Thursday, July 01, 2010

Health Insurance:  Decisions, Decisions

By Rajiv Hargunani

These days, medical conditions that previously killed and crippled are being treated and those afflicted, cured. Americans—and people from other countries who come to this country in search of medical care—pay the increasing costs associated with the improved quality of care. Physicians, patients, insurance companies, and even the government have sought ways to reduce cost but maintain quality.

Health insurance transfers the risk of unaffordable medical expenses to insurance companies that pool the risks of a large group of people, but insurance, too, is becoming more expensive. HMOs reduce costs with preventive care and guidelines for care, but HMOs offer limited choice. What else is out there? Plenty, but the challenge is in understanding these choices.

Health Savings Accounts

Health Savings Accounts (HSAs) are a new name for an old way to pay for medical care. HSAs are tax-advantaged accounts in which you can save money to pay for your own medical expenses. HSAs must be set up in conjunction with high-deductible (i.e. lower cost) health insurance. For 2010, the annual deductible can be no less than $1,200 for self only coverage and $2,400 for family coverage, and the annual out-of pocket expenses cannot exceed $5,950 for self only coverage or $11,900 for family coverage. A single person can contribute and deduct up to $3,050 and a family, $6,150. Your money grows tax-deferred and you can withdraw tax-free money to pay for allowable medical expenses. Allowable medical expenses are broadly defined, including costs traditional insurance may not cover. If you withdraw money for other purposes, you will pay tax and a penalty on the withdrawal. Nevertheless, the decision is yours as to what you use your HSA to pay for.

Medical Savings Accounts

If HSAs sound familiar, you may have heard of MSAs (Medical Savings Accounts). Before HSAs replaced them, MSAs did virtually the same thing as HSAs. But HSAs are available to individuals and most employers, while MSAs were available only to self-employed individuals and small employers. Furthermore, HSAs have lower minimum deductibles and may be funded by employer and employee, not one or the other.

Health Reimbursement Arrangements

If you’re an employer, you may prefer HRAs, Health Reimbursement Arrangements. You are the sole contributor to HRAs. Accordingly, you can decide the contribution levels to afford various groups of employees. Furthermore, HRAs allow you to control costs by determining what expenses you will reimburse. HRAs may allow the employee to “bank” unused money and carry over balances to the next year or HRAs may require employees to use the money by the end of the plan year or forfeit their contributions.

Flexible Savings Accounts

If you’re an employee, Flexible Savings Accounts, or FSAs, allow you to fund your own medical expenses. FSAs have high deductible contribution limits (up to 25% of salary, depending on the plan). FSAs may be available for day care as well as health care. The drawback is FSAs are “Use it or lose it” plans.

These consumer-driven health plans may be efficient health care alternatives for you for a couple reasons. First is the favorable tax treatment. If you make $30,000 per year and have $2,500 of medical expenses, only $250 of that cost is deductible. The first $2,250 (7.5% of your income) is not. On the other hand, you can make a $2,700 deductible contribution to an HSA and withdraw that $2,700 tax-free to pay for the doctor’s bills. If you don’t have medical expenses, that $2,700 stays in your account. Even if you don’t itemize deductions, you can use pre-tax contributions to consumer-driven health plans to pay for expenses you ordinarily don’t deduct. In fact, you’ll see more of a benefit. If you don’t itemize, you wouldn’t ordinarily have deducted even the $250 in the previous example. That $2,700 deduction will mean even more to you! The second reason for a consumer-driven health plan is individual autonomy.

You get to decide what medical care you want to have and how you’ll pay for it. If you have more serious, ongoing medical issues, you may prefer traditional insurance solutions and the transfer of extraordinarily high costs to another party. But, if your medical expenses are more reasonable and remain about the same from year to year, you may want to consider a consumer-driven health plan. Of course, this brief article is no substitute for a careful consideration of all of the advantage and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.

- Rajiv Hargunani

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Rajiv Hargunani and not necessarily those of RJFS or Raymond James. Rajiv Hargunani, Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the normal course of business have a position in the securities mentioned in this report. All stock prices are quoted as of 03/02/2011. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results.

 

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