HSAs: An Introduction

First of a three part series: The Benefits of Health Saving Accounts

Written by: The Deerfield Team

private-client-people-by-paNot many people know about the benefits of Health Savings Accounts (HSAs), a relatively new addition to the healthcare menu. With premium healthcare costs during retirement for the average couple recently estimated at over $260,000,¹ starting a tax-advantaged savings account for health expenses now may make the future a bit more manageable from a financial standpoint.

In July 2015, CNN Money published an article titled, “Why your next dollar shouldn’t go to your 401(k).” The author argues, in spite of conventional wisdom, that contributing to a Health Savings Account may make more financial sense than contributing to a 401(k). Published on the heels of a 23% increase in the number of HSA accounts in a year,² the article reflects the growing popularity of this relatively new addition to the healthcare scene. With annual per capita healthcare costs topping $9,000 per year in the U.S.,³ setting aside pre-tax income for potential future health care costs is a wise decision for people of all ages, and the sooner the better of course.

What exactly is an HSA?

Sometimes referred to as a “Medical IRA” or “Medical 401(k),” a Health Savings Account is a tax-advantaged IRA-like creation designed for people covered under a High-Deductible Health Plan to pay for qualified medical expenses, including dental and vision. To qualify, the individual must not be covered by “other insurance,” including a spouse’s Flexible Savings Account (FSA).⁴ The account may be set up with any qualified trustee or custodian.

Anyone, including employers on behalf of employees (restrictions apply), can make a contribution to an HSA account, but total contributions are limited to a maximum each year, currently $3,300 for an individual and $6,550 for a family and if you’re 55 or older you can contribute an extra $1,000 which means $4,300 for an individual and $7,550 for a family. Contributions can be invested in financial assets like stocks & bonds for the long term. The account is portable and therefore belongs to the individual, no matter what employment changes they undergo.

Tax advantages of an HSA

Possibly the most attractive aspect of HSAs is that they enjoy a lot of tax advantages. Contributions to the account are deductible from taxable income, income & capital gains occurring inside the account are tax deferred and distributions for qualified medical expenses are not considered taxable income. 

 A little Background

The American healthcare industry has been struggling for many years from problematic & stubborn cost increases. In 2014, the U.S. ranked last among eleven wealthy countries in healthcare, with significantly more money per capita and a higher percentage of GDP or Gross Domestic Product spent on healthcare than in any other country.⁵ Several attempts have been made at health care reform to address issues of quality, efficiency, and equity in the industry. In 2003, as an answer to those rising costs, the  Medicare Prescription Drug, Improvement, and Modernization Act was signed by President George Bush, creating Health Savings Accounts to replace the Medical Savings Account system.

CDHPs and HSAs today

HSAs and HDHPs fall under the category called Consumer Driven Health Plans (CDHPs), which offer a combination of high-deductible plans with relatively lower premiums, supplemented by a savings account for expenses. CDHP proponents want to put more control in the hands of consumers so that they have more skin in the game as it were. Paying more out-of-pocket should make individuals better consumers, more aware of fraud and unnecessary services and less willing to put up with poor care. Wiser consumers could drive change in the industry from the bottom up, forcing service providers to compete with each other and provide better care and lower costs.

Consumer driven health plans, like everything else in healthcare today, are controversial. Liberals argue that individuals in HDHPs are more likely to avoid getting needed care, including services and medications, because of the cost.⁶ This issue would be particularly pronounced for those with poor health or lower incomes. Many studies have attempted to analyze these issues, including the Rand Corporation.

CDHPs have also always lagged behind traditional plans in terms of enrollee satisfaction. Nevertheless, satisfaction rates have been trending upward for CDHP enrollees and downward for traditional enrollees,and the number of CDHP enrollees has been growing.

In 2015, HSA assets exceeded $28 billion in a record 14.5 million accounts, according to Devenir’s mid-year report. The report also stated, “The average investment account holder has a $14,656 total balance,” and investors received “an average annualized return of 11.3% on their HSA investments over the last three years.”⁸ Please don’t think those types of returns are the norm because they certainly are not. Three or four percent seems infinitely more likely going forward.

Conclusion

HSAs offer incredible tax advantages and are an interesting, often overlooked option on the healthcare market. If you are eligible for or currently covered by a high deductible health plan, we recommend you consider investing in an HSA for medical costs in the immediate future and in retirement.

In two upcoming articles, we will compare HSAs with other kinds of savings accounts and describe how to start and use an HSA.

As always, we are here to help you any way we can. Please don’t hesitate to call or email if you need us.

The Deerfield Team
800.233.6428
info@deerfieldadvisors.com

 


References:

1.  http://www.hvsfinancial.com/PublicFiles/Data_Release.pdf
2. http://www.devenir.com/research/2015-midyear-devenir-hsa-research-report/
3. http://www.cdc.gov/nchs/fastats/health-expenditures.htm
4. https://www.hsaresources.com/faq/#opening-06
5. http://www.commonwealthfund.org/publications/fund-reports/2014/jun/mirror-mirror
6. http://www.commonwealthfund.org/publications/testimonies/2006/sep/health-savings-accounts-and-high-deductible-health-plans–why-they-wont-cure-what-ails-u-s–health-c
7. http://www.ebri.org/pdf/PR1133.CEHCS.16July15.pdf
8. Devenir “2015 Midyear Devenir HSA Research Report”
http://www.devenir.com/research/2015-midyear-devenir-hsaresearch-report/

SOURCES:
Centers for Disease Control and Prevention, Faststats: Health Expenditures. http://www.cdc.gov/nchs/fastats/health-expenditures.htm

Devenir, “2015 Midyear Devenir HSA Research Report,” August 11 2015. http://www.devenir.com/research/2015-midyear-devenir-hsa-research-report/

Employee Benefit Research Institute, “’Satisfaction Gap’ Narrows Between Traditional and Consumer-Driven Health Plans,” July 16 2015. http://www.ebri.org/pdf/PR1133.CEHCS.16July15.pdf

HealthView Services, “2015 Retirement Health Care Cost Data Report,” 2015. http://www.hvsfinancial.com/PublicFiles/Data_Release.pdf

HSA Resources, Frequently Asked Questions. https://www.hsaresources.com/faq/#opening-06

K. Davis, K. Stremikis, C. Schoen, and D. Squires, “Mirror, Mirror on the Wall, 2014 Update: How the U.S. Health Care System Compares Internationally,” The Commonwealth Fund, June 2014.

S. R. Collins, “Health Savings Accounts and High-Deductible Health Plans: Why They Won’t Cure What Ails U.S. Health Care,” Invited Testimony, Committee on Finance, Subcommittee on Health, United States Senate Hearing on “Health Savings Accounts,” September 26, 2006. http://www.commonwealthfund.org/publications/fund- reports/2014/jun/mirror-mirror

DISCLAIMER

This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015

Credit scores and premiums: Are they connected?

Written by: The Deerfield Team

private-client-people-by-paMany companies use credit-based scores to evaluate policy seekers. The perception is that a high score makes you a better risk and will therefore cause you to pay less for insurance, while a low score makes you more of a risk causing you to pay more for the same coverage. Studies have shown that credit scores are a good indication of how much a policy holder will cost an insurance company, though no one knows exactly why. The method is so controversial that Massachusetts, Hawaii, and California have banned the practice. Those of us who live in the other 47 states, where a vast majority of insurance companies use credit-based scores, need to understand these scores and the implications they have on our own insurance costs. This article will give you an idea of what’s involved with credit scoring by insurance companies and how you may be able to improve your own “insurance credit score” position.

Credit score and risk: A mysterious link

Lenders use regular credit scoring to calculate the likelihood of a consumer to repay a loan. Insurers use credit-based insurance scoring to decide how much you are likely to cost them in claims. While the complex methods differ between industries and among scoring companies, both systems are based on a statistical analysis of consumers’ credit reports.

No one knows exactly why credit scores are predictive of insurance risk. Nevertheless, the University of Texas, the Federal Reserve, and the Federal Trade Commission have conducted studies that conclude that there is indeed a correlation between credit characteristics and insurance losses. 

Long before computerized credit-based insurance scores were invented, insurers manually reviewed credit information during their decision-making process, according to software and scoring giant FICO. Without the help of statistically valid predictive analytics, these insurers had to rely on the subjective perspective of individual underwriters, who scanned credit reports manually and tried their best to guess how risky a prospect was. Letting an algorithm determine how likely you are to cost your insurance agency money might feel strange; letting a tired underwriter make the same call may be worse.

How insurance companies use your credit information

When it comes to credit and insurance, it’s important to understand two things:
1) Credit-based insurance scores analyze credit report data in a different way than credit risk scores.
2) These scores are not the only factor in making decisions about whether or not to offer a policy and what its terms are.
Factors considered for credit-based insurance scores

  • Payment History
  • Outstanding Debt
  • Credit History Length
  • Pursuit of New Credit
  • Credit Mix

Factors not considered for credit-based insurance scores, according to the National Association of Insurance Commissioners:

  • Race, color, national origin
  • Religion
  • Gender
  • Marital status
  • Age
  • Income, occupation or employment history
  • Location of residence
  • Any interest rate being charged
  • Child/family support obligations or rental agreements
  • Certain types of inquiries of your credit report like account review inquiries, employment inquiries, promotional inquiries from credit companies, etc.
  • Whether or not a consumer is participating in credit counseling of any kind
  • Any information not found in the credit report

While these factors do not affect your score, insurers will use information like application data, motor vehicle reports, claim histories, inspection reports, demographic data and other details to make decisions about your policy.

Improving your credit-based insurance score

Your insurance company is required to give you a notice that includes your score and the name and contact information of their credit reporting company. You may ask your insurance company why your application was denied, or get a free copy of your credit report.

You can also proactively check your credit report and correct any inaccuracies you may find. The Fair and Accurate Credit Transaction Act of 2003 (FACT Act) allows you to get a free credit report annually from Equifax, Experian and TransUnion, or check all three reports at www.annualcreditreport.com.

Of course, paying your bills on time, keeping your debt low, building a good track record, and keeping your credit accounts to a reasonable number are all time-honored methods for improving both your credit risk score and credit-based insurance scores. Keep these tips in mind for lower premiums and access to beneficial insurance policies.

As always, we are here to help you any way we can. Please don’t hesitate to call or email if you need us.

The Deerfield Team
800.233.6428
info@deerfieldadvisors.com

 


 

SOURCES:

Esurance. “Your credit score doesn’t affect your rate: Partially debunking a car insurance myth.” Accessed September 1, 2015. https://www.esurance.com/info/car/myth-your-credit-score-doesnt-affect-your-insurance-rate

Federal Trade Commission. “Credit Scores.” September 2013. http://www.consumer.ftc.gov/articles/0152-credit-scores

FICO. “FICO Successfully Defends Insurance Industry’s Use of Credit.” October 2009. http://www.fico.com/en/wpcontent/secure_upload/FICO_Credit_Based_Insurance_Scores_2599WP.pdf

International Risk Management Institute, Inc. “This Month’s Tip: Understand Your Credit Score.” Accessed September 1, 2015 .“http://preview.irmi.com/online/newsletters/hidden/personal-lines-tips/2015/08-understand your credit-score

 

DISCLAIMER

This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015

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