 50% | $2500/$3500 | $5000/$7000 |
| HealthNet HSA 30 | $3105 | 70% | 50% | $3500/$4500 | $7000/$9000 |
- You first pay 100% whether you're in network or out of network up to the deductible.
- Next, the health insurance plan pays the predetermined in-network/out-of-network percentage until the OOP (out of pocket) max is hit.
- Finally, the network is responsible for 100% of all costs beyond OOP whether in network or out.
Cost savings and benefit changes
With precise numbers in hand, we can now calculate what happens if we fund employee HSA accounts to the IRS max (7 family * 5650, 2 indiv * 2850) to offset the high deductibles/OOP max.
| Plan | Premium | HSA Funding | Savings | Yr Savings |
|---|---|---|---|---|
| Blue Shield PPO 250 (current plan) | $8978 | $0 | $0 | $0 |
| Blue Shield HSA 2600 | $3617 | $3771 | $1590 | $19K |
| Blue Shield HSA 3400 | $3128 | $3771 | $2079 | $25K |
| Blue Cross HSA 2400 | $3879 | $3771 | $1328 | $16K |
| Blue Cross HSA 3500 | $3412 | $3771 | $1795 | $21.5K |
| HealthNet HSA 20 | $3880 | $3771 | $1327 | $16K |
| HealthNet HSA 30 | $3105 | $3771 | $2102 | $25K |
| Plan | Indiv Exp | Family Exp |
|---|---|---|
| Blue Shield PPO 250 (current plan) | $2000 | $4000 |
| Blue Shield HSA 2600 | $2150 (increased exp) | $4350 (increased exp) |
| Blue Shield HSA 3400 | $1650 | $3350 |
| Blue Cross HSA 2400 | $750 | -$150 (guaranteed surplus) |
| Blue Cross HSA 3500 | $1150 | $1850 |
| HealthNet HSA 20 | $650 | $1150 |
| HealthNet HSA 30 | $1650 | $3350 |
HSA account funding
With high deductible + HSA a win-win for all parties involved (except for insurance companies receiving lower premiums), the next phase was researching the implementation details. To make HSAs work, somebody has to administer the money. Why not a simple bank account you ask? Unfortunately, somebody has to report to the IRS that you made a tax deductible contribution just as if you contributed to an IRA. Hence a rather specialized industry has formed to meet this need.
A quick look at Vimo shows hundreds of HSA administrators (mostly banks) offering varying services, benefits and fees. On a lark, we decided to filter for local banks and Patelco Credit Union was 1 of 2 local administrators. 5.12% APY, $1/monthly fee, free bill review service, checks, debit card -- perfect for funding initial accounts. Vimo's HSA report shows Patelco has having the highest net (interest - fees) return so it looks to be a good choice.
Managing HSA money
For HSA account holders, managing money requires some extra planning. While you certainly shouldn't hold off treating life-threatening problems or emergencies, scheduling as many treatments as possible during a single plan year produces the best monetary result. For example, if you are planning to have a baby, most of the medical visits are clustered around the months before (for the mother) and after birth (for the baby). This means having a baby about 6 months into a plan year would use up all HSA funds for the year (and then get covered by insurance) but would leave most of the previous + following years untouched.
The idea of course is being a smart buyer for medical goods and services reduces expenses all around for everybody involved. Because our decision to switch health plans is so recent, I don't have a lot of experiences to share in this arena. However, some easy things I can think:
- Buy generic drugs and supplies
- Ask for discounts beyond fee schedule in return for immediate payment -- health insurance is typically slow in paying bills and many doctors live a high flying lifestyle requiring constant cash-flow
- Preventive health care and maintenance
- Live healthier lifestyles
How much could you build up in your HSA account over time? My guess now is the average family could see HSA surpluses of about $3000 3 years out of 5 with a fully funded account. And a young single participant could probably bank almost everything 9 out of 10 years. This makes investing HSA surpluses important after a few years of buildup.
HSAs are personal accounts -- that means you have right to transfer money out of an employer funded account at anytime to another account of your choosing. Unfortunately, the investment options currently are sparse. You can't simply call Vanguard up and sign up for a HSA. Instead, you have to go through 3rd parties who will then pass on extra fees to you. Here are some of the better options I've been able to Google up:
| Administrator | Options | Fees |
|---|---|---|
| HSA Administrators | 21 Vanguard Funds | $39 yearly +0.36% on balance |
| HSA Bank | Brokerage | $27 yearly for < $3K savings balance $15 per trade various irritating fees |
| HSA Resources | Brokerage | $40 yearly $14.95 per trade |
| Saturna Capital | 6 Saturna Funds | No fees other than fund expense ratios |
| SelectAccount | 15 Funds from various companies | $27 yearly |
| HSA Administrators |
HSA Bank |
HSA Resources |
Saturna Capital |
Select Account |
|
|---|---|---|---|---|---|
| $1000 | 4.43% | 2.80% | 4.10% | 1.21% | 5.45% |
| $2500 | 2.09% | 1.18% | 1.70% | 1.21% | 2.53% |
| $5000 | 1.31% | 0.64% | 0.90% | 1.21% | 1.55% |
| $7500 | 1.05% | 0.46% | 0.63% | 1.21% | 1.23% |
| $10000 | 0.92% | 0.37% | 0.50% | 1.21% | 1.07% |
| $15000 | 0.79% | 0.28% | 0.37% | 1.21% | 0.90% |
| $20000 | 0.73% | 0.24% | 0.30% | 1.21% | 0.82% |
| $35000 | 0.49% | 0.18% | 0.21% | 1.21% | 0.72% |
| $50000 | 0.39% | 0.15% | 0.18% | 1.21% | 0.68% |
Final thoughts
My personal experience with HSAs is just starting so I can't claim to be the ultimate authority on this subject. However, it does look to be be a great option for those who are responsible for their own health insurance premiums (self-employed, high share of premiums, money-back for not participating). My recommendations: If you work for a "nice" company currently offering a traditional plan, ask HR to look at HSA options. If you work for an "evil" company, I'd stay completely silent as they'll probably take the premium reductions and tell you to fund your HSA yourself.
Updates
- I wrote the majority of this post in 2007. Since then, the contribution limits for 2008 have increased to $5800 for families, $2900 for singles.
- We switched our plan starting September so all participants were funded for 4 months in 2007. However, the IRS allows a full contribution even for mid-year starts. This allowed me to make an additional deduction contribution of $3766.66 to reduce my taxable income for 2007.
Subscribe
Leave a comment