(Almost) Free Health Insurance

Last week, the Office of Personnel Management announced 2011 premium changes for the Federal Employees Health Benefits Program. Some of you will see your premiums increase by as much as $100 per month, although the average increase is much smaller. This week, I want to introduce you to a type of health insurance plan available under FEHBP that can reduce some people's premiums to almost nothing. It's called a high deductible health plan with a health savings account or a health reimbursement arrangement. And actually, it's not that new. HDHPs have been available through FEHBP since 2005, but very few people have chosen to use them.

Nationwide, about 10 million people are enrolled in HDHPs, a 25 percent increase over last year, according to a survey by America's Health Insurance Plans, a Washington-based trade group. Are federal employees and retirees missing out on something? As you've no doubt learned from experience, anything that sounds too good to be true must have a catch. So I'll explain the pitfalls of HDHPs later on. But let's start with the basics.

Accounts and Reimbursements

First off, it's important to know how HDHPs relate to health savings accounts and health reimbursement arrangements. When you enroll in a high deductible health plan, the plan determines whether you are eligible for an HSA or an HRA, based on the information you provide.

An HSA is a tax-sheltered trust account you own for the purpose of paying medical expenses for yourself, your spouse and your dependents. You can't make contributions to an HSA if you have other health insurance besides your HDHP. If you're covered by Medicare, the military's TRICARE system, or a spouse's non-HDHP plan, then you only can have an HRA. It is an employer-funded, tax-sheltered account to reimburse allowable medical expenses.

Premiums for HDHPs run about $100 per month for self-only coverage and $200 a month for self and family. Premium increases for these plans in 2011 will be very small. HDHPs are available through GEHA, MHBP, Aetna and a few other providers. OPM has more information about HDHP options.

If you sign up for an HDHP, your health plan will make contributions (referred to as credits, and also known as a premium pass-through) to a savings account at a bank for you. These range from $60 to $70 a month for self-only coverage to $125 to $150 per month for self and family. This essentially lowers the cost of your health insurance.

With an HSA, the money is deposited monthly. This money is yours and can be used to pay for out-of-pocket health care expenses, including your deductible and co-insurance. It also can be used for some expenses that can't be paid from a flexible spending account, such as some insurance premiums. Some long-term care insurance premiums can be paid with money saved in an HSA. (The amount considered a qualified medical expense depends on your age.) When you enroll in Medicare you can use the account to purchase any health insurance other than a Medigap policy. But you can't continue to make contributions to your HSA once you are in Medicare.

If you are eligible for an HSA with your HDHP, you can contribute tax-free dollars to the account up to a certain limit after subtracting the amount the health plan has contributed for you. For 2011, the maximum annual contribution you can make is $3,050 for self-only and $6,150 for family coverage. This remains unchanged from the 2010 limit. Most federal payroll offices allow a payroll allotment to fund your HSA.

If you are 55 or older and not enrolled in Medicare, you can make catch-up contributions of up to an additional $1,000 per year.

Federal employees also can set up a limited expense health care flexible spending account to cover out-of-pocket dental and vision expenses. You can contribute an additional $5,000 per individual enrollment to such an account.

The Catch

Now for the pitfalls I mentioned earlier:

• HDHPs have a minimum deductible of $1,200 for self-only coverage and $2,400 for self and family.
• If you haven't funded your HSA, or if the money in your HRA is not enough to cover medical expenses incurred, then you have to pay for them out of your own pocket.
• Catastrophic out-of-pocket limits are higher for these types of plans than they are for traditional health insurance.
• As with any insurance, to get the best value of the plan, you must use health care providers that are members of the plan network. Some plans will provide coverage if you go out of network, but you will pay a higher portion of the charges.

In a year when you need a lot of medical care, your total out-of-pocket expense might be comparable with what it would be under other FEHBP plans. But in years of good health, you will save money and be able to set aside a cash reserve of tax-free dollars for future health care expenses.

Is This for You?

Should you consider this type of plan? Here are some factors to bear in mind:

• These plans are popular with midcareer employees who are in relatively good health.
• If you take advantage of funding the HSA (and you meet the eligibility test), then you will benefit from the tax shelter.
• The money in your HSA does not have to be used each year. It can accumulate until later years when it might be needed.
• If you shop around for health care, you can save money. Try PriceDoc to find money-saving coupons and providers that are willing to offer discounts for their services.
• If you mostly need only preventative care and coverage in the event of an accident or unplanned illness, then an HDHP might be for you.
• These plans offer the convenience of using a debit card that withdraws money from your HSA without the need to request reimbursement.
• Preventive care and routine screenings in these plans have no deductible, co-payment or co-insurance.
• Out-of-pocket expenses can be covered by the tax-free money you've saved in your HSA.
• For care received in-network, after meeting the deductible, some plans will reimburse as much as 95 percent of covered services.
• HSA accounts include interest that accumulates tax-free.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.

Upcoming programs will feature guests discussing health insurance open season this fall:

• Nov. 1: Walt Francis, Checkbook's Guide to Health Plans for Federal Employees
• Nov. 8: Jane Overton, GEHA Federal Health Plan (Fee-for-service plan and HDHP)
• Nov. 15: John Patrick, Kaiser Federal Health Plan (HMO)
• Nov 22: Tom Bernatavitz, Aetna Federal Health Plan (HMO/consumer-driven plan and HDHP)