How Do Medical Savings Accounts Work?

Medical savings accounts, also known as health savings accounts, are designed to help you pay for the cost of medical care. With a medical savings account, you put money aside in a tax-advantaged account, and you can use that money to pay eligible health care expenses, including co-payments on doctor visits and prescription drugs.

Consumer-Driven

• The medical savings account is one example of consumer-driven health care. The idea behind the consumer-driven health care movement is that consumers who spend their own dollars on medical care tend to make smarter decisions, and shop around more for the goods and services they receive. While no one expects consumers to bargain on emergency care, medical savings accounts do provide an incentive for consumers to be price conscious about prescription drugs and elective care. For instance, a consumer with a medical savings account might request a generic drug instead of a brand name medication, or ask his doctor if a cheaper drug is available.

HDHP

• In order to open a health savings account, you must first be covered by a high deductible health plan. These plans are simply known as HDHPs to insurance brokers. If you plan to open a health savings account, ask your benefits office or insurance broker for a list of HSA-eligible plans. If you already have coverage, ask your benefits office if your plan qualifies for an HSA. For 2011, your health care plan must carry a single deductible of at least $1,200 or $2,400 for family coverage to qualify as an HDHP.

Debit Card

• When you open your health savings account, you receive a special debit card that can be used for eligible medical and health care purchases. When you go to the doctor, you can use your HSA debit card to pay your co-pay. You can also use your HSA debit card to pay for non-prescription medications, but starting in 2011 you must have a prescription from your doctor. For instance, if you use over-the-counter allergy medications, you can buy them with your HSA, but only after your doctor writes you a prescription for that medication.

Funds Roll Over

• One of the biggest differences between a health savings account and a flexible spending account is that the money in the HSA rolls over to the next year. If you have money remaining in your HSA at the end of the year, that money rolls over and you do not lose it. This allows you to build up a solid nest egg over time, one you can draw on in the event of a serious illness or accident.