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The Biggest Casualty of Obamacare

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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.

Plowing forward
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.

While the health-care stalemate continues, you need to know how to invest for health-care reform. Brian Orelli tells you who profits from the current gridlock.

Fool contributor Dan Caplinger used an HSA until the Massachusetts health-care reforms took away HDHPs as reasonable insurance options. He doesn't own shares of the companies mentioned in this article. UnitedHealth Group and Whole Foods Market are Motley Fool Stock Advisor recommendations. The Fool owns shares of UnitedHealth Group, which is also a Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy couldn't hurt a fly.


Read/Post Comments (18) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 16, 2009, at 5:23 PM, deehwills wrote:

    Loved my ex-HSA account! Used it to pay for Direct Access testing, which allows for blood tests without prescription from a doctor or clinic ... cheap and you can keep track of the results. Why is Direct Access Testing forbidden in some states ...lobbyists...of some sort? Why isn't health insurance available across state lines...lobbyists...of some sort? Why can't Medicare be offered with HSA accounts ...same answer? I totally agree with you on the benefits of HSA accounts and was disappointed that I had to give up the contribution because of Medicare. There are many smart ways to lower medical costs ...I see none of that in any of the proposals.

  • Report this Comment On September 16, 2009, at 5:41 PM, starfish36 wrote:

    HSAs are fine for people who take the time to understand them, who have the means to pay both the annual deductible and make the annual contribution, who have the disciple to leave the money in the account for future health needs (as opposed to rolling it over to an IRA, for example, and spending it), and who have the time during their lives to build up the capital needed to make the an HSA system work. Unfortunately, most people lack one or more of these requirements; moreover, modern medical procedures can costs much more than most people could possibly accumulate in an HSA. An HSA system can be a help, but it's not is not the answer.

  • Report this Comment On September 16, 2009, at 5:49 PM, Appollonia wrote:

    Please, let's get some perspective. Dan Caplinger writes that since it's my money, I 'have a lot more reason to scope out lower cost healthcare.' Here's how it actually works...many of us love and trust our physicians. We don't want to switch, and don't have reason to believe we're being overcharged. Diagnostic tests? Any good physician won't trust the rock-bottom lab's results, same for the cardio scan for calcification, or the breast-imaging. How does an average person 'scope out lower cost healthcare'? Go from lab to lab, from x-ray offices to drugstores to prosthetic stores to gyn offices? All 100 million families, all of us? OMG. Of course, we rely on the doctor we've trusted for 30 years. At 61, paying $4,200 annually for insurance premiums, then facing a $3,000 deductible, is this reasonable? My doctor recommended the insurer, and I tended to concur. By the way, United Health is for-profit -- NYSE listed. And few really like them. Hell-o-o? I'm in good health, thank God. Now I pray Medicare will be in some usable form in 3 1/2 years. Let's get the lawyers out of the doctors' offices, get the fraud and abuse out of the insurance companies and Medicare and then take a long look at where we are. I just read most women in Great Britain choose to have their babies at home (not high-risk pregnancies, I'm assuming). We do need innovation, pilot programs, forgiving med school tuition in exchange for public clinic internships. This is America, we can figure this out.

  • Report this Comment On September 16, 2009, at 6:26 PM, TMFBiologyFool wrote:

    HDHPs are great -- many people can self insure for the large deductible, but they're not the complete solution:

    1)Many people can't get them because they may exclude preexisting conditions or be prohibitively expensive if they don't.

    2)It's still cheaper to not have any health insurance and take the risk of financial ruin if you don't have many assets, especially for the young and healthy, who are the ones we really need in the insurance pool to bring down the costs.

    Requiring everyone to have health insurance and concurrently requiring health insurer to cover everyone (regardless of preexisting conditions) seems to be the logical solution to fill those gaps.

  • Report this Comment On September 16, 2009, at 6:37 PM, oldengineer wrote:

    I agree with starfish36.

    I saw no mention that in Dan's article that insurance companies negotiate rates with medical care providers. An individual does not have that negotiating power. I recently had a stent installed and spent one night in the hospital. The bill from the hospital was over $34,000, The hospital settled with Blue Cross for less than $2,600.

  • Report this Comment On September 16, 2009, at 6:42 PM, brockdavida wrote:

    HSAs are a step in the right direction, as stated in some comments above. However, the ultimate solution to lowering health care costs is a change in americans' attitude towards health. Stop eating so much junk, exercise more, spend more time with your family/friends and take more breaks/vacations. Take more responsibility for your health and quit relying on politicians to find a cure.

  • Report this Comment On September 16, 2009, at 6:50 PM, slafrenier wrote:

    Medicare does offer HSA. Most have dedutibles from $2000 to $3500. If you are healthy it may be a way to help save a little money, but it won't slow down the cost of healthcare doubling over the next 10 years. The only way that will bring down the cost is by increasing the risk pool. If everyone were in the same risk pool (yes, i mean everybody) the lowest cost per person can be achieved. Some people that are young may think they would be able to find insurane for less but when they are over 65 that group rate would look pretty good.

  • Report this Comment On September 16, 2009, at 9:13 PM, fisherv wrote:

    HSA has been a HUGE cost drain for our family of four ... no surgeries, no chronic illness, no emergencies or hospitalization ... just some persistent acne for one child and two of us with the flu in January and our annual company's contribution was gone by March 1st. We have no expectation of exceeding our 7500 deductible (required before the plan actually pays for anything), thank goodness, but that means that everything is out-of-pocket including $335 a month for GENERIC acne medication that should cost $20 (according to the FDA). Our dermatologist felt so sorry for us and our lack of adequate coverage that she charges us only for a nurse visit, but that still ends up at $160 out-of-pocket every month for the acne treatment. All of this and I work for a fortune 500 company with BlueCross BlueShield. I will gladly spend more of my money toward a program that provides all Americans with comprehensive healthcare so that people without the "benefits" I have don't have to choose between immunizations and rent.

  • Report this Comment On September 17, 2009, at 12:09 AM, hedrone wrote:

    oldengineer: "The bill from the hospital was over $34,000, The hospital settled with Blue Cross for less than $2,600."

    This is, IMO, the big sin that health care reform should be trying to eliminate. I find it hard to think of another industry (except maybe the airlines) in which one person pays more than ten times what another does for the same service depending on the circumstances of how payment is made.

    If people knew that their medical bills were going to be sensibly related to the cost of their care, they could make sensible decisions about how they're going to manage their heath-care costs. It is this constant fear of being uninsured or underinsured and then facing a ridiculous bill they need to pay out of pocket that keeps consumers clinging to bad insurance companies which would otherwise need to change their ways or go out of business.

    The idea of HSAs is that people need to make rational choices about how they spend their health care money. The hope of HSAs is that the collective pressure of these people trying to make rational choices will force the health care market to be a rational market again, where similar treatments have similar prices. But the health care market is not rational yet, and as such HSA users are going to have a really hard time of it.

  • Report this Comment On September 17, 2009, at 6:34 AM, atlscottsman wrote:

    I have saved almost $20,000 in premiums in 3 years when I switched to an HSA qualified HDHP. Even with incurring medical expenses every year, I still have a sizable balance. I have been able to save on my medical expenses by using services such as www.NewChoiceHealth.com. I also supplement my funding of my HSA with www.MyHSArewards.com. I get a cash reward for shopping through My HSA Rewards and then that cash is directed to my HSA. Entreprenuers are definitely helping individuals transition to becoming more responsible for their health care.

  • Report this Comment On September 17, 2009, at 10:58 AM, KWT8011 wrote:

    I'd like to know the name of the $330 generic acne medicine. I worked in a pharmacy for 6 years and cant believe that!

    "It's still cheaper to not have any health insurance and take the risk of financial ruin if you don't have many assets, especially for the young and healthy, who are the ones we really need in the insurance pool to bring down the costs."

    As a young (24) and healthy person, with insurance mind you, I can't blame my peers who opt out. Young people do the cost-to-benefit analysis and it makes sense not to pony up $100s a month for something you probably will never use, only to see it get more expensive the next time you renew it. Remember, we're paying $300-$1000/mo in student loans, paying more for car insurance, and have to save for goals like buying houses. The younger generation also is more into consumption - many would rather spend $150 a month for their cellphone than their health insurance. Few people *truly* NEED a smartphone, but I have lots of 20-something friends with them so they can update their facebook and download iphone apps.

    At least the HSA "rewards" you for not having to use your insurance, but it doesn't really make sense for anyone who needs thorough (ie, more than preventative) medical care.

  • Report this Comment On September 17, 2009, at 11:10 AM, Decibel45 wrote:

    hedrone hits on a critical point: we can't have sensible health care in this coutry as long as there's huge discrepancies in what people pay for the same service. And while it's easy to target the insurance companies for this discrepancy, I think that's barking up the wrong tree. What's *really* killing the system are all the people that flat-out don't pay anything. Any reform of healthcare *must* deal with that problem, more than anything else.

  • Report this Comment On September 17, 2009, at 11:41 AM, plange01 wrote:

    the biggest casulty? easy the american people all of them! the country is sinking deeper into a depression every day and obama is pushing a ridiculous healthcare plan he slapped together in about a week! that is when he is not trying to be a celebrity!

  • Report this Comment On September 17, 2009, at 12:00 PM, confusedworker wrote:

    HDHP and HSA's are not the answer for many people. If you are a relatively healthy person/family that does not have any chronic issues, then an HDHP and and HSA makes a lot of sense. In these situations, this type of insurance acts more as a protection against an emergency.

    However, if you are someone who has chronic issues (such as diabetes, high blood pressure, depression, ADHD, heart disease, etc), these plans suck! Because you are responsible for paying 100% of your prescriptions until such time as your deductible is met ($2300 per person for those of us that actually work at UHG), and some of these medicines can cost upwards of $500 per month for what the doctor (an intelligent subject matter expert) has prescribed for you, you cannot get ahead.

    My family had to move to one of these crappy plans this year, because that is all that was offered to salaried employees of UHG companies in Kansas, and we decided to schedule an elective surgery for my wife, so that she could hit that deductible in January, and not be a "burden" on the family health care budget for the rest of the year.

  • Report this Comment On September 17, 2009, at 3:37 PM, LMHands wrote:

    What does private health insurance add to the health care in the country. I would rather have a Medicare-type system and avoid dealing with private insurance companies. Private insurance companies' goal is to collect premiums and not pay out claims. They are the real death panels in the health-care industry. How can my private insurance company say that I need to use a different medication than what my doctor prescribed? They are not trained as medical doctors, they are accountants and actuarials.

  • Report this Comment On September 17, 2009, at 3:58 PM, BMFPitt wrote:

    "we decided to schedule an elective surgery for my wife, so that she could hit that deductible in January, and not be a "burden" on the family health care budget for the rest of the year."

    That makes no sense whatsoever.

  • Report this Comment On September 17, 2009, at 7:52 PM, cropconsultant wrote:

    I consider the group posting and reading these comments to be an above average sample of the population, but it is obvious from reading the comments that too many believe that what works for them is good enough for everyone else. The reality is that most people on this post don't really have a problem with health insurance. If you can worry about your investments, health care is just another expense that you'd just like to cut, or circumvent.

    Being self-employed the last 25 years, I can tell you that the cost of health care has prevented me from expanding my business. My wife went to work for a local company so we can have health insurance. When the premium crossed $12,000/yr and my youngest entered college my business could no longer cut it even for my family. HSA's are no answer to increased costs.

    It is obvious that from the way the word "socialism" is thrown around these days that noone really knows what it means. My B.A. degree was in political science before I turned to agriculture as a profession. Politics, and its rhetoric, is NOT economics. People who confuse the two are going to lose money. We are the only developed country to not have addressed this problem and it does not have to be solved with a "socialist" solution. Germany has over 200 private payers (the equivalent of our insurance companies).

    If you want to invest, and make money in, pharma, health insurance companies, hospitals, care clinics of various kinds and other health related companies, guess what? The costs of those products and services will go up, because that's what investors demand of their investments. I have long invested in the bank stocks of those banks I use in order to recoup the fees they charge me. I don't get enough return in health care stocks to cover my insurance costs, however.

    People are NOT going to give up anything they already have. Most people WITH health insurance that pays everything, like us through my wife's employer, would consider the establishment of HSAs as just another tax. Doggone socialism!

    If health care costs are not taken off the back of american businesses, and not just small ones like mine, we will have our lunch eaten in the global business marketplace. Which, if you haven't noticed, is already beginning to happen. My foreign investments have beaten the pants off domestic ones over the last 10 years.

  • Report this Comment On September 30, 2009, at 5:41 PM, PALH wrote:

    First of all, Fools: read fisherv's comment above and ALL of the negative comments about HSAs and then perhaps revisit your whole premise -- and nuke it altogether.

    Your presumptions about income and assets that seem reasonable in using an HSA may work with your investor demographic but out there in the real world, where tens of millions are completely UNinsured, this ``casualty'' of ``Obamacare'' is completely irrelevant.

    And HSAs do absolutely nothing about the problems of caps, nontransportable insurance, claim denials, premiums spiraling up (along with profits to insurance companies) and the cripplig of small businesses.

    Do better, Fools.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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