Wealth

Rein In Your Health-Care Costs

Employee contributions to company health insurance have sky-rocketed. Fortunately, there's an antidote.

By: Len Costa
[ Updated: Sep 11, 2008 - 10:50:36 AM ]

If your salary keeps going up and you still don’t have extra money at the end of the month, it might not be your wife’s affair with Neiman Marcus that’s punishing your paycheck. Since 2000, the average employee contribution to company health insurance has sky-rocketed by more than 143 percent. And if you’re healthy, shelling out the cash for the premiums is like living in the desert and paying for mandatory flood insurance.

Fortunately, there’s an alternative that can help you control health-care costs and still protect your family from a catastrophic medical expense. The antidote is a health savings account (HSA) combined with a low-cost, “high-deductible” insurance policy. By one estimate, as many as 45 million Americans will make the switch by 2010. “It’s all I’ll recommend anymore,” says certified financial planner Edward Dee Hinds, of Hinds Financial Group, in Paso Robles, California.

Here’s how it works: First, you sign up for a high-deductible policy—either on your own or through an employer—that requires you to cover at least the first $2,100 of your family’s medical costs ($1,050 if you’re single). That cuts your premium substantially. Then you set up an HSA and fund it with pretax dollars up to the amount of your new, higher deductible—not to exceed $5,450 ($2,700 if you’re single), the maximum set by the federal government. As long as you use your HSA money for health care, earnings and withdrawals are tax-free. Unlike standard flex-spending accounts, any unused funds can be rolled into future years, and you can take your HSA with you if you change jobs. After age 65, it works like an IRA: You can withdraw money penalty-free and spend it any way you want.

One big reason to love HSAs is that, by socking that savings away into your account, you are effectively paying yourself instead of your insurer—and you can spend the money only on the care you need, including many health-related services that aren’t covered by regular medical insurance, such as dentistry, acupuncture, or even a shrink.

You also get solid protection in the event of a major emergency. High-deductible insurance is the only kind with a maximum out-of-pocket expense that’s capped by the government ($5,250 for an individual; $10,500 for a family). So if you spend that much from your HSA in a crisis, your insurance kicks in and covers everything above that. And you’re less likely to encounter costly exceptions that insurers often write into standard health policies, says Hinds.

If your company doesn’t offer an HSA and high-deductible insurance, chances are it will soon: The number of companies taking the plunge is doubling annually. Bill Sharon, senior vice president of Aon Consulting, says about half of these early adopters are sweetening the pot even further by making HSA contributions on behalf of their employees.