Using a Health Savings Account to Lower Your Medical and Health Insurance Costs

Another year is ending, and many people are reconsidering their health insurance coverage. And, of course, many employees are seeing an increase in their premiums, or a cut in their benefits (or both). Not only that, but there are some changes being made to flexible spending accounts for 2011. For some, all of this means paying more money for less in terms of value for the health care dollar. Faced with these rising costs, it is not surprising that many are beginning to think about Health Savings Accounts.

Indeed, even some employers are encouraging Health Savings Accounts, and insurance companies are offering Health Savings Accounts in conjunction with high deductible health plans. If you are reasonably healthy, it might be worth it to consider switching to a high deductible health plan this enrollment season, and opening a Health Savings Account. Doing so can noticeably lower your health insurance premiums and health care costs.

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What is a Health Savings Account?

As you might imagine, a Health Savings Account (HSA) is designed for you to save up money for health care expenses. You can only open one of these accounts if you have a high deductible health plan. Contributions to the Health Savings Account are made with pre-tax dollars, so your taxable income is lowered. Additionally, the money grows tax-free — as long as you use withdrawals to pay for qualified health care costs. Some of these costs include prescriptions, office visit co-pays, certain health products and services, and other items.

One of the nice things about the Health Savings Account is that it is yours. Even if you open it with the help of the insurance company or with the help of your employer, the money in the account is yours. You can accumulate money, and it grows in the account, since the HSA acts much like an IRA. In fact, if you get to retirement age (59.5) and have a lot of money in the account, you can withdraw it for non-medical purposes — but you will be taxed as if you are withdrawing from a traditional IRA. This presents an opportunity to help you save up for medical expenses while keeping more of your money, instead of handing it over to the insurance company.

Who Benefits from a Health Savings Account?

Those who are most likely to benefit for a HSA are those who are in relatively good health, without chronic conditions. Because the deductible is so high, you will have to pay out of pocket for a number of your prescriptions and office visits (you can use money from the HSA to do this). For those who are fairly healthy, with few health care needs throughout the year, the HSA can be a great tool. In my case, a HSA would save me a great deal of money, since my family does not have many health care needs.

Because the deductible is high, premiums on high deductible health plans are much lower than other plans. You can take a portion of the savings and put it into the health savings account, where it can accumulate (and earn interest) on your behalf. Then, you can use the money to pay for the expenses that you do have. Your high deductible health insurance plan is in place to protect you in case of an unexpected trip to the hospital or other developments. As long as you have enough money in your HSA to meet the deductible, then you shouldn’t have too many problems.

As you consider your options this open enrollment season, don’t forget to consider combining a high deductible health plan with a Health Savings Account. You might be able to save money — now and in the future.

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About the Author

By , on Dec 13, 2010
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (3 Comments)

  1. Miranda says:

    @Jenna: I don’t know an average amount people put into an HSA. I know that I am considering a HSA, and I would probably put 2/3 of the difference between my old premium and my new premium in a HSA. So, in my case, the difference would be about $300, so I would put $200 in my HSA (leaving me $100 extra each month). The point of the HSA, IMO, is to put the money to work for me, rather than giving it to the insurance company. This works because my family has few health needs.

    @IRS Hitman: I would consider (but, of course, how much it helps depends on your individual circumstances) two things to lower health care costs: 1. Check your coverage and drop unnecessary coverage and 2. Raise your deductible if you can. And, of course, you can shop around for better rates, as well as find out if your health care provider offers a 10% or 15% discount when you pay with cash rather than relying on insurance.

  2. IRS Hitman says:

    Miranda, anything else you can recommend to lower health insurance costs? Maybe a top 3?

  3. Jenna says:

    What is the average amount people put into their HSA?

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