The differences between health insurance and a health savings account are not always clear. In fact, this murkiness is likely responsible for the relatively low adoption rate of health savings accounts even though they offer a number of benefits over traditional health insurance. The differences between the two types of health care coverage are explained below along with some reasons why a person might choose one over the other.
What Is a Health Savings Account?
A health savings account (HSA) is really just another name for a high-deductible health plan (insurance plan) that has special tax-advantaged status. The basic premise is that high-deductible plans have lower premiums and so are more affordable. However, because they have high deductibles, people tend not to use these plans for routine health maintenance. To encourage people to undergo preventive care while keeping a handle on overall health care costs, it was decided to allow people to create tax-advantaged savings accounts from which they could pay medical expenses and the deductible of an HSA plan.
The savings account is really the heart of the HSA. It allows individuals (not companies or the government) to set aside a certain amount of money in a savings account each year. As long as that money is used for medical expenses, it is never taxed. The idea is that the government is making more of an individual’s income available for health expenditures by not taxing income contributed to an HSA.
This approach differs dramatically from standard insurance, which has high premiums but usually provides immediate, full coverage. For many people, traditional insurance premiums are financially untenable. The idea of the HSA is to provide an option that prevents people who cannot afford traditional insurance from going without insurance or from falling back into government safety nets, which tend to be a burden on taxpayers.
What Are the Benefits of an HSA Over Insurance?
For healthy individuals, HSAs, like those offered by HSAforAmerica.com, can reduce health insurance premiums and decrease the overall cost of health care. They are particularly advantageous for young individuals who see a doctor less than once per year. Money put into a medical savings account rolls over from one year to the next with the idea that people are continually saving for future health care costs that may arise in older age. In general, HSAs are beneficial because they
. allow individuals to decide how much money they set aside for health care costs,
. allow individuals to control how health care dollars are spent (no PPOs or HMOs),
. ensure that the money belongs to the individual and not the employer (it follows the individual wherever he or she goes),
. allow unused money to roll over each year, and
. provide a tax benefit that improves health care savings as well as quality of life.
What Are the Benefits of Insurance Over an HSA?
HSAs aren’t for everyone. If a person needs health coverage to begin immediately and cover relatively large expenses (child birth, surgery, etc.), then the high deductible of an HSA will mean that the such a plan is too costly, in the short term, than a traditional health insurance plan. Health insurance is beneficial to those who
. need immediate coverage,
. find it difficult to navigate the complexities of health care systems,
. find it difficult to save money each month, and
. would take money from the HSA for non-medical expenses.
Right or Wrong?
The decision between traditional insurance and an HSA is a personal one. If you are young, relatively healthy, and able to set aside a bit of money each month, then give strong consideration to an HSA. Remember that if you have traditional health insurance, you cannot carry an HSA (though you can purchase a small catastrophe policy to cover you during the first few years of an HSA while you accumulate savings). Choose the plan that is right for you by following the tips above.
Ron Sheffer has worked in healthcare for many years. He frequently blogs about common questions everyday people have about navigating the healthcare system.