“Financial ruin from medical bills is almost exclusively an American disease.”
What if I told you that you could save up more money in a tax advantaged account, use it to pay your medical bills, and then, when you hit age 65, use it just like another IRA. Would you be interested?
What if, furthermore, I told you that you’d no longer have to worry about whether or not your employer provided your health insurance? After all, we’ve almost come to expect employers to provide health insurance (hello, hedonic adaptation) as a benefit much as Clark Griswold expected his Christmas bonus in National Lampoon’s Christmas Vacation.
No, this isn’t some get rich quick scheme or some financial secret I’m going to reveal. It’s been around quite a while, but a lot of people are afraid to dip their toes into the world outside of the box that everyone else has drawn around them.
First, though, let’s examine the way the health insurance story is currently told today.
Story #1: Healthcare is expensive, so you need to have your employer provide it for you.
It has become much more commonplace to see employers providing health insurance for their employees. Yes, it has become more expensive over time, and it doesn’t look to be getting cheaper any time soon. When I ran a software development company, we got the Cadillac of healthcare insurance from Guardian because we felt like it was a differentiator for benefits when we were hiring employees. I get it. I was taking part in the narrative lock, stock, and barrel.
Story #2: It’s almost impossible to get a deduction for health expenses.
Again, in most cases, this is true. If you’re paying for medical expenses out of your own pocket, then you can deduct expenses above the 7.5% AGI threshold. If your AGI is $100,000, then that means there are no deductions until you have at least $7,501 in medical expenses out of your own pocket, and insurance doesn’t count. In most years, you’ll never come close, especially if you’re healthy.
Story #3: I would pay an arm and a leg at the doctor or hospital.
Be honest. Since you use insurance, do you really have any idea what it costs to get an x-ray? Or a physical? Or have a baby? You get the picture.
Yet, the truth is that there are a couple of ways that, if you were having to pay out of your own pocket, you could save money:
- Shop around. If you need to have a procedure done, call up several doctors and see what their prices are. Pit them against each other, in a cage match of price reduction.
- Offer to pay cash. Cash is king. If you can offer to pay cash up front, then you can generally get a pretty good discount. Healthcare providers don’t want to have to waste time with insurance providers trying to get reimbursement, playing the medical billing game. They also don’t want to have to worry about whether or not they’ll get paid everything that they think they owe when an insurance reviewer kicks back the claim for the sixth time. Having enough cash on hand to be able to negotiate is important, though.
Now, let’s examine how to change the tale.
I’m going to introduce you to two acronyms:
- HDHP: The High Deductible Healthcare Plan. According to the IRS, a HDHP is “a health care plan with an annual deductible not less than $1,400 [for 2020] for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses [basically, anything that you pay related to the insurance, such as a deductible, except a premium] do not exceed $6,900 for self-only coverage and $13,800 for family coverage.”
- HSA: Health Savings Account. This is a specially administered account from which you can pay for your medical expenses aside from your insurance premium. In 2020, an individual can contribute $3,550 to an HSA, and a family can contribute $7,100. If you are on Medicare, you can no longer contribute to a HSA.
A HDHP, for all intents and purposes, is for catastrophic healthcare coverage. If you go to the doctor once a year to get a checkup and get the occasional ankle sprain (or torn meniscus in your knee like I did recently), then you’re not going to hit the deductible premium, particularly if you choose a high deductible.
Insurance companies want healthy people to choose Cadillac coverage rather than a lower level of coverage. The insurance agents get a big fat commission, and the insurance companies profit. You pay a lot of money for coverage which you don’t use. The healthy people also balance out the unhealthy people who are put into group coverage by the employers. It’s the preponderance of healthy people who pay for way more coverage than they need that make the insurance companies very profitable.
Compare health insurance to homeowners insurance. You get homeowners insurance to ensure that, if your house burns down or has a tree fall on it, you’re not homeless, sitting on a mortgage tied to a house that has no value. You use it for catastrophic instances. If a kid throws a ball through a window of your house, you’re not going to make a claim. You’re going to fix it yourself, or, ideally, get that kid’s parents to fix it.
The same holds true for car insurance. It’s meant for catastrophic damage or for liability and health coverage if you get into an accident. If a bird drops a rock on your car and dents it, you’re not going to call your auto insurance company to file a claim. You’ll just grin and bear it and either let the dent remain there (thereby imbuing your car with the characteristics of a beater) or you’ll go to the shop and have it repaired out of pocket.
In either instance, you’re very reluctant to file a claim with the insurer. Why? Because you know that the insurance company will either jack your rates through the roof or they’ll drop your coverage. It’s pretty simple. You want the coverage to cover your rear end in the case of a major, major expense, because once you use it, it takes quite a long time to see the rates go back down.
As a result, the cost to insure my house or my car is less than the cost to insure my health. One could make an argument that if health insurance is similarly positioned, you won’t do anything to maintain your health. You’ll look at the cost of a physical and decide to skip it. Yet, you change the oil in your car, don’t you? You do repair projects around the home, right? Those preventive services aren’t covered by the insurance, are they?
There is a health insurance option which mimics auto and homeowners insurance. Yes, you guessed it – the HDHP. HDHPs are for catastrophic coverage, by design. You’re not going to make an insurance claim for getting your physical or getting that cut stitched up, at least, not until you hit the premium threshold.
Because there are fewer claims, the HDHP is also cheaper. You can generally get a policy for a lot cheaper than you can get a regular policy, particularly if you’re younger, a non-smoker, and healthy.
There’s an additional benefit, besides a cheaper policy rate, to the HDHP. You can pair the HDHP with an HSA to use the HSA to both contribute tax-exempt contributions (meaning a dollar-for-dollar reduction in your taxable income) and pay for your expenses from the HSA. So, instead of paying for expenses with after-tax money, like you do now, you can pay for them with pre-tax money.
HSAs are only available when you have a HDHP in place. However, not only do they allow for pre-tax contribution of funds, they grow tax-free. You can withdraw money for qualified medical expenses at any time, and once you reach age 65, you can withdraw money in your HSA for any reason, not just medical expenses. This is the equivalent of saying that you can open up another IRA.
Based on the way that the plans have been structured under the Patient Protection and Affordable Care Act (PPACA, or Obamacare), Bronze plans may be considered HDHPs as well. The California plan, as it has been published, will enable the Bronze level of coverage to use HSAs.
Is an HSA/HDHP combination right for you? Perhaps. It’s a situation where it’s probably worth spending a couple of hours with a financial planner (note: make sure that the planner is a fiduciary to you lest you get sold some horrendously expensive high commission insurance product) to see if it is, because if it is, the return on investment on the savings will be much more than you spent on the planner.