Exploring the Health Savings Account; is it right for you?

The healthcare insurance marketplace, working with the federal government, has recently begun to offer an alternative to traditional health insurance. This new option, known as the Health Savings Account, is designed to give consumers more control and accountability for their health care spending and to ease the burden on employers who have been struggling under the continually increasing cost of healthcare.

The Health Savings Account (HSA) is a savings account that accepts pre-tax dollars designated for healthcare expenditures only. You are entitled to establish and use an HSA if you are enrolled in a high deductible health plan (HDHP). An HDHP is a health insurance plan where there is a high deductible (the minimum deductible to qualify as an HDHP is $1,000 for individuals; $2,000 for families in 2005). In general, these HDHPs have significantly lower premiums, freeing money that can be placed in the HSA for later use.

The theory behind the HSA/HDHP is several-fold. 1. If consumers are aware of the cost of their healthcare, as they will be with a high deductible, they will buy more prudently. Prudent purchase means being able to keep money saved toward healthcare costs in another year, or, eventually, drawing down the funds and paying regular income tax on it, something like a 401(k) plan.

2. Employers are relieved of the burden of high cost premiums and can choose to place some or all of the savings into HSAs on behalf of their employees.

3. HSA funds can be rolled over from year-to-year, allowing you to build a medical nest egg.

The HSA option was signed into law in 2003 and made available in 2004. The major impetus for the HSA approach was the continued rise in healthcare premiums. Premiums for employer-provided health insurance have risen 59 percent since 2000, according to the National Bureau of Economic Research. Employer health insurance premiums increased by 11.2 percent in 2004, nearly four times the rate of inflation, according to the National Coalition on Health Care. Mellon Human Resources and Investor Solutions in May conducted a study that showed 7 percent of the over 360 employers surveyed already offer HSA plans to employees and 32 percent plan to offer them in 2006.

These rapid changes have left many people wondering if they should agree to an HSA option. The answer to that question rests with an analysis of your individual situation. You must balance:

1.)the cost of your share of the premium; 2.)the savings that you will roll into the HAS

with the likelihood of spending that money and/or more on healthcare costs. If you are like more than 70% of Americans and spend less than $500 out-of-pocket on healthcare annually, there may be a substantial savings for you in the HSA. If, on the other hand, you or your family use a lot of medical resources or are at-risk for larger medical expenditures, or do not have cash readily available for unexpected expenses, the HSA could be a very difficult option.

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