Let's face it, insurance is a necessity today. We insure homes, cars, health. But for the most part, all those policies are meant to cover you when something unpredictable and expensive happens. You don’t file a claim against your auto insurance company when you need an oil change, or even when the fan belt breaks. If these things were even covered, your car insurance premium would have to be enormous. But on that dark night, when the deer lurches out in front of your car and ends up doing $5,000 in damage, the insurance is there to cover it. Now, think about the enormous medical costs you would incur if you had a major injury or were suddenly stricken with a life-threatening illness. Medical insurance shields you from this financial risk.
But what about routine visits to a doctor, chiropractor, or pediatrician? Most medical insurance plans cover these. And, whether or not you go to the doctor regularly, the premium you’re paying assumes you do. The average person has about $1,000 a year in medical expenses, but is paying as much as $5,000 or more a year for medical coverage. A lot of that difference, you’re paying “just in case”: the insurance company holds it in reserve in case you get very sick or have a bad accident and incur higher than expected medical expenses.
Wouldn’t it make more sense to apply the “unpredictable and expensive” rule here? Let the insurance company worry about that. You would take on a lower premium and put the money you save into your own reserve account to have cash to cover your routine medical costs yourself. There is medical insurance that let you do this. It’s called a consumer-driven healthcare plan, or CDH plan. A CDH plan gives healthcare “consumers,” that is, employees and their families, more control over healthcare costs and how their medical dollars are spent.
In a CDH plan, employees pay a lower premium, so less money comes out of pay. Now, of course, there’s no free lunch, so with the lower premium there’s a higher deductible before the benefits kick in.
To help cover this deductible, and to save for future health expenses, the CDH plan comes with a Health Savings Account (HSA). So, the employee takes some of the money they’re no longer spending on the insurance premium, and puts it into the HSA. Some employers even put some money into each employee’s HSA to help them get started. But this is the employee’s account; they own the money in it. It carries over from year to year. It goes with them if you leave the company. Over the years, many people will be able to build the HSA into a large account. It’s like a 401k for healthcare.
Like a 401k, the money going into an HSA is pre-tax, that is, there is no income tax on it. Now, of course, there’s an annual limit to how much can be put in pre-tax. But as long as the money in the account is spent on allowable medical expenses, there’s never any income tax on it. And the money is in an interest-bearing checking account, so it grows a little bit. And when the balance reaches a certain level, the employee can actually start to put the money into investment funds so the account can grow even faster. And there are no taxes on what is earned. So, an HSA is TRIPLE tax-free. It goes in pre-tax, it grows tax-free and it comes out to pay healthcare expenses tax-free. It is just about the best way to avoid the tax man out there. If an employee does take some out for other purposes, they will owe taxes, plus a 20 percent penalty.
So, employees accumulate money in their HSAs and then use this cash reserve to pay for routine medical expenses until they’ve satisfied their deductible and the coverage kicks in. But they’re not on their own, because with a CDH plan they’re still members of a medical plan. So even when they’re spending their money, they get services at the lower rates that the insurance company has negotiated with the doctors, hospitals, pharmacies and others.
The idea of a CDH plan is that employees hold onto some of their own money and use it for some of their medical expenses . . . with a safety net should something unpredictable and expensive happen. So, it’s in their interest to be a good health care consumer -- to check medical bills, to compare treatment options and costs, and to consider the urgency and frequency of doctor appointments. It’s called consumer-driven health care because the consumer is driving it. So . . . that deer had better watch out.
The consumer driven healthcare and HSA strategy described here are an integral part of the Bright Choices® program from the Buffalo Niagara Partnership. To learn more, visit www.thepartnership.org/insurance or call Fred Bristol at 541-1729.
This blog was written by Fred Bristol, Buffalo Niagara Partnership.