health insurance: February 2008 Archives

For those of you coming into this topic cold, here's a good primer at The Penny Saved: Health Savings Account Vs Health Reimbursement Account Vs Flex Savings Account (and keeping my hair for cheaper)

I originally planned to write a followup on my previous HDP/HSA article after a few more months of medical bills. However, I just noticed an error in my spreadsheet so I've decided on an earlier update. The initial spreadsheet did not have a row for transaction costs -- this has been fixed now, download here: HSA_investment_options.ods, HSA_investment_options.xls

Spreadsheet Example: HSA Bank

Let's use HSA Bank as a quick example of how to use this spreadsheet. HSA Bank charges $2.25 per month if you have a bank balance of less than $3000. On the other hand, they pay a puny 2% interest compared to 5.12% at Patelco (minus $1/mo in fees). So we have 2 options:

• Keep $3000 at HSA Bank earning 2% interest and pay no fees
• Keep $0 at HSA Bank and pay $39 in fees

To run the numbers on this scenario, fill in the spreadsheet like so:



Although people don't like fees in general, sometimes it's better to pay them. In the above example, the 3.12% interest difference on $3000 is $93.60. Would you pay $39 in fees to get $93.60 back? I would.

New Investment Option: Bancorp HSA

While browsing Boggleheads, I ran across this message about Bancorp HSA using a Fidelity platform with mutual funds available for $4.95 per transaction. (The price is scheduled to increase to $5.95 as of March 14 -- see their fee schedule for more details.) Fees are waived if you have an automatic ACH deposit plan. Among the list of 1500 mutual funds available at $5.95 are Fidelity's Spartan Index funds. Assuming you meet the minimums for those funds (or the minimums are waived for HSA accounts), this seems to be the lowest cost investment option available. (The updated spreadsheet includes Bancorp HSA.)

Updated Summary

In the below table, Bancorp HSA uses Fidelity Spartan funds at above 10K balance. Below 10K, index funds from Dreyfus, Columbia, JPM Morgan, etc are available ranging from 0.15% to 0.60%.

	HSA Administrators	HSA Bank	HSA Resources	Saturna Capital	Select Account	Bancorp HSA
$1000	5.62%	5.54%	6.84%	2.55%	5.43%	2.05%
$2500	2.56%	2.30%	2.82%	1.83%	2.51%	0.97%
$5000	1.54%	1.22%	1.48%	1.59%	1.43%	0.61%
$7500	1.20%	0.86%	1.03%	1.51%	1.21%	0.49%
$10000	1.03%	0.68%	0.81%	1.47%	0.88%	0.25%
$15000	0.86%	0.50%	0.50%	1.43%	0.88%	0.25%
$20000	0.78%	0.41%	0.47%	1.41%	0.80%	0.22%
$35000	0.51%	0.29%	0.33%	1.38%	0.70%	0.18%
$50000	0.41%	0.25%	0.27%	1.37%	0.66%	0.17%

Tax Filings

Remember to file Form 8889 if during 2007:

• You or your employer made contributions
• You withdrew money for any reason (medical, non-qualified or rollover)

After looking through this form, it appears the cheapest and quickest way to transfer money across acounts is to write a check to yourself and deposit the money manually as the various HSA administrators all seem to charge fees for an outgoing rollover. If you do it by hand, fill in a simple offset on lines 14a, 14b, 14c during tax time and it's a done deal.

Paying Medical Expenses

No issues. The bills I get in the mail, I use online bill pay. When I go to the pharmacy or optometrist, I use the debit card. And for reimbursements, I write a check to myself. Pretty easy.

My balance has remained relatively constant even though there's a constant stream of bills for my wife's pregnancy. The bills seem spaced out just enough to be covered by the employer contributions. Of course, making an additional contribution last year has helped maintain a good buffer. At this point, we're about $1800 away from the annual deductible and $2500 away from the out of pocket maximum. Once those numbers are hit, I expect my account to start growing again.

You also have the option of never paying a single medical bill out of your HSA. Instead, let it grow tax free until you pass away. At that time, your estate will then submit all your saved medical receipts for reimbursement. The math works out in your favor -- assuming Congress doesn't close this loophole.

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:

• 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

As far as I know, this is the only savings/investment vehicle where you don't get taxed either on the contribution or the withdrawal as long as the money is used for qualified medical expenses. While that may seem limiting, a big portion of life's expense is medical. This recent study from Fidelity claims the average couple in retirement will spend $215K for medical. So for practical purposes, any money saved in a HSA probably will never get taxed unless you have to take the money out for non-medical emergencies. Hence, I describe HSAs as IRAs on steroids.

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

What do these numbers mean? Here's my best guess from paying medical bills and reading convoluted plan materials:

• 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

Basically, every HSA option compared to the standard PPO plan was a winner for the employer even after funding everybody's HSA account to the IRS max. But what about possible downsides for plan participants? Let's look at what employee exposure for paying with their own money beyond employer HSA contributions.

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

After looking at these numbers, the final decision was rather easy. The Blue Cross HSA 2400 plan had the least exposure which made it an easier sale to employees and only was a tad bit more expensive than higher deductible plans. In terms of network coverage, Blue Cross and Blue Shield are relatively equal for the states our employees are in (California and Florida) with HealthNet trailing behind in number of doctors. Of course, pre-funding a HSA means you don't care whether you're in network or out of network up to the deductible amount.

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

When you visit these sites, you'll see most of them have all sorts of complicated twists in their schedules of fees so you have to analyze each option in terms of opportunity cost. For example, if you have to put in a minimum of $2000 in their checking account earning 2% interest, would it be a better option to instead get 5.12% at Patelco and pay the low balance fee? So I created the a spreadsheet (HSA_investment_options.ods) that models all the factors based on how much you have invested. Assuming we're picking the 65/35 stock/bond fund options available, the total expense ratios look like so:

	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%

One word: ugh. I am used to investing directly at Vanguard so the low balance total expense ratios are total turnoffs. (Mind you, these are the cheapest HSA investment options available.) Unless better options come to the market, I have no plans to invest my HSA money until I reach the $7500 mark.

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.

EDIT: Replaced broken Forbes link with the source Fidelity article.