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Your Answer to Skyrocketing Health Costs

Dan Caplinger
November 3, 2010

Tired of paying through the nose for health insurance you never use? As dumb as it may seem to throw good money after bad, going entirely without health insurance is a risky move, potentially leaving you one serious accident away from bankruptcy. But one insurance option that's growing in popularity is worth a closer look, especially if you have some money in the bank and don't tend to have a lot of medical expenses.

Time for some alphabet soup
First, get ready for a bunch of confusing acronyms. Health savings accounts, or HSAs, are tax-favored vehicles that let you set aside money for medical expenses. The easiest thing to do is to think of HSAs as IRAs for health care, because they're similar in several ways.

But before you can open an HSA, you need to have what's known as a high-deductible health plan or HDHP. HDHPs and HSAs always go together, but they're different things that you typically have to establish separately.

As their name suggests, HDHPs allow you to have a higher deductible on your health insurance than most traditional plans offer. If you've ever bought auto or homeowners insurance, you've probably noticed that if you choose a higher deductible on your policy, you can cut your premiums significantly.

The same principle applies to HDHPs. Instead of providing coverage for all your medical expenses, HDHP insurance only kicks in after you pay a fairly large deductible: $1,200 for single coverage and $2,400 for family coverage. After you pay that much, HDHPs work like regular health insurance policies. Many employers offer HDHPs in their benefits packages, and Aetna (NYSE: AET  ) , UnitedHealth Group (NYSE: UNH  ) , and Humana (NYSE: HUM  ) are among the insurance companies that offer them to customers.

If you have an HDHP, you can open an HSA. Some insurance companies offer HSAs and HDHPs in one package, but you don't have to combine them. Instead, you can go directly to financial institutions to open HSAs, including US Bancorp (NYSE: USB  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC