Recently, I asked insurance broker C. Steven Tucker who should avoid health savings accounts and associated high-deductible plans. His answer?
It is my informed opinion that no one should avoid an HSA-qualified high-deductible health plan (HDHP). The longer you own one the more lucrative having one becomes. However, it should be noted that prior to age 30 the premium difference between an HSA-qualified HDHP and a more traditional health insurance plan (with all the "first dollar" bells and whistles) is almost non existent. This being the case, younger families can enjoy a more traditional health insurance plan with "first dollar" coverage for about the same premium. However, they will not have the unique tax advantages allotted to those who own an HSA qualified HDHP.I'm going to take the contrary view on this, not only as someone who started her freelance career with an HSA and as someone who's written about them. Your mileage may certainly vary, but when I was looking at them, I had a hard time finding any critical information on them. In an effort to provide you with more information, I've compiled the following.
About HSAs and HDHPs
Here's the deal with HDHPs and HSAs: HSAs are the Individual Retirement Account of the health insurance world. They're essentially a tax-protected savings account rom which you can draw funds to cover approved health expenses. These are pretty generous: They cover everything from chiropractic to emergency room visits. However, in order to use one, you must have a corresponding HDHP. Deductibles range from $1,000 to $4,000 and premiums can be anywhere from $150 to much much more. The idea is, the money you save will be invested in the stock market according to your wishes and, when you have money left over at retirement you can use it for anything you want, not just health costs.
Sounds like a good deal, right? But let's look at the potential problems:
Not enough money
The attraction of high-deductible plans is that they are inexpensive, catastrophic coverage that can at least get you in the door of a doctors' office or emergency room. But they aren't so cheap when you really look at them:
- The saving problem: In an ideal world, you'd take the difference between what you'd pay for a full-coverage plan (in some cases, up to $1,000 a month) and what you'd pay for a HDHP ($200 or so a month) and put it in the HSA. That way, when you need healthcare, you can draw down the account without having to pay a lot if you're relatively healthy. But as I've written elsewhere, most Americans are abyssmal at saving. Unless you can save the equivalent of your annual out-of-pocket expenses (in some cases $10,000), you may go into more debt with an HSA and HDHP than without it.
- The coverage problem: The reason you could incur serious debt is because you must pay out-of-pocket for all your health expenses until you hit your deductible. The plan I got had a $4,000 deductible. I didn't have $4,000, let alone the money to meet the deductible. What's more, my particular HSA and HDHP didn't cover prescriptions. So I ended up paying $150 for a bottle of allergy spray. No kidding.
- The fee problem: Tucker says the longer you own one, the more lucrative it becomes, but that wasn't my experience. I wasn't a good money manager--I'll be the first to admit it. What I didn't count on what that most HSAs charge you fees. When I finally closed the account because I signed on to a big HMO, I expected to get $20 back. I got $0.11. The bank took the rest in fees.
It tickles me that we talk about a health care crisis in this country. The health care is not the crisis. It's a health care INSURANCE crisis. There is plenty of care, but no way to pay for the insurance. Sorry to disappoint, but medical savings accounts are not as impressive as they sound.Tax time
Tucker says HSAs and HDHPs offer "unique tax advantages." That they do, if you have cash you want to protect from the IRS. But as a self-employed person, you might get just as much of a tax savings, or even more, from getting a high-premium, full-coverage plan if you can afford one.
That's what freelance business writer Randy Hecht argues:
Interestingly, Heather, I've learned to take the opposite approach presented by the first two posters [who advocate HDHPs], something I was taught by Bob McGarvey. I buy relatively high-end health insurance with a low deductible because it's far more advantageous come tax time. Premiums are guaranteed to be expenses you can deduct off your 1040. But high insurance deductibles/co-pays may not be. Too many freelancers treat insurance as something less than a necessity when they ought to give it the same regard and priority they give to housing, utility and food expenses. It's a necessity, and my suggestion to anyone considering a switch to self-employment would be not to do it until they were confident of making enough money to pay for decent coverage.Bottom line: The fact is that the U.S. Government Accountability Office found that the average income of someone with an HSA was $139,000 and that 41 percent of people with an HSA didn't draw money from it for health costs. It was a tax shelter. If you actually plan to use it, HSAs won't be the great investment you hope it will be.
I've been on a HIP plan for 7 years or so by way of Media Bistro, which itself actually piggybacks on the IRBA health plan. I'm probably going to make the switch to an Oxford plan offered through the Authors Guild, but not for reasons of economizing--simply because a doctor I like no longer takes HIP but does take Oxford. In either case, my monthly insurance expense is slightly higher than a third of my monthly housing expense (though I should qualify that by saying my monthly housing expense is low by NYC standards because I bought my apartment 20 years ago). My suggestion to anyone who's shopping for health insurance is to compare the plans available from any professional associations they're qualified to join--and to get quality rather than bargain-basement coverage, both for peace of mind and for the tax deduction.
Photo by K e v i n.