HSAs May Be Health Care's Remedy

The Role of Incentives

There are some bad incentives in our current system. When businesses -- or their health insurance companies -- are picking up the tab, there is absolutely no incentive for individuals to care about how much health care they use.

And there's no tax-deduction incentive for people to buy health insurance policies, because individuals can't deduct the premiums.

But most important, there's no reward anywhere in the system for staying healthy! That is, there was no reward until health savings accounts came along two years ago. HSAs are an incentive for people to stay healthy and spend wisely, because the money they don't spend belongs to them and grows tax-deferred.

How HSAs Work

HSAs combine a high-deductible health insurance policy and a tax-favored savings account. Instead of buying a health insurance policy with a $250 deductible, you'd buy a policy with a $5,000 deductible, or your employer would buy it for you.

It sounds scary to have such a high deductible, but the policy costs much less. The money you or the company saves on insurance premiums -- as much as 40% of regular costs -- can go into a special, tax-deductible savings account and be used to pay for medical expenses, tax free. Unspent money grows for future years' expenses.

Many employers contribute some or all of their insurance-premium savings into these HSAs for their employees. In 2006, an individual can put up to $2,700 a year into an HSA, or $5,450 for families.

But you can start an HSA account with a much lower amount. Later, if you incur medical bills, you can put more money into the HSA on a pretax basis and immediately pay your bills.

And for those who can't afford a contribution, the low-cost medical insurance plan, despite its high deductible, will at least protect them against bankruptcy caused by medical expenses.

Where and Why

If your company doesn't offer health insurance coverage, you can search for individual HSA plans at ehealthinsurance.com. Bob Hurley, eHealthInsurance's vice president of strategic operations, says his company's site is seeing a higher percentage of people choosing HSAs.