Getting health insurance with the highest deductible and putting the savings in HSA

Question

I'm thinking about getting the highest deductible plan for next year, which would save us a lot of money. With that money, I'm planning to put all the savings (and some more) into our HSA account. We are on a family (and will still be) plan, me and my wife. We are both under 30 without any health problems.

My reason is that we are so young and without any problems so we don't need any coverage more than the most basic. If we do need any medical care during the year we just use the HSA for everything and if not we can just keep the savings for when we get older and might need the money more. Spending it on health insurance is just a waste because if we don't use the insurrence the money is just gone. The one flaw I see in this is what if something catastrophic happens soon after new years. Fortunately, we have about 20k saved outside of health costs. So we could recover from that.

I'm just worried I might have overlooked something important. Are there any other cons that I should be aware of with this strategy?

Answer 1

Advantages

• Contributions lower your tax liability. If the HSA is through your employer's cafeteria plan, pretax payroll deferral lowers not just your income tax but your social security and medicare tax as well.
• It's your money. Unlike FSA and HRA, you aren't required to "use it or lose it". Any unused balance remains from one year to the next.
• Distributions are not taxed either, provided they are used for medical expenditures.
• Distributions can be made for any qualifying medical expense after the date the HSA was established.
• You can withdraw funds even if you no longer have a qualifying HDHP.
• You can even take a distribution years or even decades after a medical procedure was performed (be prepared to keep good records if you go this route).
• HSAs can be used to pay Medicare premiums during your retirement years.

Disadvantages

Unlike other tax advantaged medical saving plans such as HRAs and FSAs, which give you access to the entire amount you plan on contributing from day one, an HSA only gives you access to the amount you've actually contributed. This can make you uneasy until you have a decent amount invested.

Like any financial decision you have to weigh the risks. An unplanned hospitalization while on an HDHP can be a huge financial burden. One strategy, if you can afford it, is to contribute an amount equal to or greater than your deductible for the first few years. That way, if a catastrophic illness does occur, you have the funds set aside to cover it. Then after a few years you choose to increase or decrease contributions based on your own risk tolerance.

Also keep in mind market risks. HSAs are investments. HSAs usually start off in a money market fund that is extremely conservative, earning only moderate dividends. Most HSAs offer the option to move money within the HSA to a mutual fund to earn greater returns. Which funds are offered is up to the HSA administrator. But keep in mind that regardless of whether you stick with the money market fund or move to a mutual fund, HSAs are not FDIC insured and are subject to varying degrees of volatility.

One other little gotcha, if you contribute to an HSA outside of your employer's cafeteria plan, the tax advantages aren't as good.

Answer 2

Last time I ran the numbers on insurance in my state you were almost certainly better off taking the highest deductible available. It was almost impossible to find an amount of medical bills where this wasn't your best choice. Obviously, this means you're taking a higher risk the first year as you might get a big bill before seeing the savings. Note that health didn't enter into this, the only downside was bills before you saw the savings.

Insurance companies know that most healthy people will go with the high deductible, the only people choosing a low deductible are the ones expecting a lot of bills--so the plans are priced with this in mind.

Answer 3

Generally, you are correct. If you and your family are relatively healthy, a HDHP + HSA can be a great thing and will often leave you with more money in the long run.

In the case of a catastrophic medical emergency, HDHPs have a "max out of pocket" amount, usually given in individual + family numbers. For example, your max out of pocket might be $7,000 individual + $10,000 family. If you have payed out of pocket up to this limit, the insurance pays 100% of the rest for the calendar year.

For example, you get in a car wreck with your wife and have to go to the hospital. You get billed $10,000 for you and $10,000 for your wife. You only have to pay $7,000 for you (individual max) and $3,000 for your wife (combined you hit the family max). Insurance will pay the rest.

The only "gotcha" is the covered services. Since HDHP are marketed as the "cheap" option, they sometimes are limited in what they cover. (As @quid stated in comments, they should 100% cover preventative care before the deductible is met, as of 2014). They may also have relatively high (25%) coinsurance once the deductible is met. Just make sure the coverage is worth the premium, as you do when shopping for any type of insurance.

Answer 4

I think you have the main points covered; an HDHP is a tradeoff between lower premiums (fixed) and higher deductibles (variable).

On think to keep in mind is to make sure you have enough to cover the higher expenses until your HSA is funded. My HSA allows you to spend money even before its funded, so long as you eventually make up the difference. If yours allows something similar then that may not be as big of a concern. My strategy is to fund the HSA amount to a level higher then the deductible but slightly less than the out-of-pocket maximum for the year. That way I can certainly cover the deductible, and if anything catastrophic should happen, then at worst I might need to cash flow part of it.

Also, the HSA can be used for things that don't go toward your medical deductible like prescriptions or dental/vision costs, so keep those in mind when you choose a funding level.

Answer 5

Your plan is pretty sensible for a young, married couple without children or known elevated health risks, and you've clearly thought about most of the explicit angles.

The main issue is more related to what health insurance is, and what you're actually buying when you take out a policy. The wording in the question makes it appear that you are thinking of a health insurance policy as a contract to buy money, in the case of certain health care needs:

Spending it on health insurance is just a waste because if we don't use the insurrence the money is just gone.

That's a really common way to think of it, but it's not accurate. Buying a health insurance policy is about managing unknowable individual risk. When you stated that

The one flaw I see in this is what if something catastrophic happens soon after new years. Fortunately, we have about 20k saved outside of health costs. So we could recover from that.

you indicate the exact issue. The strategy you're describing leaves you, personally, bearing more of the risk than if you purchased a plan with a lower deductible (assuming similar other benefits, etc.).

Your plan to self-insure against that risk is fine (assuming that it suits your personal degree of risk tolerance, which seems to be the case here), and I'm not criticizing it. But you asked for potential flaws or things you might be missing, and this is one of those: you aren't saving money, full stop, with the HDHP, you are declining to buy a higher level of protection from risk (and thereby saving the money you might have spent to do so, in exchange for bearing that risk by yourself).

Again, your plan is sound based on what you've described. But it is much easier to value insurance properly when thought about in terms of the risk management product/service that it is.