Use of High-Deductible Health Plans Soars

Group and individual plans favor tax-deductible accounts to combat rising healthcare costs.

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Health Savings Accounts (HSAs) are booming. More than 13.5 million people now have HSAs and other high-deductible health plans, according to the 2012 HSA census released by America's Health Insurance Plans (AHIP). That's a jump of more than 2 million in the past year. HSAs are linked with high-deductible health plans.

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To qualify for the plans, you must pay at least the first $1,200 in qualifying health expenses ($2,400 for families) before you can start to use your insurance. That's a minimum. Most plans have much higher deductibles:$2,000 to $3,000 for individuals and roughly double that for families.

Preventive or "wellness" procedures such as annual physicals and mammograms are not subject to the deductible and are covered right away—often at 100 percent with no co-pays. Maximum out-of-pocket expenses are capped at $6,050 a year ($12,100 for families). That's an upper limit. Many plans have maximum exposures that are much smaller.

To help pay the bills, you get to contribute up to $3,100 annually ($6,250 for families) in pre-tax dollars into your HSA. Employers may chip in some of that contribution as well, and many do. These amounts are indexed for inflation and will change in 2013. People 55 and older can toss in another $1,000 a year.

The average monthly premium for HSA plans is $361 for a single person and $896 for a family plan, AHIP says. Average premiums in high-cost states top $400 and $1,000, respectively.

While you can use the HSAs to pay for expenses, some experts advise participants to let their HSA balances build up if they can afford it. Unlike health retirement accounts (HRAs), unspent balances in HSAs can rollover indefinitely from year to year. Unspent plan balances can be invested like 401(k)s, and the earnings from these investments will never be taxed so long as withdrawals are spent on qualifying health expenses. And with such expenses in retirement looming as a big wild card, wouldn't it be nice to build up a tax-sheltered nest egg to help pay those bills when the time comes?

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Financially, the only bad news about HSAs is that most people can no longer contribute to them when they turn 65. There are exceptions when a 65-year-old person is still working and using private insurance and not Medicare. Or when that 65 year-old is still carried on the private health policy of a spouse who is still working. "Once you're enrolled in Medicare, you no longer can contribute into an HSA, but you can still use an HSA," says an Aetna spokesperson.

Several large private insurers—WellPoint, Aetna, and Cigna—all said internal studies have persuasively shown that people with their high-deductible HSA plans actually take better care of themselves than people with traditional health insurance coverage. "People do not skimp on the care that they need," says Will Giaconia, vice president in charge of consumerism products at Cigna. "In fact, they get more engaged in their health."

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It turns out that when people have their own money on the line, they become more informed healthcare consumers. They are more likely to seek out free preventive services and use them. They see the bottom-line charges for health procedures, courtesy of increasingly transparent and data-rich insurance company websites. They shop for better prices. They use generic drugs more than people with traditional coverage. And because generics are generally much cheaper than branded drugs, people with HSAs demonstrate better records of taking their drugs as prescribed.

"The simple act of putting the dollars in the hands of individual consumers is the thing that really creates the behavioral change," Giaconia says, equating the change to the different drinking habits of people at open versus cash bars.

People in WellPoint's consumer-directed health plans used 20 percent more preventive services than people in the company's traditional plans, says Tracey Stanton, senior director of product management. WellPoint has more than 1.9 million HSA members, including nearly 1.5 million in group policies and 450,000 in individual policies.