What Is a High Deductible Health Plan With an HSA?

Health insurance plans that require insured patients to pay significant sums before insurance kicks in are known as high deductible health insurance plans. Under federal tax law, persons with high deductible plans can open special tax-favored Health Savings Accounts, under which a person can divert pretax income to save for medical care.

Basics

• For people with expected medical costs, such as pregnancy, high deductlble plans may be expensive.

  According the IRS, a high deductible plan must feature higher deductibles than typical plans, and must cap a patient's out-of-pocket costs. The plans may pay for some routine care and other programs defined by the IRS, such as smoking cessation, without impacting the deductible, but many do not. In 2010, the minimum deductibles were $1,200 for single person insurance and $2,400 for family insurance. The out-of-pocket maximums were $5,950 and $11,900 respectively.

Features

• Over-the-counter medications are not qualified medical expenses.

  Because Health Savings Accounts offer special tax advantages, the IRS restricts how patients can use the money. Under the regulations, money from HSAs can only be used for medical expenses that are tax deductible, with an important distinction. Under federal tax law, medical expenses are only deductible if they exceed 7.5 percent of a person's adjusted gross income. This is not the case for HSA expenses. Expenses that qualify for the deduction are listed in IRS Publication 502, Medical and Dental Expenses. Money not spent on qualified medical expenses is subject to taxes and penalties.

Recent History

• High deductible plans may help employers curb costs.

  According to the Kaiser Family Foundation, the average premium for a high deductible health insurance plan was $11,000 per year in 2009, compared to roughly $13,000 per year for traditional health insurance plans. Writing in 2009, the Associated Press noted that the plans have been around for several years, but have been growing in popularity among employers looking to reduce health care costs in the recession of 2008 and 2009.

Benefits

• Money from an HSA plan can be used to pay insurance premiums in retirement.

  High deductible plans offer some benefits. For young employees, the plans offer the chance to accumulate a significant sum of money that can be used for health care costs in later years. They have also allowed employers to avoid layoffs or more drastic benefit cuts in recessions. Some plans offer users the ability to invest some HSA money in the stock market and mutual funds. Policy-makers also believe that high deductible plans will curb the rise in health spending. Under this belief, patients will choose health care providers and utilization more carefully when large sums are coming out of their own pockets.

Drawbacks

• If younger people use HSAs, older people on traditional plans may find that insurance is too expensive to use.

  High deductible plans also offer some drawbacks. According to Families USA, patients with such plans may avoid preventative care to save money, driving up costs when they are sick. Furthermore, because the policies are less expensive, they may be favored by younger workers. When in traditional health insurance plans, younger workers paid premiums while receiving little benefit, subsidizing the insurance of others. If this group leaves traditional plans, it will drive up costs for older, sicker workers. According to FamiliesUSA, "as healthy individuals migrate into high-deductible policies, less-healthy people will be left in traditional insurance pools. Costs for traditional insurance will rise and premiums will skyrocket for people who need health care the most."