8 Comments

Insurance or Medical Savings Account?

It is open enrollment time for many companies. We get to choose what insurance benefits we want to participate in. For the first time, my wife’s employer is offering the option of a Medical Health Savings Account. Is this a good option for us, or for you? Well, I didn’t know much, and I don’t claim to know everything. I may present stuff wrong, but I hope you will help me decide if this is a good option. Here’s how it works (as I understand it.)

My wife was offered 3 options: (1) Cadillac coverage, (2) Toyota coverage, and (3) Medical Savings Account. Here’s the cost breakdown of the 3 options.

Cadillac Coverage

(1) Costs about $220/month for our family.

(2) When we visit the doctor, we pay a copay of about $25-$40 usually.

(3) Our family deductible is about $750/year in network, $1500/year out of network and

  1. then the plan pays 85% of in network coverage, 60% for out of network coverage.
  2. Max out of pocket is $6400, then the plan pays 100%

Toyota Coverage

(1) Costs about $165/month for our family

(2) No copay is offered. I’m not sure how much we would pay to visit the doctor

(3) Our family deductible is about $2000/year in network, $3750 out of network

  1. The plan pays 80% for in network coverage. If you go out of network, it pays 60%.
  2. Max out of pocket is $8000 in network, $12000 out of network, then the plan pays 100%

Medical Health Savings Account

(1) Costs just $11/month for our family

(2) You pay the full doctor bill when you visit

(3) The family deductible is $3000 per year

  1. The plan then pays 80% for in network coverage, 60% for out of network coverage
  2. After you pay $9000/year in network, $13,500 for out of network, then the plan pays 100%

So the first apparent advantage to a Medical Health Savings Account is the low cost. But you are expected to set aside money each month tax free (kind of like a 401k). So it has the benefits of a 401k. You can invest it in mutual funds, stocks, or whatever you like. However, you can only withdraw funds to pay for medical expenses. If there is money in the account at the end of the year, you keep the money. But if you don’t set aside enough money and end up with a large bill, you’re going to have to fork over at least $3000 before the insurance starts to kick in.

So is it a good idea to set aside say $200 each month instead of paying that to the insurance company? Well, I decided to review my medical bills for this year and last year and see if it would be a good idea for us.

This year

Through September, Here is what we paid in medical expenses and insurance

$1728 in monthly premiums (it was just $192/month this year)
$230 in copays (doctor visits)
$210.56 for a CT scan for my daughter recommended by doctor (turned up negative)

$2168.56 Grand total outlay (for 9 months of care.)

Now, let’s see how the insurance helped me.

I was billed by my doctors $2904.52. (I call this the “retail price.”) However, they didn’t receive the full amount. My insurance company paid just $1212.76, and the doctor collected the $410.56 from me for a total of $1653.42. So my insurance company negotiated for me down the retail price from $2904.52 to a “wholesale” price of just $1653.42. In essence, even though the doctor billed me $2904.52, he only received 57% of that ($1653.42). Wow, my insurance company knocked down the bill by 43%. That’s pretty cool. In essence, the doctors were shorted $1251.20. (I bet they don’t like that, but it sure seems the price is quite inflated if they only accept 57%.)

And the insurance company made money on me. They collected $1728 in premiums from me this year, but only paid $1212.76 to the doctors. So they’ve made about $500 on me, and the year isn’t over yet. So is it worth it to me that the insurance company dropped my bill by $1200? I think so. I mean they are in business to make money, so I guess it is fair that they make $500 off of me. Would it have been better to be in a medical health savings account? Well, let’s see.

If I saved $200 for 9 months, I’d have just $1800. But with a medical health savings account, I have to pay everything up to my $3000 deductible. So, I’m on the hook for $2904.52, but I have just $1800 in the account to date. Somehow, I’ve got to come up with another $1100, and the year isn’t over. I don’t get the wholesale price that the insurance company negotiated above—I’m paying retail for my doctor visits. How is this a good idea?

UPDATE FOLLOWING MORMON COWBOY’S COMMENTS BELOW

If I saved $200 for 9 months, I’d have just $1800. But with a health savings account, I get my insurance company’s wholesale price.  Instead of paying the whole $2904.52, I get a discount and only pay 57% of that.  But it’s still under my $3000 deductible. So, I’m on the hook for $1655.58, but I have $1800 in the account to date, so theoretically if all the bills came in September (which they didn’t), I may have enough money to cover. In reality, some months I’m probably going to come up with money to pay the doctor before my HSA has enough money, and the year isn’t over.  At this point of the year, I’ve spent $2168.56 on the Cadillac plan in premiums and copays, but I would have spent just $1655.58 with the HSA.  I’ve saved myself $413.98.  Ok, maybe there is something to this.

Now, last year I had greater expenses. We were involved in a serious car accident. My wife had a broken collar bone. We were driving near Beaver, Utah. I didn’t have a choice what hospital we would go to, so we were out of network. Let’s look at how last year’s expenses played out.

Last year

Here is what we paid in medical expenses and insurance

$2040 in monthly premiums (it was just $170/month last year)
$1125 in copays (doctor visits)
$0 out of pocket

$3165 Grand total outlay (for 12 months of care.)

Now, let’s see how the insurance helped me.

I was billed by my doctors $5439.52. (“retail price.”) However, they didn’t receive the full amount. My insurance company paid just $1963.06, and the doctor collected the $1125 from me for a total of $3088.06. So my insurance company negotiated for me down the retail price from $5439.52 to a “wholesale” price of just $3088.06. In essence, even though the doctor billed me $5439.52, he only received 57% of that ($3088.06). Wow, my insurance company knocked down the bill by 43% again! That’s pretty cool. In essence, the doctors were shorted $2351.78. (Is there a doctor out there that can explain this to me?)

And once again, the insurance company made money on me. They collected $2040 in premiums from me this year, but only outlayed $1963.06 to the doctors. So they’ve made about $80 on me, a much more modest sum. So is it worth it to me that the insurance company dropped my bill by $2350? You bet!!! I mean they are in business to make money, so I guess it is fair that they make $80 off of me and take care of all the hassles. Would it have been better to be in a medical savings account? Well, let’s see.

Most of the expenses occurred in April. (The accident was Easter Sunday.) I would have paid the $3000 right off the top at retail price. At just $200/month, I would have just $800 in my account at that time, so I’ve got to come up with another $2200 just for the deductible. Since the accident occurred in remote Utah and I didn’t have a choice of the hospital, I am now out of network, so the plan pays just 60% of the costs. Now perhaps the insurance negotiates it down to 57% of the excess of $3000, so rather than paying on the entire $2439.84, the doctors will accept just $1390.71, of which I am responsible for 40%, so I need to come up with another $556.28. That means I am out of pocket $3556.28. Insurance still seems like a better idea to me, and I am glad I have the Cadillac coverage.

UPDATE FROM MORMON COWBOY’S COMMENTS BELOW.

Most of the expenses occurred in April. (The accident was Easter Sunday.) I get the wholesale price of $3100.71 (57%) instead of the retail $5439.84.  At just $200/month, I would have just $800 in my account at that time, so I’ve got to come up with another $2200 just for the deductible. Since the accident occurred in remote Utah and I didn’t have a choice of the hospital, I am now out of network, so the plan pays just 60% of the costs. I have to pay an additional $40.28 for the amount in excess of $3000.  My total outlay is $3040.28, but I paid $3165 for the Cadillac coverage.  I would have saved $124.72 which I could invest for next year’s expenses.  Hmmm, maybe there is something to this after all.

We are lucky enough to have been to Hawaii on a few occasions. On one occasion, my wife started bleeding. She had already experienced a miscarriage, and we were concerned. (Lucky for us, everything turned out ok this time.) Once again, we were out of network, so the coverage was very helpful. On another occasion in Hawaii, my daughter acquired a terrible earache. We knew she couldn’t fly home with that, so we paid the doctor with our credit card. Once again, we were pleased to receive a refund for a good portion of that expensive doctor visit.

So is there anyone out there that can tell me if I made any calculation errors? (Even though I have updated this, I will leave this as originally written.  If you would like to see my calculations:  See insurance2.) I just don’t see where a Medical Health Savings Plan is at all helpful. Perhaps if I was single with no children, I could save up enough money so that my medical savings account would have had enough money to cover the accident, miscarriage, and earache. But this just doesn’t seem to be a viable option when I have to pay retail price instead of the insurance negotiated wholesale price. I know there are tax advantages in the fact that I don’t get taxed on money invested in an MHSA, but I think those tax savings will get eaten up by the retail price of health care.

I am grateful that my wife works for a very large company with excellent benefits. My previous employer was a very small organization (approx. 9 employees) that didn’t offer health insurance. I wonder if the MSA is an option for them. It would have been better than nothing, but surely insurance is a better option than an MSA. When I worked at Wal-mart, I was appalled at how expensive the insurance was and how little they covered. There have been videos made where Wal-mart shows employees how to obtain government health care. They are not at all interested in providing good benefits. As large as that organization is, it is appalling how poor the benefits package is for their employees.

Medical Health Savings Accounts may be a good idea for these people, but for those who work for large employers with good benefits, I just don’t see how a Medical Health Savings Account is a good idea. I just don’t see it. (I would be especially interested to hear from people that work in small companies.  Is it being offered to you as a benefit?) If it works in your situation, can you describe it? Comments?

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8 comments on “Insurance or Medical Savings Account?

  1. Do you get to put money in a flexible spending account for medical expenses? Because those copays and deductibles look like they add up fast.

  2. Thanks for this I always wondered how the American Medical insurance system worked. I understand it more now thanks to this post . But am still confused as to why u need to be in company to get insurance and can’t just get it from the insurance agent your self.

  3. Hi,

    Another blogger I read recently went through the numbers and he came up with a different conclusion. Here is the link to that post. He can be a little extreme, but his numbers are sound. Also, it allows us to take responsibilty for ourselves and our families.

    http://www.mrmoneymustache.com/2012/11/01/our-new-237-per-month-health-insurance-plan/

  4. Ben Shideler, in your blogger friend’s scenario, his previous health insurance was costing $1200/month whereas this scenario the health insurance is subsidized by the company and costs $220/month. In fact, your blogger friend is actually buying health insurance for $200/month with a $10,000 deductible in addition to the HSA.

  5. JKS, If you buy regular insurance, I believe you can use a Flexible Spending Account to pay for premiums, but I haven’t tried to do that. My daughter needs braces on her teeth, so we are going to utilize the FSA for her. However, FSA doesn’t apply if you purchase an MSA.

    Astral_LDS, yes you can buy insurance yourself, but it is VERY expensive, especially if you have a pre-existing condition (diabetes, or something like that.) I think my wife’s husband pays like $600/month, with a very high deductible that doesn’t pay for much. It is much worse than my wife’s insurance and costs way more. Many people can’t afford that kind of a monthly payment, which is why Obama put forth a medical plan.

    Under previous rules, employers got a tax break if they contributed to the cost of health insurance. Many wonder if fewer companies will participate under Obamacare. We will see, but the cost to purchase insurance on your own is crazy high. When you leave an employer, you can purchase temporary insurace from your previous employer for a period of time (like 9 months) but you don’t get the company subsidy. (It’s called COBRA, but I can’t remember what COBRA stands for.) I have heard it can cost $800-900/month, so many people take chances with no insurance.

    Americans don’t want “rationed” health care, but we don’t understand that we already have it. We ration health care by making it so expensive that many people can’t afford it.

    Ben is lucky to be healthy. If he was a diabetic, his insurance would be much harder to obtain (if not impossible.) I’m sure MSA’s make sense for some people, but it sure doesn’t make sense to me. I think that few people shop around (like Ben does), so that’s one thing that he says is good advice.

  6. Yes he has a really high deductible, which cocers him for catastropic coverage. One of the comments in the post was that there was the assumption that he couldnt get the discounted rate, but from anecdotal evidence from the link and others that I jave talked to you can get the discounted rate too. Being from the northern neighbor I have not had to deal with it.

    I have also heard on the blogosphere that with the obamacare there will be many more clinics that will be just cash anyways.

  7. In Oz were I live. Buying medical insurance from an insurance agent is the only way that u can it unless u want to rely on the public system.. In Oz they will not reject u if you have a pre-exiting condition but the do put an exclusion period on the policy. The longest exclusion period for a condition is abt 2 years.

  8. I don’t know how our system evolved to where it is. Are you happy with your medical coverage in Oz?

    I posted this at Wheat and Tares, and apparently there was a wrong assumption I had. I’ve updated the post here to correct the assumptions previously.

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