HSA Financial Tradeoff

An interesting comment on this EconLog article got me thinking about the break-even point between an HSA and traditional coverage:

People are amazingly reluctant to make the move. One law firm I know of made HSA - type policies available to their attorneys. One of their tax people ran the numbers and concluded that they couldn't possibly lose with the HSA deduction, combined with lower premiums. The worst downside was a small advantage.

Yet not a single attorney took the HSA option. If you have this problem with a well-educated and informed group, that's scary.

I have an HSA myself, and it's great. I'm not sure what it will take - maybe just time and a slow process of education will eventually start to turn things around.

I switched to an HSA-eligible plan for 2005, the first year my employer offered one. My old plan cost me $300/yr (tax-deductible) and was traditional insurance with a $10 co-pay. It was the sort of plan you'd love to have if you were a big health-care consumer. But I'm not. I'm young, male, and single, so I don't see a lot of doctors.

I assume a 25% marginal tax rate throughout the following.

My new plan's deductible, and HSA contribution limit, is $1100 — lower than I would prefer, but it was the only option. It costs me $0/yr to enroll; the premiums are paid entirely by my employer. (My new plan is significantly cheaper to my employer than my old plan was, though I won't disclose the details. I wish they could pass the savings along to me as wages, but I think they're legally forbidden. Socialism has to stay competitive somehow, eh?)

My old plan actually increased premiums this year, but I don't remember the amount so I'll calculate with last year's figure. The $300/yr premiums cost $225 after tax.

With my new plan I can get the tax deduction on $1100. The $1100 goes into the HSA, costing only $825 in after-tax dollars, for a benefit of $275.

My old plan cost me $225/yr. My new plan benefits me $275/yr. As long as my annual health care spending is less than $500, I come out ahead — and that's before the customer service benefits of the new plan, and ignoring compound interest in my HSA balance.

Unlike the attorneys, I'm not guaranteed to come out ahead. If I need expensive care I could end up paying more. But that's a risk I'm willing to assume, because I think my spending will be much less than $500.

In this situation my employer gets the better half of this win-win, saving significantly more than $500 in premiums, but I won't begrudge them that. I'm just happy to have something that more resembles insurance than pre-payment for services I don't plan to receive.