While Republicans in Congress duke it out over how to repeal and replace Obamacare, we can take matters into our own hands by making use of a hidden gem: the health savings account.
The Affordable Care Act has hit a crossroad because of younger, healthier consumers opting to take the individual mandate hit as opposed to purchasing insurance in marketplace exchanges set up by the government. As a result, insurance companies are dropping out of these exchanges as they are left with a pool of older, unhealthier folk increasing their costs. For consumers who are too scared to go without health insurance, premiums for the most popular insurance plans are expected to rise by 22 percent in 2017.
Scribbled into law in 2004, health savings accounts, or HSAs, were designed to level the playing field for individual self insurance. Employers who pay into health insurance premiums for their employees get to skimp out on payroll and income taxes at the end of the year. However, individuals (and employers) who would have a separate savings account, dedicated to directly pay for health emergencies, would not get this kind of special tax treatment.
HSAs changed it up. In fact, close to half of every dollar thrown into one of these accounts would get taxed away, thus lavishly benefitting the insurance companies. Now, HSAs have been awarded a better tax treatment. Similar to how a 401(k) or individual retirement account (IRA), the money stashed along with the interest earned in the health savings account is tax-free. We like that! Likewise, an individual can contribute up to $3,350 into an account and will get penalized by the taxman if any of the funds are used for nonqualified medical services.
The catch is that you must have a health-insurance policy with at least a $1,250 deductible. Though this may sound like an extra cost, this is actually catered to the younger crowd. For example, by getting an insurance policy with a large deductible, like upward of $3,000, the cost of the insurance premium plummets. The higher the deductible, the cheaper it is to have insurance. This type of insurance policy, called “catastrophic coverage,” is for when your body gets hit by the apocalypse. This means that routine check-ups and minor hospital visits are generally paid out-of-pocket. The health savings account allows you to save for those visits.
If you’re like me, you can probably go all year without going to the doctor or hospital. But, even if you go in for an annual physical, it will only run you around $200. With contributions of $2,000 to an HSA per year, you can amass some serious wealth over a long period of time, depending on how aggressively the HSA is invested. What’s more, anybody can contribute to your HSA!
If potatoes at one grocery store are too expensive, we just go to another store that offers potatoes at a cheaper price. This is how the price mechanism works and what keeps prices low. When it comes to healthcare, this mechanism does not exist. We have no idea what’s on the price tag of most health services. Instead, prices are determined by third parties: doctors, insurance companies, and the government.
HSAs now give consumers power since health services become “out-of-pocket” so to speak. It also restores the doctor-patient relationship. In a healthcare system in which even routine check-ups are covered by third parties, doctors treat insurance companies, employers and the government, rather than actual patients, as their customers. With HSAs, doctors can do what they went to school to do — to be of service and heal people.
HSAs aren’t substitutes for a retirement account, but they act as an awesome supplemental account for when our “raging 20s” finally catch up to us in our retirement years.
However, the reform proposals being offered in Congress are not getting to the root of the problem of the high cost of healthcare. By taking advantage of HSAs, it can bring to life the beautiful price mechanism within the health-service industry; the same mechanism responsible for making goods and services like cell phones, which were once exclusive to the rich, accessible to the masses.
This article was originally featured on GenFKD.org
Kevin Gomez is Master's Fellow at the Mercatus Center at George Mason University.