Insurers are increasing premiums for health insurance at a rate faster than employers are increasing wages, and that's straining worker's budgets. The National Business Group on Health reports that employee premiums will climb 5% next year -- and yet according to the Bureau of Labor Statistics, average hourly earnings are up only 2.4% in the past year.
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss Health Savings Accounts and Flexible Spending Accounts, two strategies you might be able to deploy to lower your overall healthcare costs.
A full transcript follows the video.
This podcast was recorded on Sept. 28, 2016.
Kristine Harjes: Let's talk a little bit more about insurance. One of the things you were hinting at is that there's so many moving parts to consider when you look at what you'll actually pay, even with an insurance plan. It's very easy to focus just on your premiums, but there are so many other costs that end up coming out of your pocket.
Todd Campbell: Yeah, it's tremendous. I think, most of us tend to look at our healthcare costs, when we're healthy, as simply, "Oh my god, my premiums, I have to pay these monthly premiums," and that's 100% of your focus, how expensive are your premiums. The problem with focusing too much on your premiums is, how does that saying go? A penny wise, a pound foolish? Is that it?
Campbell: Yeah, sure. What happens is, you may be saving money on the premium side of things, but if you do end up requiring healthcare, you could end up getting stung by going to the low-premium health plan that ends up having a higher deductible or higher co-pays or higher co-insurance or higher out-of-pocket maximum.
Harjes: Yes, that is absolutely true. You mentioned deductibles. This is the amount of money that you have to pay toward your plan, out of pocket, before the plan starts to kick in. There is one really good option for plans that have high deductibles. This is to set up a health savings account, or an HSA. Todd, do you want to talk a little bit about this?
Campbell: This is one of the single best money-saving strategies that anybody who has access to a high-deductible plan should take advantage of. HSAs are wonderful. Can you tell I like them?
Harjes: Just a little bit. I do, too. They actually are wonderful.
Campbell: They allow you to take pre-tax dollars and set them aside in an account. Oftentimes, you can invest in that account and earn interest on it. So, set it aside in an account, and then use it -- oftentimes they'll issue you a debit card -- to pay for your co-pays, your co-insurance, your dental visits, your vision care, your kids' braces, healthcare costs that you would otherwise be paying for with after-tax dollars. There are some restrictions. HSAs, as we've already said, are only available with high-deductible health insurance plans, which means a lot of people who have employer-sponsored health insurance won't have access to HSAs. You never know until you ask, though. It's very important to take a look and make sure you qualify for an HSA before setting up. Find out if you can, because if you can, it's a great way to sock away thousands of dollars in pre-tax money that can be used to cover healthcare expenses.
Harjes: And all of the details on qualification can be found on the IRS website. The important one to note is the deductible number you have to meet. It has to be $1,300 for an individual, or $2,600 for a family. One of the really great things about HSAs is, it's not use-it-or-lose it. Meaning, you put that money in year and year out, and you don't have to use it in a given year. This is important because it directly contrasts to an FSA, which is a flexible spending account. This is also something that goes through your employer, and it's also a good tax-saving mechanism, it's money you contribute pre-tax. And you can use it throughout the year, but you can only really use it in the year that you contributed it. Sometimes you can carry over $500 from one year to the next, but in general, you need to spend it during that year.
Campbell: Right. What's great about FSAs, and I love these just as much as HSAs, is that if you don't qualify for a high-deductible plan, you do qualify for a flex spending account. So, you may not be able to contribute to the HSA because your health insurance doesn't qualify, but if you have very good health insurance and a low deductible, then you can do the FSA. In 2017, you can put $2,550 in pre-tax money into this account. If you have a family of four, you may be spending $1,000 alone on just dentist visits. So, there's a pretty good likelihood of being able to use $2,500 in a given year on out-of-pocket expenses that otherwise would be covered by insurance.
Harjes: And yet, surveys show that about 80% of employees that have this available to them ignore the benefit. I can sort of see why. It's kind of daunting to put this money in, and if you don't spend it, you lose it. But, if you look at the list of things that count as a qualified healthcare expenditure, you can spend that money on sunscreen, shoe inserts, first aid kits, there are so many thing that, if you actually make it to the end of the year and have too much yet, you can spend that money on useful things.
Campbell: Yeah. Also, you have elective procedures. If you have a lot of extra money kicking around at the end of the year with your FSA, you could pull a procedure forward, and maybe take care of that. FSAs are a great way to lower your taxable income, to get a tax benefit, to get a discount on all the healthcare services that you're buying throughout the year. If you're in the 25% tax bracket, that's an extra $100 to $500 per year in savings, depending on if we're talking about the FSA or HSA. It could be even more.