One of the main flaws of many health insurance plan designs is their inefficiency in paying for first dollar coverage. First dollar coverage includes; doctor visits, prescription drugs, lab work, emergency room, urgent care and other common expenses. It is estimated that the true cost to insurance carriers to cover these items is about $1.50 for every $1.00 spent. Time is money and it takes administrative time to process all these small claims. The problem we end up with is paying too much in advance for care that can be funded in a much more cost effective manner.
A much more efficient solution to cover first dollar medical expenses is through self-funding. A Health Savings Account (HSA) is one way to accomplish this goal. An HSA is a tax advantaged way to cover first dollar expenses – many refer to it as a medical IRA. Health Insurance is much more effective at predicting potentially catastrophic expenses, expenses that can bankrupt a family. First dollar medical expenses are much more difficult to predict. Human nature is that, when a very benefit generous plan is purchased (at a significantly higher monthly premium), the policy holder is hyper aware of this and tends to over utilize the first dollar medical benefits.
An HSA allows the consumer to self-fund first dollar benefits and pay for first dollar benefits out of a tax advantaged bank account. The HSA compatible plan is designed with an integrated (one deductible for medical and prescription drugs), higher deductible that is administratively light. Only annual physicals are covered (at 100%) before the calendar year deductible (Jan. 1 to Dec. 31 of any calendar year) is met. After the deductible is met there is generally co-insurance (the insurance carrier and consumer split these medical expenses, generally 60%/40%) until the consumer reaches the calendar year out of pocket maximum, which, by law in 2017, is $6,550 for individual policy holders and $13,100 for family coverage.
After the calendar year out of pocket maximum is met, the health insurance policy will pay 100% for all covered medical expenses (see your Evidence Of Coverage, EOC, for a detailed list of covered medical expenses). HSA accounts may be opened at many major financial institutions. In general, contributions to an HSA account is 100% tax deductible. The maximum annual contributions in 2017 are as follows; for individual policy holders it is $3,400 and for family coverage the maximum is $6,750.
These accounts are designed to cover unreimbursed medical, unreimbursed dental and more. At age 65 any remaining balance may be used for any reason without a tax penalty. There are tax penalties (generally 20% plus income tax on any gains/interest/dividends) on using the funds for unauthorized expenses before age 65. For more details on Health Savings Accounts, see IRS publication 969.