Bachmeyer Benefits Consulting

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Why the Health Savings Account Makes Sense

HSAs are not rocket science. Really, they are not. It just seems like it. And yes, there is a learning curve to really appreciate just how good they are. And yes, it is easy to get tripped up by the tax savings calculations. And yes again, it is at heart major medical insurance and therefore it has its aggravations. However, the idea is fairly straight forward. Combine a high deductible health insurance plan with a tax-favored savings account and what you get is a plan with lower cost and better insurance coverage. Let the following example of coverage for a typical family illustrate:

Plan design	Plan A traditional Major Medical $500/ person 80/ 20 to $10,000, then 100% Doctor off copay $20 Drug card $15/$30/$50	Plan B HSA Major Medical $3,000 / family 100% above deductible No copays- Doctor off, prescriptions apply to the deductible
Monthly cost Annual Outlay	$900 x 12 $10,800	$500 x 12 $6,000

Now let's look at two scenarios for our family, one a best case and one a worst case. If the family is healthy and has no medical claims for the year (best case) it is pretty obvious that Plan B is going to be the more cost efficient ( that is, an outlay of $6,000 for the year vs. an outlay of $10,800). Well, what about worst case? Let's say one family member incurs $50,000 of charges in the year what happens then? If we look at Plan A we know that that person will have met his $500 deductible and 20% of the next $10,000. That means out of pocket expenses will be $2,500 ($500 + $2,000) in addition to premium cost. If we look at Plan B we know the same person will have met the entire $3,000 family deductible and so have $3,000 out of pocket in addition to the Plan B premium.

Best Case	$10,800	$6,000
Worst Case	$10,800 + 2,500 $13,300	$6,000 + 3,000 $9,000

In either case the family is far better off using Plan B. Further, when you throw in the tax benefits of utilizing a health savings account to pay for those out of pocket costs the advantage is even greater. Let's look at that now.

If the family decides to fund their savings account each month along side their insurance premium payment they can quickly build up a savings account that equals the $3,000 deductible. In our example above if the family pays in $750/ mo ($500 for insurance and $250 for savings), what they have done is create 'Cadillac' coverage because the $250 that goes into the savings will, over a 12 month period, grow to $3,000 and cover the deductible. Since coverage above the $3,000 deductible is 100% then that means the coverage is 100% for everything. This is a plan better than the best HMO design, even the ones you remember from 15 years ago.

To continue, if our family on Plan A does experience a worst case year where they have the $2,500 out of pocket in addition to their $900/ mo premium, they will be paying those out of pocket costs with after tax dollars. Whereas the family on Plan B pays out of pocket costs with money from their HSA which is not after tax.