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HSA vs. HMO Analysis

Loyal reader, Angry Dinosaur, decided at the start of this year to sign up for a Health Savings Account health plan instead of the standard HMO plan and as we reach the close of the year, he’s lived to tell about it and give his analysis and thoughts. I’ve always been intrigued by the idea behind the HSA because you can invest the funds in your account but neither my old or new employer offered it as a benefit so I’ve never done the analysis, so I’ll have to rely on the war stories of others.

At the beginning of this year, I chose to sign up for an Health Savings Account health plan (through my employer), rather than picking the standard HMO plan. Without getting into the minutiae of the options, the overall differences are listed below:

HMO Plan: Costs $1,740 per year, covers most things In-Network with a minimal co-pay.

HSA Plan: Costs $1,608 per year, links with a $2,650-deductible PPO plan. That $2,650 is not just the maximum per incident, it is the maximum that I would have to pay in a year.

The kicker to the HSA Plan is that in addition to allowing me to put tax-free dollars into the account, my employer will also help fund it to the tune of $750 per year. For awhile the account earns a paltry 1.5% APY, but all funds above $3000 can be invested in mutual funds or other investment vehicles. Comparing these options back in December, I was thinking, “Well I’m a healthy 24-year-old; I should get into an HSA early so that after a few years I will have a pile of cash to use on medical expenses.”

At least that was the plan. The plan was to take my employer’s free money and to hold it for a rainy day. The plan was NOT to be in the emergency room ten months later. Long story very short: I incurred some medical expenses. (I am perfectly okay now, thank you)

The bill came in around $2000, but because the provider was in my network, I was responsible for only about $1400. Needless to say, that $100 co-pay that I would have had under the other plan was looking pretty good.

There was still good news, though. For one thing, my HSA had about $560 of my employer’s dollars sitting in it, so that would come out of the $1,400. Also, I could deduct the remaining $840 from my taxes, amounting to a savings of approximately $250.

When I really started to look at the details of the HSA and compared the overall cost with what it would have been, it was surprisingly not that bad at all:

Under the HMO Plan: $1,740 annual fees + $100 co-pay = $1,840 for the entire year (assuming the next 2 months go smoothly)

Under the HSA/PPO Plan: $1,608 annual fees + $1,400 hospital bill – $750 employer contribution – $250 tax-savings on the balance of the hospital bill = $2,008 for the entire year

Wow! This was almost the worst-case-scenario for the HSA, and it only cost me an additional $168 dollars over what it would have.

While I was learning how the account works, I also learned some benefits to the HSA that I hadn’t even realized before: the money can be used not only for hospital and doctor visits, but also for things like prescriptions, glasses/contacts, dentist/orthodontist visits, and other expenses even though they are not covered by the PPO. And the account doesn’t have to be funded in order for me to get the tax benefits: I can pay for these things out-of-pocket, save the receipt, and then take a distribution from the account later.

Now that I realize the full benefit of the HSA, I am definitely going to keep the same plan for next year. Even though it cost me a little bit more this year than it would have, there is a much better chance in any given year that it will be cheaper than a standard HMO plan, especially now while I’m young.

Also, a little bit about loyal reader Angry Dinosaur, he is a friend of my fiancée’s from back in college and in the three years or so that I’ve known him, he’s gone to the emergency room at least twice. Once was when we spent a long Labor Day weekend in Canandaigua, NY when he took a boat anchor the face… he’s still pretty though. 🙂 Thanks for the post A.