5 Steps to Significant Health Care Savings

More and more people are being forced to buy their own health insurance. As more small companies opt not to provide health benefits, more individuals and their families are being forced to purchase affordable health insurance on their own. But this can be easier said than done. Indeed, many pitfalls await the uninformed health insurance purchaser.

A common mistake that can be made is to try and replicate the benefits under a former group plan. Typically, these group-benefit type plans are very expensive in the individual market, primarily because of lower deductibles and co-pays for everything from physician visits to prescription drugs.

When an individual is not paying the full cost of the policy, such as when he or she is an employee with a subsidized plan, benefits are usually the most important consideration. But when that employee becomes self-employed or must otherwise purchase his or her own coverage in the marketplace, cost of the policy can suddenly become the number one priority.

A viable alternative for many people is to consider a health savings account plan instead of a traditional health insurance policy with low deductibles and co-pays. A health savings account plan consists of 2 elements: 1) a high deductible health insurance policy (or HDHP) and 2) a savings account that is similar to an IRA (because it offers tax advantages).

Here is a 5-point plan approach to help individuals make the switch to a health savings plan:

1. Carry a low cost plan with a high deductible. This alone can save thousands a year in premiums.

2. Take the money saved on premiums and deposit it into a special tax-sheltered HSA. These deposits are 100% tax-deductible "above the line," so you instantly lower your tax bill each time you merely deposit money into your savings account.

3. You can then withdraw money from the HSA on a tax-free basis to pay routine medical bills during the year. When you use tax-free money to pay medical bills, you are using discounted dollars to pay those bills, thereby lowering their actual cost to you.

4. Most larger expenses should be covered under your high deductible health plan (after the deductible has been satisfied, subject to policy terms, benefits, and limitations).

5. What you don't use from the health savings account each year is always yours!The unused funds remain in the account and continues to grow on a tax-deferred basis, just like an IRA. In fact, HSA plans are often referred to as "medical IRA" plans because they help supplement your retirement, just like an IRA.

By following this 5-point plan, you should see your health care account grow and grow over time. In fact, if you consistently contribute to your HSA, you should see it grow to challenge your IRA in size. It's a much more attractive option for most people than paying high premiums for health care they rarely need.

In some situations, it may make sense to pay a higher premium for a plan with co-pays for prescription drugs. For example, if an individual is currently on a regime of a prescription costing $240 a month at a retail pharmacy, then certainly that individual may be better served with a $15 co-pay for prescriptions. Note, however, that coverage may not be available to such an individual due to "pre-existing" conditions. In the big picture, high deductible plans certainly are more attractive to individuals who are not in current need of pricey prescriptions.

About the Author

The author is an advisor affiliated with HSA Insurance Brokers in Scottsdale. He specializes in hsa insurance plans for groups and individuals. He has many years experience helping his clients establish health savings account plans.

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