Nevada ranchers David and Kathi Hussman were paying nearly $12,000 a year for health insurance. But their medical bills never exceeded the plan's $1,000 deductible. It was a burdensome flow of hard-earned cash, all going the wrong direction.
But what farmer or rancher can risk going without health coverage, no matter the cost? Statistics have everyone convinced farming is a dangerous way to make a living. That perception helps drive up the cost of health insurance for everyone who works with crops and cows.
Until recently, farmers and ranchers had but two choices: pay what they had to for insurance or take their chances without coverage. It has been costly either way. But many selfemployed people, including farmers, are now giving serious thought to a creative new approach for funding medical costs.
The Hussmans and their 17-year-old son Beau have a 560-acre spread near Gardnerville, Nevada. "We paid $2,900 a quarter for a $1,000 deductible plan," said David. "We never hit that deductible."
No Health Coverage
Discouraged, they were ready to drop all health coverage entirely and take their chances. "For a fairly small business, $12,000 a year for health insurance was out of our league," David said. The Hussmans planned to put the money they had been paying out as premiums into their own bank account, use it to pay routine medical bills, and hope a medical catastrophe would not occur.
When they ran their idea by insurance agent Steve Warrell, he had some unexpected news. He told them about "Medical Savings Accounts"
(MSAs), which are now authorized by the federal government. This approach for paying medical bills combines a low-cost, high-deductible major-medical insurance policy with a tax-free savings plan. The tax-free dollars may be used to pay a wide range of medical expenses.
The insured makes tax-deductible deposits into the MSA at a qualified bank or brokerage company. Withdrawals from the account are tax-free so long as they are used to pay qualified medical expenses. Individuals may deposit 65 percent of their insurance deductible each year, families up to 75 percent ... all of it tax deductible.
The insured, not the insurance company, owns the MSA. Unused funds are never lost, and what the farmer doesn't spend he or she keeps. Unused money in the MSA account rolls over to the next year, accumulating tax-deferred interest until retirement age when it may be withdrawn, penalty-free, but reportable as income.
Lower Premiums
The Hussmans went with the Medical Savings Account paired with a high-deductible insurance plan. Immediately, their premiums dropped from $2,900 a quarter to $520 a quarter.
They started making tax deductible deposits into an MSA. With a high deductible, it may take a few years to accumulate the entire amount of the deductible. At that point, however, many choose to stop making payments into their account until the fund is drawn down by medical expenses.
Power in Paying cash
Users of MSAs cite two obvious cost savings. First is the tax savings of a totally deductible payment.
Then comes a surprise. The patient who can pay for medical services on the spot from an MSA has a lot of purchasing power. Costs drop for cash-paying customers. Doctors and hospitals don't want to wait months for insurance payments. Cash savings of up to 20 percent are not unusual.
'We started getting an automatic discount," said Kathi Hussman. "We used to pay $65 for an office visit at our family doctor, and now it's $58."
Prescriptions And Glasses
The MSA is more flexible than traditional insurance. It covers procedures that other insurance does not, including prescriptions, vision, dental, chiropractic, and even acupuncture and massage therapy. When Kathi Hussman needed glasses, "I just went and got them because the money was in that account for me to pay for them," she said.
There are several steps toward establishing a Medical Savings Account:
1. Find an insurance agent or company that works with MSA qualified plans.
2. Determine if your MSA will be an individual or a family plan.
3. Choose your level of deductible. The higher the deductible, the lower the insurance premium.
"I always recommend clients take the lowest deductible the first year. They have less exposure to risk, and if something major does happen, it's not such a big hit" said Steve
Warrell. "But, over time, the true dollars and cents rational decision is to take the highest deductible and pay the lowest premium. The Hussmans went with the highest deductible right off the bat."
4.Choose where your medical account funds will be invested.
5. Manage the MSA wisely. It's your money. Don't create unnecessary medical expenses, because any funds remaining in the account continue to earn taxdeferred interest.
Once in the MSA program it's merely a matter of keeping the fund at a usable level and paying medical bills with a check or debit card. "Once we get the deductible (fully) funded," David explained, "we'll probably just let it ride. We've got other options to save for retirement. However, if we decide to start a long-term care policy in a few years, our agent recommends using the MSA as a source of tax-free dollars to fund the premium on the plan."
While the MSA covers a wider range of
medical expenses than traditional insurance, it is up to the insured
person to keep track of bills so the deductible can be verified.
If you withdraw funds from your MSA for non-medical use, they are
handled like an IRA and those funds are subject to normal taxes as well
as a 15 percent penalty.
Once you reach age 65, funds can be
withdrawn, penalty-free, for any reason, and only ordinary income tax
applies. It's like building equity in a home with the monthly
payments. At the end, the insured is richer, not the insurance
company.
(excerpted
from an article in The New Holland News, Nov/Dec 2001)
Article by Cynthia
Harrington |
