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Amid all the controversy over the administration's health-care proposal, there's one almost-forgotten tax provision that could potentially achieve many of the same goals, including helping people cut costs and take greater control of their health care. What's more, you can already use that provision if you qualify -- but it may soon become a moot point depending on the form a national health-care plan eventually takes.
Understanding health savings accounts
Health savings accounts (HSAs) were created back in 2003. Conceived as a way for individuals to cut their health insurance costs while retaining more responsiblity for covering their actual health expenses, HSAs were designed for use in combination with specialized health insurance policies known as high-deductible health plans or HDHPs.
The idea behind HDHPs is similar to what you may have seen on your homeowners or automobile insurance. Just as you can cut your premium costs by raising your deductible on those policies, HDHPs offer lower monthly premiums. In exchange, rather than covering you from the first dollar of expenses, HDHPs only kick in after you pay a sizable deductible of at least $1,150 for singles or $2,300 for families. Many health insurance companies, including Humana (NYSE: HUM ) , Aetna (NYSE: AET ) , and UnitedHealth Group (NYSE: UNH ) , offer HDHPs.
Once you have a qualifying HDHP, you're eligible to open a health savings account. Although some insurance companies offer both the insurance policy and an HSA to go with it, you can also open HSAs at other financial institutions, such as Wells Fargo (NYSE: WFC ) , BB&T (NYSE: BBT ) , US Bancorp (NYSE: USB ) , and Bank of America (NYSE: BAC ) .
How HSAs work
The IRS allows you to contribute up to $3,000 for singles or $5,950 for families to your HSA. Those contributions qualify for deductions on your income tax return. The account acts much like the flex accounts that many people are familiar with at work, with one big difference: Rather than having to forfeit whatever you don't use at the end of the year, you can carry forward unused HSA contributions throughout your lifetime.
In terms of functionality, HSAs are pretty simple. When you incur a qualified medical expense, then you're allowed to take money out of your HSA tax-free in order to pay it. In fact, many HSA providers will provide debit cards or checkbooks to allow you to pay qualified medical expenses directly from your account at your doctor's office.
Benefits and downsides
As Whole Foods CEO John Mackey pointed out in his recent comments on health care, HSAs place more responsibility on individuals to control their health-care costs than traditional health insurance policies do. With most health insurance, there's little or no incentive for individuals to seek out lower-cost providers; since you're only responsible for a small co-payment, a $300 bill doesn't cost you any more than one for $200.
In contrast, with an HSA, you're the one on the hook until you meet your deductible. Since it's your money you're saving, you have a lot more reason to scope out care at a lower cost. In addition, it works out extremely well for those who are healthy -- you get to keep the money you set aside in the HSA, and you essentially pocket the savings from the cheaper insurance policy.
On the other hand, those with high medical expenses may find the high deductible outweighs the premium savings. Yet HSAs have annual out-of-pocket maximums that are in line with those of traditional insurance policies, so the difference between the two may not be as significant as you'd first think.
Despite their attractive traits, HSAs have never met their full potential. One reason is that people already have a lot of trouble choosing among different health insurance options. When your employer provides full health insurance, you may not have any reason to accept the less-extensive coverage that HDHPs provide. Also, investment options for HSAs are somewhat limited, and many institutions charge fees to participate that offset some of the tax savings.
Nevertheless, it's unfortunate that in the discussions on health-care reform, HSAs haven't gotten more attention. With more support, HSAs could address many of the concerns that policymakers have and give everyone an incentive to do what they can to keep their health-care costs as low as possible.
Are HSAs the right answer to health-care reform? Tell me what you think in the comment box below.