High Deductible Health Plan + HSA: A Practical Guide

Warning: I am not a financial or insurance professional. The following is my experiences with medical insurance and is not professional advice nor guidance. You are responsible for understanding all specifics and conditions of any medical plans you are considering!

I did it. This past fall I switched from my normal medical insurance to a High Deductible Health Plan plus Healthcare Savings Account (HDHP + HSA). I had been considering making the switch for a couple of years, and this year the numbers seemed to work and I convinced myself it was the way to go.

The biggest problem with HSA based plans is that they are complicated — or at least seem complicated. So people are wary of making the switch. I mean, who wants to research medical insurance? Most folks rather have a root canal.

Now that I’ve lived with an HSA plan for a few months I figured I’d write about my experiences making the change. And that might help you decide if HDHP + HSA is the way to go. So let’s get started:

What is an HDHP + HSA?

HSA based plans have two parts:

  1. A high deductible insurance plan (HDHP)
  2. A healthcare savings account (HSA)

HDHP

The HDHP is a lot like normal insurance, but instead of a deductible of hundreds of dollars the deductible is thousands of dollars. And, unlike most plans, almost everything hits the deductible.

You can think of this deductible as a bridge that you must cross before the insurance kicks in. Almost all medical costs count against this bridge and you must pay out of your pocket until the bridge is crossed (the deductible is paid off). I say “almost all” because health maintenance items like physicals and mammograms often do not get charged against the deductible and are therefore covered by the insurance.

Once you cross the bridge the insurance kicks in.

For example, let’s say you go to the doctor because you’re sick, and you get a prescription. Under traditional insurance you would pay a co-pay (say $20) for the doctor’s visit, and a co-pay (say $15) for the prescription. So $35 out of pocket. Your insurance pays for everything else.

But under an HDHP it all goes against the deductible and therefore comes out of your pocket. So maybe $150 for the doctor’s visit and $50 for the prescription. $200 out of your pocket that counts against the deductible.

So if your deductible (bridge) is $3000, you have paid down $200 of that, and are left with $2800 more to go before the insurance kicks in.

Now you may be thinking: WTF? This sounds terrible! Why would I ever want this type of insurance?  Two reasons:

  1. It has lower premiums, so each month you will pay less for this insurance
  2. It allows you to have an HSA, which is a hugely beneficial financial tool

HSA

OK, so you have this awful bridge you must cross before your insurance kicks in. Now if you never get sick and only have physicals you never need to worry about crossing the bridge. But what if you do get sick? How do you pay for those bills?

This is where the HSA helps. You contribute pre-tax dollars to the HSA, and when you take the money out to pay for medical expenses it is also tax free. Plus any investment income earned by the account is not taxed. That’s called triple tax free. That’s really good.

And the HSA is yours for life. Any time you have a HDHP you can contribute to your HSA. And all the money in an HSA rolls over year to year. And it is yours for life, so you can use it 10, 15 , 20 years from now to pay for medical expenses. And many HSA’s offer investment options like mutual funds if your balance is over a certain level.

So in many ways an HSA is like a medical 401k. But it is even better than a 401k. Why? Because in a traditional 401k your money is taxed when you take it out, but for an HSA the money is not taxed when you use it to pay for qualified medical expenses. And after age 65 those medical expenses can include premiums for medical insurance. Finally, even if you don’t use it for medical expenses, after age 65 there is no penalty for making withdrawls — you just pay income tax on the money you pull out (just like you would for a 401k).

And as a bonus, your employer might give you seed money each year for your HSA! That’s right, free money! Another benefit is you can, one time, rollover IRA funds into an HSA. So if you want you can seed your HSA with funds from an IRA.

Note there are limitations. There is a cap for how much you can contribute to an HSA, and in order to contribute to an HSA your must have a HDHP.

But what about FSA’s (Flexible Savings Accounts)? You might already have one of those without needing a HDHP. Yes, FSA’s are good, but they are not as good as an HSA: they are use-or-loose  (don’t rollover year-to-year), typically no employer seed money, you can’t “take them with you”, and no investment options. Keep in mind that having an HSA does not completely eliminate the option of having an FSA. There is something called a “Limited FSA” that you are allowed to contribute to even when you have an HSA. A Limited FSA is less flexible than a typical FSA, but can still handle a number of expenses like dental, etc.

So HSA’s are really good things. In fact some financial advisors recommend funding a 401k just up to the company match limit, and then put any additional savings into your HSA.

Got it? An HSA is fantastic,  but even so there are a number of other things to consider before jumping into an HDHP.

The Math

OK, so we have an HDHP which looks pretty awful due to that high deductible, and an HSA that sounds great. How do you decide if it’s the way to go?

First start by doing some arithmetic. You need to take into account  4 things:

  1. How large is the deductible (the bridge)
  2. How much will you save each month in premiums
  3. How much HSA seed money does your employer offer
  4. How much out-of-pocket expense do you usually have under your current plan

For example, let’s say:

  1. The deductible is $3000
  2. You will save $150 each month in premiums
  3. You will get $1000 in HSA seed money from your employer

Doing the math:

$3000 – $1000 – ($150 * 12) = $200

Hey, that’s not so bad! Your exposure to the deductible is just $200 because your employer is covering $1000 of the deductible, and your premium savings is covering another $1800.

So now you can take into account your out of pocket expenses under your current plan. Odds are your current deductible is more than $200 (although fewer things probably hit that deductible), and you are making co-pays. So depending on your situation that $200 deductible exposure under the HDHP might be AOK.

And obviously if you have a generous employer who gives you $1200 in seed money then it is a no brainer. Or if your premium savings is $170. In those cases your bridge is fully covered by the seed money plus premium savings.

Other Considerations

The dollars and cents arithmetic is a very important consideration, but not the only one. Some other things to look at.

The HDHP + HSA requires more work on your part

Under a traditional plan you go to the doctor, make your co-pay, and then forget about it. With an HSA plan you don’t pay anything at the doctor’s office, but you will get a bill after the visit. So you need to watch for the bill, make sure it is processed by your insurance company and applied to your deductible, and then make the payment (hopefully out of your HSA).

This means you need to be more involved with your medical expenses. In general this is a good thing, but it requires more work and planning. For some folks this is not a good fit. I know one guy at work that tried the HSA and hated it: “I get all these damn bills!” Well, duh, yes you do. He switched to Kaiser and is much happier!

Timing

You can’t borrow ahead against your HSA (like you can with many FSAs). That means if you get in a car accident in January and have thousands in medical bills you might not have enough money in your HSA to cover your out of pocket expenses. You will need to pay those bills somehow, and then re-imburse yourself later from the HSA after your HSA contributions catch up and fund it (there is a way to “pay yourself” from the HSA to reimburse you for qualified expenses).

This also means you might defer medical visits because you won’t have enough money in your HSA until later in the year. This might not be a good thing. If your employer gives you seed money that helps, but not everybody is that fortunate.

The Insurance

Another consideration is what is the HDHP coverage that your are bridging to? Is it comparable to your current plan?

In my case the insurance plans were comparable, but not identical. Instead of co-pays my cost under the HDHP is 10% for most procedures. Turns out that 10% is a bit less than many of the co-pays I had under my old plan. So that made the HDHP coverage a hair better for me.

Tooling

I mentioned that the HDHP + HSA requires more work on your part, so it is important to understand what tools are provided by the insurance company and HSA provider to help you manage these things.

In my case those tools are pretty good. I have two online accounts. One with the insurance provider and one with the HSA bank. The insurance is tightly integrated with the HSA, so a typical scenario for me is:

  1. I log into my insurance company account
  2. I review new claims to see what the costs were and that they were applied to the deductible
  3. I pay new claims/bills right there from the claim summary. It lets me pay electronically from my HSA with just a few clicks.

The HSA bank also provides a debit card that can be used to pay for prescriptions and other qualified medical expenses.

Periodically I will log into my HSA bank account to verify my paycheck contributions are going in and what funds are available and what has been paid out.

Overall I find the tools to be good, and I expect other major insurance companies would provide similar online tools.

Your Age

I am well into middle age, but if I was young, healthy, and typically only went to the doctor for physicals (which might be %100 covered under your plan) — then I would consider HDHP + HSA very seriously. You possibly get free seed money from your employer, you can put your premium savings into the HSA, and voila! you are saving for retirement!

401k Tradeoff

Another buddy at work is considering reducing some of his 401k contributions and putting that money into his HSA. He is being careful to make sure he still maximizes the company match on the 401k, but he is viewing the HSA as a long term savings plan for retirement like his 401k is. Note he is NOT reducing his 401k contributions to pay current medical bills, instead he is shifting some of his retirement savings from the 401k to the HSA as part of his long term plans. Why? Because as stated earlier, you pay no taxes on money pulled out of an HSA to pay medical bills. You do pay taxes on money pulled out of (most) 401k’s to pay medical bills. So in your retirement years the money in the HSA has more value (assuming you will have medical bills).

Is It Right For You?

My brother, who had an HSA based plan for a number of years, commented to me that during the bridge “I was the insurance company”. He became more aware of healthcare costs, and he felt more empowered to question things — since he was the insurance company!  So he would question his doctor if that full panel of lab tests was necessary. Or if a more cost effective prescription option was available.  And he found that yes, there were often other (less expensive) options.

Maybe that appeals to you, maybe it doesn’t. But even if it doesn’t the arithmetic does not lie.  If your effective exposure deductible is low, and you are reasonably healthy, then you can come out far ahead with an HSA plan.