Health savings accounts (“HSA’s”) provide a means for an individual or family to self insure all or a portion of their medical expenses. Contributions can be made up to a certain annual limit, and the balance carries forward from year to year. They are designed to be supplemented with a high deductible health insurance plan (“HDHP”), a medical insurance plan which covers medical expenses and, as its name implies, has a high deductible. Premiums for high deductible health plans are typically much lower than for other health insurance plans, so by saving in an HSA the individual or family is self insuring a portion of their medical expenses and by doing so is saving on premium expenses.
Health savings accounts have several tax advantages. Contributions made to HSA’s are tax deductible in the year in which they are made, grow on a tax deferred basis, and are tax free when withdrawn, as long as they are used to pay for medical expenses. Unlike traditional IRA accounts, HSA accounts are not subject to required minimum distribution rules. For the 2018 tax year, the contribution limits for health savings accounts are $3,450 for an individual and $6,900 for a family, with an additional $1,000 “catch up” contribution for individuals 55 and older. Contributions can be made to an HSA up until age 65, after which point the funds in the HSA can be used to fund out of pocket costs associated with medicare.
The different types of health insurance policies are listed below.
Health maintenance organization (HMO)
Health maintenance organizations provide coverage from entirely within their network of providers. These plans typically have lower administrative costs and less paperwork than other plans. Members usually must obtain a referral on order to proceed with receiving care from another provider.
Preferred provider organization (PPO)
In a preferred provider network members can receive care from inside or outside the network, but typically have higher out of pocket costs when outside the network in the form of higher deductibles and co-insurance.
Exclusive provider organization (EPO)
Exclusive provider organizations are similar to HMO plans except that referrals are usually not needed.
Point of service (POS)
Point of service plans are similar to HMO plans except that care can be obtained from outside the network. Referrals are typically needed in order to do so, and costs borne by the member are usually higher.
High deductible health plan (HDHP)
High deductible health insurance plans are typically the lowest cost plans, but also have high deductibles and usually high co-insurance payments as well, resulting in high out of pocket costs overall. These plans are usually supplemented with health savings accounts (“HSA”s) which enable the member to accumulate assets on a tax advantaged basis for the purposes of paying for out of pocket costs associated with the high deductible health plan.
Certain parts of medicare are administered by private insurance companies. These include medicare part C (“medicare advantage”), medicare part D (prescription drug plans), and medicare supplement plans.
Medicare part C, frequently referred to as “medicare advantage”, provides a means for medicare eligible individuals to obtain their hospital and outpatient medical coverage through private insurance companies. This is in contrast with medicare part A and part B, in which such coverage is administered and provided by the federal government.
Medicare advantage plans vary and have different rules, provider networks and out of pocket costs. Some medicare advantage plans include prescription drug coverage while others do not, and the premiums for these plans are typically paid for by medicare. The private insurance companies and the plans which they provide must be approved by and are regulated by the federal government.
Medicare part D includes prescription drug coverage. As discussed previously, some medicare advantage plans include this coverage while others do not. Additionally, medicare beneficiaries who are enrolled in part A and part B have the options of purchasing stand alone part D prescription drug coverage.
Medicare supplement plans, frequently referred to as “medigap” plans, are private plans which can be purchased by an individual who is enrolled in medicare part A and part B. These plans provide a means for medicare participants to obtain coverage for deductibles, co-insurance, and other out of pocket costs associated with medicare part A and part B. Like medicare advantage plans, medicare supplement plans are regulated by the federal government.
Medicare coverage is broken down into parts A, B, C and D. Medicare part A (hospital coverage) and medicare part B (medical coverage) are run by the federal government. Part C (medicare advantage) and part D (medicare supplement) are administered by private insurance carriers and are approved by the federal government to replace or supplement parts A and B.
How you manage your medicare coverage is an important part of financial planning if you are of the age where you qualify for benefits of any kind. Here we will provide a very basic overview of medicare parts A and B and how they work. In subsequent articles we will discuss medicare parts C and D and how you can use these private plans to actively manage your individual situation.
Medicare part A – hospital coverage
Medicare part A is hospital coverage, and you do not have to pay premiums for this coverage if you are age 65 and you meet certain requirements. Medicare part A covers medically necessary services required to treat a disease or condition. These include hospital care, skilled nursing facility care, nursing home care, hospice, and home health services.
Medicare part B – medical coverage
Medicare part B is outpatient coverage, and you must typically pay premiums for part B. You must under many circumstances enroll in medicare part B when you are first eligible. If you do not, you will have to pay a penalty in the form if higher premiums when you finally do enroll, unless you meet certain exceptions. Medicare part B covers medically necessary supplies and services needed for diagnosis or treatment of your condition. This includes services received at a doctor’s office, clinic, hospital, or other health facility.