A Health Savings Account is a pre-tax fund that policyholders contribute to, through payroll deductions or regular payments, that can be used to pay for medical expenses. HSAs can pay your doctor bills or prescription medication costs tax-free, but it won’t pay for over-the-counter meds and everyday healthcare needs like a Flexible Spending Account does. The money can be invested in mutual funds or bonds similar to a retirement account and any gains on the investment are also tax-free. Funds contributed are not subject to federal income tax, up to a certain amount set by the government.
The balance in an HSA rolls over every year. HSAs are paired with high-deductible plans that protect policyholders from major healthcare costs at a low premium. The theory behind an HSA/high-deductible plan is that a policyholder will buy-in when he or she is young, healthy, and has relatively low healthcare costs. The low premium will allow them to contribute more money to their HSA, which grows with time due to smart fund management. With regular contributions and a low amount of care needs, policyholders will have a sizeable HSA nest egg by the time they start to age and require increasing healthcare needs.
The advantages of the plan are first and foremost that the policyholder has more freedom to make their own healthcare decisions. Instead of having to gain prior approval for certain procedures, they can decide for themselves whether the care is required. If a policyholder wants to see an “out of network” doctor, the additional cost will be theirs alone to bear. The plan’s goal is to inspire personal responsibility and give people the ability to care for themselves instead of relying on companies or the government. There is also more freedom in how much money is contributed to the HSA every month, instead of an immovable monthly premium for care that may be or may not be used.
The downside of an HSA is that your ability to afford healthcare is completely tied to the amount of money you have been able to save. If you haven’t saved the money, you essentially have little or no medical coverage. Unlike the “personal responsibility” of say, paying off a mortgage or saving for a college education, failing to save for medical expenses could mean delaying care or not being able to obtain care to the point of death. We could say that you need to use personal responsibility to pay your debt or the bank will repossess your home. We could say that if you are unable to save enough money for college, you can’t afford to go to college. But when we say that people need to have personal responsibility for healthcare cost, the “or else” is that you could die.
Of course, death is the most severe downside and it’s not like everyone who can’t afford health insurance will suddenly drop dead. But an HSA most certainly advantages those who have the money to contribute the full amount annually and disadvantages those who are struggling to meet the premium and not save any money in their HSA. Sometimes families will be able to save the money at the expense of saving an emergency fund. This means that when a financial disaster strikes, they drain the HSA at a tax penalty and end up worse off than they were before.
Still, the argument can be made, and has been made by certain people, that this is the definition of personal responsibility and that people will simply have to prioritize their healthcare. HSAs are, in many ways, counterintuitive to how group insurance is supposed to work. Insurance is supposed to pool together a group of people, some who will need healthcare and some who will not. All of these people pay into the same pot, and some people take money out of the pot. The theory behind group policies is that as long as not everyone takes money out of the pot, there will always be money for the people who need it. With an HSA, the pot is only yours to manage.