Switching to a high deductible health plan

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Switching to a high deductible health plan

You may have heard the buzz about health savings accounts (HSAs), a new vehicle the lets you set aside pre-tax dollars to pay your medical bills. You're intrigued, but to start one, you'll have to switch insurance plans. Here's more about how to do that.
 
What is a high-deductible health plan? As the name implies, this type of insurance provides coverage after you meet a steep deductible. Sometimes it's called "catastrophic" insurance because, with the exception of some preventive care, you'll have to pay at least the first thousand dollars of medical expenses you incur before the plan begins covering your care.
 
What are the advantages? The biggest advantage is a savings on your income tax. Federal legislation allows you to set up a tax-free health savings account when you buy a high-deductible health insurance policy to cover your major medical expenses. The HSA and high-deductible plan work in tandem. Second and maybe just as important, high deductible medical insurance plans promote disease prevention. It's in your best interests to stay healthy through diet and exercise so that your HSA would be used only for serious illness or injury. Third, the high deductible/HSA tandem creates an incentive for people to spend judiciously. Your initial out-of-pocket costs will be higher than what you would incur as a member of a tightly controlled managed care plan, such as an HMO. But your premium will be much lower than what consumers pay for HMO health insurance plans.
How does this type of insurance work? You are responsible for routine medical costs; the high-deductible plan serves as your safety net. So, if you or someone in your family comes down with a serious medical condition or is frequently ill, you needn't worry about the financial impact. One you've met the deductible, your insurance will cover most or all of the subsequent medical expenses.
 
How much will I pay out of pocket? In 2005, the minimum annual deductible is $1,000 for self-only coverage or $2,000 for a family. Including deductibles and co-pays, annual out-of-pocket spending cannot exceed $5,100 for an individual or $10,200 for a family. These amounts are adjusted annually for inflation.
 
How much can I contribute to my HSA? Generally, your HSA contribution cannot exceed your annual deductible. So people with higher deductibles can contribute greater amounts. However, the maximum contribution in a year is capped at $2,650 for an individual and $5,250 for a family.
 
How do I make the switch? Some insurers offer a high-deductible health plan packaged with an HSA. Others offer only the insurance policy. In that case, you'll need to contact your bank or some other financial institution about opening an HSA.
 
SOURCES: U.S. Department of the Treasury, Washington, D.C.; HSA Road Rules for Consumers, Employers, Insurers, Banks, Credit Unions and Administrators (Dec. 7, 2004), The HSA Coalition, Washington, D.C.; White House Office of Communications, Washington, D.C.;
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