Myth #3: High-deductible health plans are the more expensive option

October is HSA Month. Each week this month, we’ll be busting a common myth around health savings accounts (HSAs) in hopes of increasing the access to and understanding of these helpful tax-advantaged savings vehicles. With healthcare costs in the U.S. continuing to rise, we hope to elevate HSAs and improve consumer understanding to deliver another tool that will ease the cost burden in retirement and make healthcare more affordable today.

If you have a question about how HSAs work, reach out to us on Twitter @alegeus or email HSAQuetions@alegeus.com.

 

Myth #3: High-deductible health plans are the more expensive option

Here’s what we know: High-deductible health plans (HDHPs) would be financially beneficial for 65% of consumers.

Yes, you read that right. When paired with a health savings account (HSA), HDHPs are the most cost-effective health plan for most people. Yet many remain hesitant to consider electing one.

This hesitation often arises when people simply hear the term high-deductible. The expectation of more out-of-pocket costs can send people to a traditional (PPO) plan. Inci Kaya, senior analyst at Aite Group, said on Twitter last year, “High deductible is such an unfortunate label to slap on these plans. Calling them HSA-compatible would be much gentler on everyone’s psyche and draw attention to the benefits that come hand in hand with such plans.”

Others agree. The Health Savings Act introduced in Senate in Jan. 2019 proposed changing the name “high deductible health plan” to “HSA-qualified health plans.” Both Kaya’s comment and the proposed legislation aim to draw more attention to the benefits of such plans – primarily the triple tax advantage of HSAs that typically pair with HDHPs. In fact, financial expert and radio host Dave Ramsey suggests reframing the comparison between plans as HSA vs. PPO, rather than HDHP vs. PPO.

HDHPs + HSAs can lead to savings

To start with, HDHPs typically have a much lower monthly premium than traditional health plans. When employees save on those monthly premium costs, they can reallocate the saved dollars as contributions to an HSA and reap pre-tax benefits. Similarly, employers can elect to reallocate their monthly premium savings to seed employee accounts. When employers contribute to employee accounts, they not only see greater adoption of HSAs, but also see higher account balances. The more employees use pre-tax dollars to pay for their healthcare, the less money they’ll spend. In fact, an Alegeus report found that American consumers could save a collective $85 billion on eligible out-of-pocket medical expenses if they used pre-tax dollars. This would go a long way toward bending the medical cost curve.

HDHPs can also save people on taxes. The FICA tax (7.65% in 2020) is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax the IRS imposes on employee earnings. However, as this article from National Benefits Services points out, “Employee’s HSA contributions are exempt from income taxation.” In addition, if an employer chooses to seed employee accounts, it will save them their portion of the FICA tax as well.

Finally, HSAs provide the opportunity to invest funds for tax-free growth. People can use these funds on future expected and unexpected medical costs – or build up savings for retirement.

Bonus: HDHPs + HSAs can lead to savvier, healthier consumer behavior

While HDHPs paired with an HSA save money for most people, they also lead to better consumer behavior and outcomes. The 2018 EBRI Research Institute 2018 Consumer Engagement Survey found that those who elect HDHPs are more likely to look into cost and coverage information than those in traditional health plans. Those with HDHPs are also more likely to check quality ratings on doctors, discuss treatment options, develop a healthcare budget and more. With a closer eye on their healthcare processes and expenses, it stands to reason that people will save money and make more informed care decisions.

 

Source: EBRI Research Institute 2018 Consumer Engagement Survey

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