There was a time on the California health insurance market when HSA's were the plan to beat.
At that time, we still had pretty rich PPO and HMO plans which had been successful in keeping costs down for almost a decade but they were quickly losing their ability to do so. The rates were exploding double digits (sometimes, twice a year) around 2003-2005. It's was frightening to watch. The HSA's were a savior to the market and all the Californian's that who needed a respite from medical inflation.
You didn't even need to take advantage of the tax benefits of the HSA to make the plans work.
If you could save $2K annually by increasing your deductible $2K (or less) with an HSA plan, it made sense.
That has definitely changed since then now, you really have to fund the actual tax-favored HSA account to make the plans work. Let's take a closer look at this trend and also discuss how HSA's will fare with Health Reform effective Jan 1st, 2014.
Let's first look at the basic premise and promise of the California HSA health plan model.
There are two key components.
On one hand, you have a high deductible plan (generally PPO in terms of network and between $2K-$5K on average). You could just purchase this plan by itself and be done. Many people did this since the pricing was so good. The HSA "eligible" or compatible health plan works a little differently than most PPO plans on the market in that office visits and RX are subject to the main deductible where PPO plans generally break those out separately. So far so good...clean, high deductible PPO plan at a low price.
The next piece which is optional, is a tax-favored checking account.
You can fund this account up to a fixed Federal level each year (year after year) and use the funds for eligible medical and dental expenses with no tax implication.
The unused funds roll over year to year (it's not use it or lose it) and fund interest or investment gains are usually tax-deferred. It was basically a carrot for people to fund the HSA account and self-fund the smaller medical bills while using the high deductible plans for more catastrophic coverage. We've written extensively on how the California HSA health insurance plans work.
So how do these plans compare now on the market against the standard PPO plans?
Back to the early 2000's...the rates for the HSA plans were amazing.
We could usually drop a person's premium in half from their high to high-mid PPO plan. It was the insurance version of the slam dunk. If you have an average year, you pocket the premium difference.
If you had a bad year in terms of medical care usage, the premium offset the high deductible effect on the back end significantly. It wasn't uncommon for the premium difference to equal or be greater than the deductible amount. We loved finding this option for California health insurance shoppers. Now, it's not as easy.
The PPO plans continued their trend down towards much higher deductibles and/or max out of pockets. The rates consequently dropped and there were other little tricks the carriers could apply to newer plans to further reduce rates (separate max for diagnostic lab, generic RX only, etc). In order for HSA plans to make sense now, you almost have to fund the HSA account and get the tax advantage.
Let's see why.
Let's say your an individual who funds an HSA account $3K and you have a 30% tax bracket. That's $900 in real after-tax money or savings. That's equivalent to dropping your monthly premium by about $80 which now makes an HSA look pretty good. This is how we now have to look at it.
Straight high deductible plan element of the HSA doesn't necessarily cut it any more. We're still looking for guidance on whether the HSA plans will survive Health Reform.
They might not even exist due to deductible
requirements on the newly available plans. We'll
update this site as we get closer.
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