Monday, March 23, 2009

30-Day Economic Stability Challenge: The case against high-deductible plans

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.
The reason so many people choose HSAs and HDHPs is because they don't have $1,000 or even $400 to spend on health insurance a month. And with budgets strapped, it can seem easy to slide off on saving money in your HSA. As writer Beth Goethe shared when I asked about health insurance on LinkedIn:
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.

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.
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.

Photo by K e v i n.

1 comment:

C. Steven Tucker, President SBIS said...

Great piece Heather! I agree with you that HSA qualified High Deductible Health plans may not "feel" like the best way to go if one is not funding their HSA account regularly.

In fact, when Senator Bill Archer of Texas (R) started promoting the HSA (or MSA) concept back in the 90's, the entire concept was based on a family keeping the money that they would have paid to an insurance company for a more "traditional" health insurance plan.

But not just keeping it, wisely & responsibly investing it in a Tax Deferred Health Savings Account each and every month. A little at a time, and frankly nothing more than what they would have given to the insurance company anyway.

If one does not take the difference in premium and deposit it into a tax deferred interest bearing HSA account, then the concept itself may not "feel" like the best deal. However, it will still "feel" pretty good paying up to 40% less than a traditional Health Insurance plan would cost. Most especially since both kinds of health plans offer the same kind of Major Medical coverage, namely $5,000,000 of lifetime coverage per insured family member.

There are some substandard products that are also HSA qualified. Such as the Assurant Health "Right Start" plans that include very little if any coverage for outpatient medications or the Autograph HSA plan from Humana which covers NO outpatient medications, or the Aetna HSA qualified plan which stops covering all outpatient medications at $5,000 a year (even though all of the aforementioned plans include a $5,000,000 Lifetime benefit.

These coverage caps are often times not noticed by the consumer
and this is yet ANOTHER reason why no one should purchase Health Insurance blindly over the Internet. Most especially since it costs nothing extra to use a knowledgeable Broker. In fact, my guess is, that if you had known that your plan did not cover outpatient prescriptions you would have most certainly chose one that did (even if it costs a bit more).

What has happened in the Health Insurance industry in the last few decades with the advent of "Managed Care" is that Health Insurance itself is no longer used for it's original purpose. Namely, to cover one in the event of a worse case scenario. Instead, "first dollar" (no deductible required)coverage became an attractive "selling tool" to promote traditional health insurance plans.

No longer did the policy just cover the onset of a major medical condition. It now required only a small "co pay" for many outpatient services. The advent of the "co pay" has led to the overuse and abuse of Health Insurance.

Instead of relying on Health Insurance to keep one out of bankruptcy, the insured was now able to pay only a small "co pay" and see the doctor as often as they would like to, without sharing in the cost (other than their $20 co pay).

Whilst this is an attractive "selling tool" and a very attractive feature for the insured. What is not discussed is how much of a financial burden this added feature puts on the shoulders of the person actually PAYING the premium.

Since Health Insurance has been historically tied to the Employer many employees who enjoyed this benefit (and used it often) had no idea what this little feature was actually COSTING their Employer).

In fact, very few people actually realize what this feature costs until they loose their Employer sponsored Health Insurance coverage and are then handed a GIGANTIC Cobra continuation premium.

In fact the number one statement made to me when a former employee calls me for quotes on health insurance is: "Why does THIS Health Insurance cost so much? When I was working, my Health Insurance only cost me $48 every two weeks out of my paycheck? Why are YOU charging me so much more!."

That statement is a testament and a verbal endorsement for HSA qualified HDHP's. HSA qualified HDHP's only look good when YOU are the one actually cutting the check each month for the premium.

I would also like a dime for how many times I've heard the following additional statement once I have sent both Traditional & HSA qualified Health Insurance quotes his way: "You know Mr. Tucker, I looked at both quotes and I like the Traditional plan, but we're going to go with the HSA qualified plan because ALL THAT WE REALLY NEED is coverage for the worse case scenario".

It's funny how one's outlook on Health Insurance changes dramatically when THEY actually have to pay the entire premium.

I wanted to also expand a bit on the portion of my quote in your article that stated "The longer one owns and HSA qualified plan, the more lucrative it becomes". What I meant by that statement is that IF one responsibly deposits the money they save each year from buying an HSA qualified plan instead of a Traditional plan. Their out of pocket risk decreases exponentially as the years pass. Why?

Because the longer they go without a major medical claim, the more money they will have saved (tax deferred and tax deductible)to pay for that worse case scenario if and when it ever occurs.

It should also be noted that with not having a copay with your plan does not mean that your outpatient doctor visits and outpatient prescription drugs will not be a covered expense. With most HSA qualified HDHP's these charges are a full covered expense just as they would be with a Traditional Health Insurance plan. The only difference is these charges will be subject to the "aggregate" family deductible.

Being "subject to deductible" does not mean that you will pay full price for these charges either. If you stay within the vast PPO network that most reputable carriers offer your outpatient doctor office visit charges will be discounted by as much as 40%. Your prescriptions will also be discounted significantly as well by staying within the Rx network.

Let's break that down in plain english. Let's say your doctor's office charges you $100 for a "sick visit". If you sue a PPO provider (typically PHCS or MultiPlan) those office charges will be "repriced" down to roughly $60.

Compare that to a Traditional plan which provides you with a $25 "copay". The difference to you is $35 out of pocket for that doctor's office visit. But is that all you are really saving?

Not if you add in the monthly premium savings between the two plans. The typical monthly premium savings between a Traditional plan and HSA qualified plan for a family is $200 to $300 monthly or more. Let's split the difference at $250 less monthly. This equates to an annual savings of $3,000.

Now let's take that $3,000 annual savings and deposit it into a tax deferred, tax deductible interest bearing account. Let's go a step further imagine you find an HSA account that bears you NO interest AT ALL (which is not that hard to imagine in this economy). Your still saving $3,000 annually and your deducting that amount from your adjusted gross income. This means less reportable income which means less taxes.

Now lets imagine you have no major medical claims in year two and you deposit the same amount. Now in year three you have a worse case scenario occur. Now you have $9,000 to help pay your "aggregate" family deductible.

Moreover, since deductibles with HSA qualified HDHP's have on deductible for the entire family there will be no other risk to any other family member for the rest of that year. Unlike Traditional Health Insurance plans which typically require each of three separate family members to pay their own calendar year deductible if they end up in the hospital (or need an MRI, CT, Nuclear Medicine Scan etc.)

The longer you look at HSA qualified HDHP's the more sense they make. This is why they have caught on like wildfire and will continue to do so. The only inhibitor to the spread of HSA's is lack of education (as is the case with any other financial vehicle).

In summary, I would encourage any consumer to look hard at HSA qualified HDHP's. Most especially in this economy.