Like a lot of people, our family had to make a change in health insurance at the first of the year.
After reviewing all our options (and re-reviewing them, and reviewing them some more) we took the opportunity to go a direction we had been thinking about for a while: a high deductible policy that would allow us to also open a health savings account (or HSA). We purchased our policy directly from the company and not through the exchange.
Our previous policy had also been a high deductible policy, but because we had affordable co-pays for office visits and prescriptions, it disqualified us from having an HSA.
This time around we dumped the copays and are paying most of our health insurance costs out of pocket. Essentially what we have is a plan that provides coverage for a serious illness or catastrophic injury or, I suppose, lots and lots and lots of less serious things.
In exchange for having this catastrophic-only coverage, we are saving a significant amount on our monthly premium (we’re paying less than half than we were before) and we get to save for our healthcare expenses in a tax-advantaged health savings account.
The idea behind HSAs is that you pay for or reimburse yourself for your expenses from the account. But our plan is to do something different. We’re going to contribute the maximum to our HSAs ($6550 for a family in 2014) and leave it there. So we’ll be paying for our out-of-pocket costs with after-tax dollars.
Why would we want to do that? There are actually two reasons:
1. Our high deductible health insurance plan has – well – a high deductible: $6300 per year per individual. We hope we never come close to meeting that deductible amount, but we’d like to build up a savings cushion in case we ever do. So we won’t be paying for our teeth cleanings, allergy shots, prescription drugs, and other predictable expenses with the HSA, but the HSA money will be there if we ever have bigger, less routine expenses.
2. We also want to build up the balance in our HSA account as additional retirement savings. Once we reach 65 the money in our HSA can be used for non-medical expenses without a penalty, although we would still owe taxes on that money. Basically it would work like a non-Roth IRA at that point. We’re really focused on saving more money for retirement so this is a great opportunity to do that in a tax-advantaged way. Here’s an article from Forbes that also explains this strategy: The Most Tax-Savvy Use Of A Health Savings Account.
I have to admit that even though I fully understood the way high deductible insurance/HSAs work, there has been a bit of an adjustment period. There may in fact have been a little bit of a freakout period.
That bottle of nasal spray for my allergies? It has a $300 price tag, which I didn’t know about because I was paying a much lower copay amount with our old policy.
But I called a friend of mine who has had and HSA for years and he reassured me that it’s been a great plan for his family. I also discussed it with our accountant when I took our taxes in and he reminded me that he’s been encouraging us to do this for a while now. He also gave a thumbs up to the plan to use the HSA for additional retirement savings.
Needless to say I talked to my doctor about the nasal spray and he prescribed a generic for me to try and that’s actually the way this plan is designed to work. I’d never had a reason to ask my doctor about prescription alternatives before. The byproduct has been a more educated health consumer (I had no idea that prescription was that expensive) and lower healthcare costs (no reason to use an expensive name brand if a generic works just as well).
So we’ll see how this goes over the course of time. I’ll be looking at a couple of things in particular:
1. Will our out of pocket health costs be higher or lower once the lower premiums are figured in as part of the equation?
2. Will we be able to pay for all those out-of-pocket costs without raiding the HSA savings?
I’ll keep you posted.