We just finished another open enrollment period at work. It is always stressful for me to be forced to lock in a health insurance selection for another 12 months. This is one of the most high risk and complicated decisions I make every year; there are loads of options, lots of trade-offs, and thousands of dollars at stake. All that is ignoring that my family’s physical well-being is directly impacted and there is a potential for life-and-death consequences. Perhaps I am a bit of a worrier.
As in years past, I built a spreadsheet model of all of the options and played with various tragic scenarios of how much it would cost me if my family went to the hospital X times. And as in years past, an HDHP + HSA comes out as the cheapest plan regardless of the variables I use.
A High Deductible Health Plan or HDHP is a plan that is meant to put the consumer in control of his or her health spending. The general features of an HDHP are mandated by law and don’t vary much, so I won’t go into great detail. Simply put:
- Preventive care is completely paid for,
- Nothing else is covered until an annual deductible is met,
- At which point everything is covered.
So I am responsible for covering the majority of my family’s health care needs out of my own pocket. However, I pay significantly lower health insurance premiums. This means:
- Less money to insurance,
- More money for my family,
- More flexibility in when we incur costs which fits our variable income,
- And more of a say in what type of medical care I receive.
HDHP’s are usually paired with a Health Savings Account or HSA. This is a special bank account where I can put pre-tax money to grow tax-free. I can only use the contents of the account on medical expenses for my family, but (unlike a Flex Spend Account) the money will always be mine and I can use it even if I go back to a traditional health insurance plan at some point in the future.
An HDHP + HSA has been a winning combination for our family. However, I have found that the features of an HSA vary widely so it takes some caution in selecting your financial institution. Even more than the plan features, I have found that most HSA providers are generally incompetent. I guess there is no pressure to provide a good product when the majority of your customers are forced into the relationship by the insurers. I have a few tips to help you get the most out of an HSA:
Choose who you bank with.
If your employer offers an HDHP, they will likely also setup an HSA for you at the bank which lobbied the HR department (or the insurer) most aggressively. I have not had an insurer suggest I bank with anyone competent. I suspect that they put all their resources into selling the insurer, and none of their resources into actually providing a quality product. Errors abound and hidden fees lurk. I have friends who have worked for some of the largest HSA providers in the country and their horror stories are appalling. These people do not have your best interests at heart.
I have had much better luck with community banks and credit unions. There is a trade-off, however, as these smaller institutions offer a much more limited range of investment options. Per my next point, I don’t think in practice this presents much of a problem.
Save enough to self insure.
This system will not work if you don’t have the discipline to put some of the money you save away to cover future medical expenses.
An HDHP caps your annual out-of-pocket expenses at around twelve thousand dollars for a family. You will probably not have that kind of money the first year, but you will probably not have enough cash to cover a major medical crisis that first year even with average insurance. My strategy is to look at what I would spend on regular insurance, and put the difference between the monthly cost of my HDHP and that insurance plan into my HSA as a direct deposit. You will be surprised how quickly this builds, and most employers that offer an HDHP will also provide some seed-money for the HSA.
Remember, you are acting as your own insurer for non-catastrophic medical events. Your HSA is not an investment that you expect to grow. I recommend keeping your first twenty-four thousand dollars in a secure and accessible savings account. Only once you have more than that two year catastrophe level saved should you worry about investment options. I’m not there yet.
Watch out for hidden HSA fees.
The big guys nickel and dime all over the place. I found the worst fees kicked in when I left my employer and thereby lost their sponsorship of my HSA.
Keep control of your money.
Once I noticed the monthly fees they were taking out, I decided to get my money into a local institution that I could trust. Unfortunately, that bank made it very difficult to get my money in a way that wouldn’t incur huge tax penalties. Be patient, and fill out all of their paperwork. They have to give it to you eventually.
Things to be aware of.
My recommendation is to not use the bank suggested by your insurer, but to use a community bank or credit union that you have can trust. This does have some implications that you should be aware of:
- You are indirectly (through your insurer) paying a bank for services you don’t use. This violates my sense of justice, but there is nothing I can do about it and it is still in my best interests to use another institution.
- Your might not be able to populate your account via payroll deductions if you don’t work with the bank your payroll company or insurer demands. Talk to your HR people, as this is kind of silly—they can direct deposit anywhere they want, so it isn’t a technical limitation. I solved it by doing an automatic withdrawl from my savings account a few days after my pay check is deposited. The accountant makes the post-tax dollars pre-tax at the end of the year.
- Understand that an HSA can only be owned by one person. If you are married, I suggest you pick one name and make all deposits under than name. When I naively allowed my insurer to setup my HSA, they did it under my wife’s name because she is a few months older than me. But my current employer will only contribute dollars under my name. Being able to chose which name gets used is another benefit of managing it yourself instead of letting your employer / insurer do it for you.
Name and shame!
- Wellsfargo—warned away due to horror stories.
- Mellon—really expensive.
- Health Equity—I did some work for them when they were a new startup but they refused to pay me (and were rude about it). Years later I was in the unfortunate position of having to use them as my HSA provider. Big mistake. They act like a bank, but are not regulated like one. It took months to get my money out and ended up being really expensive in terms of fees. Web site was annoying. Customer service couldn’t help me get to my money. They said they would wave fees and then didn’t. It was a real horror story with hospitals wanting to get paid and HealthEquity loosing five thousand dollars. Stay away!
- Chase—worst web site on the planet. Can’t directly deposit money outside of the payroll process. Wouldn’t work with HealthEquity to get my money rolled over to their accounts. Expensive fees.
- America First Credit Union—Aren’t credit unions wonderful! No fees. Good service. However, no investment options.
- Stanford Credit Union—Nationwide membership with only a donation to their museum.
Recommendation: Find a credit union.