Saturday, February 12, 2011

Why Health Savings Accounts are a rip-off

One way the government has tried to offset the rising cost of health insurance was to create the Health Savings Account.  It turned out to be a rip-off that didn't do anything but benefit insurance companies and banks.

In exchange for selecting a high deductible health insurance plan, you can create a savings account that you can use to pay your out-of-pocket costs, the savings plan allows you to make your contributions tax deductible, so, theoretically, all your out of pocket costs are tax deductible.

The problems are:
  • The annual contribution limit for tax purposes is less than the out of pocket maximum in the insurance plans.  So, if you go over your out of pocket limit due to large claims, you cannot recover all the money you spend.  You can theoretically recover it in future years, but you need to have enough leftover unspent money in future years to do it then.  (The current annual funding limit is around $7,000 for a family).
  • The premiums for the HSA plans are not comparatively lower than traditional PPO plans to the extent that you take on additional risk; you take on more financial risk, but you are not fully compensated for it with lower premiums. In short, the insurance companies quickly absorbed the difference by ratcheting premiums back up, so the plans were essentially a Trojan Horse for implementing higher deductibles without offsetting rate reductions for the policyholders.
  • There is no individual out of pocket limit as there is in a PPO plan, only a family limit.  If you have family coverage, this is a very bad deal.  Be careful: because the spreadsheets that insurance companies use to compare HSA and PPO plans imply that there is an individual limit.
  • You need enough leftover money to actually put money into the HSA savings account; the point of the whole scheme.
  • You need to pay for your high deductible before any insurance kicks in, that means you "front" more of the first-dollar claims cash, compared to a PPO plan.  You better have enough extra cash ready for a big claims year.

The tax deductibility is a pretty clean benefit, although there are other ways to get it, including the tax deduction on your 1040 schedule A (subject to a limit) or an employer’s Cafeteria plan (subject to use-it-or-lose-it provisions).

In the end, choosing between a PPO and a HSA is a gamble, the outcome depending on how much claims you have in the year, and which family member has them.  There are scenarios where an HSA is better (and the tax deducibility is more assured), but there are many scenarios where an HSA is worse.  It is mainly better if you don’t have any claims that year.  The HSA is best when you don’t use it, and then only to the extent that its premiums are lower than a PPO.

But the real problem – and this is where the rip-off comes in, is that the HSA accounts themselves are a bad deal; and a boondoggle for the banks that hold the accounts.  They have all sorts of fees – account set up fees, low balance fees, and the usual checking account type of fees.  Also the rate of interest you earn is ridiculously low, like passbook savings account low.  The fees can add up to a couple hundred dollars per year, and you must keep a minimum balance sitting in the account our you will get sucked dry with a monthly fee..

In addition, the balance in your account may or may not be FDIC insured, so be careful what bank you use and how much you accumulate.

1 comment:

  1. You are so right. Our HSA monthly premium is $350 with a $6,000 CYD Calender Year Deductable PER FAMILY MEMBER. Only Wellness visits are covered. Any other Doctor visit is out of pocket till we meet the $6000 deductable. A usual doctor visit is $70. Blood work is $170 unless I use my HSA then it's $370 out of my pocket. Duh yeah !
    A PPO Plan is $300 with $250 deductable and well visits are covered. Additional office visits are $50 and includes lab work.