Saving on Health Care Costs

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November 2008

According to two recent national surveys, health care coverage costs will continue to increase in 2009. Are you one of the many consumers who are concerned about rising health care costs? This month's report looks at various ways to help you save on health care.

Health Care Savings Programs

There are various programs established by Congress that can help you save money on health care costs. The following types of plans utilize either pre-tax or tax-free dollars to pay for health care.

Health Savings Accounts (HSAs)

Health Savings Accounts are tax-exempt savings accounts that allow account holders to pay covered health care expenses with pre-tax dollars.

To qualify:

• You have a high-deductible health plan (HDHP) which typically features a high deductible but lower premiums than traditional health care plans. An HDHP has a maximum annual amount on the sum of the deductible and out-of-pocket medical expense that you pay for covered expenses. To be a HDHP, a plan covering one eligible individual must have a minimum annual deductible of $1,100 and a maximum annual amount (deductible + other out-of-pocket expenses) of $5,600. For a plan covering a family (one eligible individual and at least one other individual), the minimum annual deductible is $2,200 and the maximum annual amount is $11,200.
• You cannot be covered under any other health coverage. Exceptions include worker's compensation insurance, insurance for specific disease or illness, insurance that pays a fixed amount per day (or other period) of hospitalization, or coverage for accidents, disability, dental care, vision care, or long-term care.
• You cannot be enrolled in Medicare.
• You cannot be claimed as a dependent on someone else's tax return.

Save on health care costs Participate in a health care savings program: Health Savings Account (HSA) Health Flexible Spending Arrangment (Health FSA) Health Reimbursement Arrangement (HRA) Save on prescriptions by: Using a generic medicine, when appropriate Use a mail-order pharmacy.

These plans can be used by self-employed persons, or anyone who provides their own health insurance. Employers can also offer HSAs with an HDHP.

HSAs can be set up at participating financial institutions, with the insurance company that provides the HDHP, through another insurance company, or through your employer.

Benefits

• You can claim any contribution you or another eligible individual (except your employer) made as a tax deduction even if you don't itemize deductions on Form 1040.
• If a contribution is made to your HSA by your employer, it may not be counted as income. This means that it may not be included in your gross income total on your W-2.
• Contributions do not have to be used by the end of the year since they roll over.
• Any earnings or interest on the assets in the account are tax free.
• Distributions are tax free if they are used to pay for qualified health care expenses.
• The HSA goes with you if your employment situation changes, such as changing employers or leaving the work force.

Potential Drawbacks

• Contributions must be in cash. Contributions of stock or property are not allowed.
• Contributions are limited. For 2008, the maximum contribution for an individual is $2,900 and a family is $5,800. If you are age 55 or older, you can contribute an additional $800.
• You can no longer make contributions once you are enrolled in Medicare.
• If distributions are not used for qualified health care expenses, you will pay federal income tax on the amount, plus an additional 10% tax on the amount.
• If you exceed the contribution limit, you must pay a 6% excise tax on the excess amount.

Health Flexible Spending Arrangements (Health FSAs)

A Health Flexible Spending Arrangement is a benefit plan offered by employers. It can be offered as part of a cafeteria plan. The plan allows you to save a set amount of your paycheck before taxes to help you pay for expected health care costs not reimbursed by your health insurance. The plan uses payroll deduction. For many individuals, a properly designed FSA offers a way to save money by reducing taxable income and paying for all or a portion of out-of-pocket medical expenses with tax-free dollars.

Even with a health insurance plan, you and your family will have expenses the plan doesn't cover such as the deductibles, co-payments for doctor's visits and prescriptions, over-the-counter medications, and uncovered services such as eyeglasses, dental care, chiropractic services (uncovered expenses of course vary from one insurance plan to another). By enrolling in a Health FSA, you can set aside a certain sum each month in the FSA to pay for these expenses. The employer determines the maximum amount you can set aside each year; within that maximum you determine a figure that comes closest to your expected expenses (doing your homework here is most important). That annual amount is divided by 12 months (or number of pay periods), and that portion is deducted from your paycheck each month (or pay period) before taxes are withheld. When you incur one of those anticipated unreimbursed health care expenses, you submit the claim and receipt/required documentation to your employer to reclaim those tax-free dollars as reimbursement.

Benefits

• Lowers your taxable income by the amount you put in the FSA. Because you'd be paying those expenses anyway, the tax savings is like a discount on those expenses. For example, if you're in the 28% tax bracket and you sock away in an FSA the $4,000 maximum your employer allows and use it to cover $4,000 of your $4,300 out-of-pocket medical expenses, then you could realize tax savings of up to $600. This is just an example. You need to look carefully at your individual situation.
• The plan also covers over-the-counter (OTC) drugs, an advantage with all the prescription drugs that have moved to OTC.
• Deposit $300, for instance, in the account and your take home paycheck may drop only $275 because of the tax savings.
• If you itemize deductions on your tax return, but know that your typical medical expenses barely exceed the deductible percentage threshold of 7.5% of Adjusted Gross Income, then the FSA could offer greater tax savings than taking the deductions on Schedule A. For example, if you and your spouse have a joint Adjusted Gross Income of $75,000, you could deduct on Schedule A only the amount over $5625. But if you have only $4,300 unreimbursed medical expenses, the FSA would offer you greater savings.
• Typically, you can use the money you've agreed to place in the FSA before it's all paid in. Let's say in March, you fall down the back steps (ouch!), breaking your arm, your glasses and your pride, not to mention chipping a tooth. By the time you're on the mend, you've spent $750 on deductibles and the glasses and dental work your health insurance doesn't cover, but at $200 deducted per month you have only $600 in your FSA. Usually you can submit a claim for the whole $750, kind of an "advance" against the $2,400 total you've agreed to deposit.

Potential Drawbacks

• Use it or lose it. At present, if you don't spend all the funds within the year, you lose what you didn't spend. There is no rollover. The average amount left in accounts is about $100. Some plans provide a grace period of up to 2 ½ months after the end of the plan. If there is a grace period, any medical expenses incurred during the grace period can be paid from the amounts left in the account.
• Just like insurance, you have to submit your claim and documentation to get the reimbursement from your FSA. Different companies handle the reimbursement process differently. So make sure the process at your company is something you are willing to follow faithfully. (More and more companies are turning to some sort of "account card" to make use easier. In practice, these typically work like a debit card.)
• Unless you carefully figure your estimated out-of-pocket expenses, you could put too much money in the account. So if you aren't willing to take the time up front to really look at your health care costs and do the math, then you could leave more than your potential tax savings in the account. Many employers offering the plan provide worksheets to help make this task easier.

FSAs may also be offered for dependent care expenses. For more information about dependent care FSAs read the Remar's Report Flexible Spending Accounts—Used Right They Can Save You Money.

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement is a benefit plan offered by employers which is funded solely by the employer. Employees covered by an HRA receive tax-free reimbursement of qualified medical expenses up to a maximum dollar amount. An employer can offer an HRA along with other health plans, including FSAs.

Benefits

• Contributions to the account by your employer are not counted as income. This means that the amount contributed is not included in your gross income total on your W-2.
• Reimbursements for qualified medical expenses are tax free. This means you don't have to pay any income tax on the amount.
• At the end of the plan year, any remaining money can be rolled over for use the next plan year.

Potential Drawbacks

• To get reimbursement from the HRA, you have to submit your claim and documentation. This reimbursement process varies from company to company. Many companies are using some sort of "account card" which typically work like a debit card.

Alternatives to Going to the Emergency Room for Non-Emergencies

Can't get in to see your doctor today? Is it after hours or the weekend? In these situations, some people head to the nearest emergency room. That can be costly, even with insurance.

Walk-in health clinics, also known as minute clinics or retail health clinics, can be found in drugstores, discount stores, shopping centers, and even workplaces. They are usually staffed by nurse practitioners and set up to treat minor medical problems. The conditions treated can vary from clinic to clinic. Regulations (which vary by state) may also limit what the clinic can treat. These clinics fill a need by being open days and evenings, 7 days a week. Some are open 24 hours.

Urgent care clinics are set up to handle more serious medical problems that are not life-threatening. They are usually staffed by physicians and are typically open in the evenings and on weekends but not around the clock.

Of course, if it is an emergency or if you aren't sure it's an emergency, the emergency room is the right place to go.

StraightTalk Tip: Before you need a clinic, why not check with your insurance company for the location of an in-network clinic. Many insurance companies list in-network providers on their website.

Tips for Saving Money on Medications

Ask your doctor if there is a less expensive medicine for your condition. Some high-priced medications don't work any better than lower-cost alternatives.

Ask your doctor to prescribe a generic medicine, when appropriate. Generics are equivalent to name brand drugs, work the same and can cost considerably less. Some pharmacies are offering generic drugs at $4 or $5 per month with some offering similar discount pricing for 90-day supplies. Many of these pharmacies publish a list of the drugs offered.

Ask your doctor if you can save money by splitting your pills. Some medications come in various dosages with different costs. For some of these medications, it can be less expensive to buy a higher dosage pill and split it.

Does your prescription plan have a mail-order pharmacy? If so, and if using it is convenient, check out the prices for any medicines you take regularly. Some mail-order plans offer 90-day supplies for as little as $20. You'll still need to go to your local pharmacy for short-term prescriptions.

You can save with over-the-counter (OTC) drugs as well. Compare store brand prices with name brands. Store brands can cost significantly less than name brands and they typically work just as well.

Other Tips for Saving

Try to choose doctors, hospitals, specialists, labs, and other providers that are part of your insurer's network. Your insurer has negotiated lower fees with these providers. You'll typically pay more out of pocket if you use a provider that's out of the network.

If you must use an out-of-network provider, trying negotiating the fee. Find out how much the insurer will cover for the type of service you need. Make sure that the price includes what the insurer will pay and the amount you will be expected to pay. Then ask the out-of-network provider if they will accept that price.

Planning Ahead to Save Money

As you can see, most of these programs and tips take some planning on your part. But for most of us, the money saved is well worth the time.

 

Prepared for Corning Credit Union by Remar Sutton & Associates, November 2008. All rights reserved.