That calculation is changing, in part thanks to the new health savings accounts (HSA) that were authorized in the 2003 Medicare prescription drug legislation. The HSA plan comes in two parts. First, you must buy a health insurance policy with a high deductible. Then you open an HSA, a tax-sheltered account much like an individual retirement account. The account is funded with pretax contributions, up to $2,650 for individuals and $5,250 for families (table). The account's earnings are not taxed -- nor are withdrawals when used to pay for qualified medical expenses.
Anyone can use HSAs, but experts believe they are particularly well-suited for the self-employed. "Entrepreneurs trade off the risk of paying out a couple of thousand dollars in tax-sheltered money in order to protect themselves from catastrophic costs," says Leon Rousso, a certified financial planner in Ventura, Calif. Brad Rosley, who has a wife and three children, also a financial planner in Glen Ellyn, Ill., made the switch. His previous health insurance policy to cover his family cost him $660 a month, or nearly $8,000 a year, with a deductible of $1,000.
Rosley replaced that plan with an HSA. He went for a policy with a $5,100 deductible and put that much into the tax-sheltered account for a family. His premium for the policy is $260 a month, or $3,120 annually. He uses the $400 a month he's saving over the previous policy to fund his HSA. Rosley figures he could well end up with a six-figure account, since any money left in the HSA can be rolled over from year to year. That money can pay for everything from long-term care insurance to a new hip during his golden years.OUT-OF-POCKET COSTS
Rosley's experience appears typical. The average yearly premium on a family policy for an HSA is $3,550 for those aged 30 to 54, according to America's Health Insurance Plans, a Washington trade group. In contrast, private sector employees with a family plan through work pay between $2,100 and $2,400 a year, according to John Ascensio, senior vice-president at Segal Co., a New York benefits consulting firm.
But the cost gap is narrowing even as companies prepare to hike employees' out-of-pocket costs during the upcoming benefits season, a number of major insurers are cutting premiums for their HSA products. Indeed, sales of HSA policies more than doubled, to 1 million, in the six months ended Mar. 31. One reason for that is the tax break. The maximum contribution to an HSA for a family in the 35% tax bracket generates a tax savings of over $1,800 a year. Plus, any earnings in the account compound tax-free, assuming the money does go for medical expenses.
To be sure, HSA plans are controversial. Advocates argue that this type of consumer-controlled health care is the main solution to braking the nation's spiraling medical costs. Opponents fret that HSAs siphon off the healthiest and wealthiest consumers, leaving traditional plans with a sicker pool of people to insure. Public policy concerns aside, anyone contemplating these policies needs to address more mundane concerns. For one, you need to have the cash to fund the HSA. Also, these plans are inhospitable for anyone with preexisting conditions such as cancer or diabetes.
The HSA market is evolving. Health insurance is regulated by the states, and these plans aren't available everywhere. Benefits and prices vary, even within the same region. But the Internet is making it easier to evaluate benefits and compare prices. "The consumer can lower costs by shopping," says Robert Hurley, who heads up HSA products for eHealthInsurance Services, which markets health coverage online.
HSAs are complex, and many consumers rebel against paying several thousand dollars out-of-pocket, even with tax-free money. "HSAs aren't a solution to all our health-care ills," says David Dranove, an economist at Northwestern University. "But they're terrific for the entrepreneur." For this group in particular, HSAs may be the best way to obtain a safety net against catastrophic medical expenses at a reasonable cost. By Christopher Farrell