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A relatively new entry to the field of health insurance, the HSA or health savings account, is gaining in popularity, but only once you’re able to understand what a HSA includes.

What is a HSA?

In simple terms, a health savings account is a special savings program associated with your PPO medical insurance. The HSA stores funds that can be used to pay for medical expenses not fully covered by your plan before you have to pay out of pocket. The HSA helps to pay some of the costs you would normally pay from your own checking account. The funds in an HSA are earned through your ongoing health initiatives such as check-ups and screenings and are placed in the account as part of the benefits package.

HSAs are usually used in conjunction with a high-deductible PPO health plan. For example, your health insurance might have a deductible of $2,000 with a maximum out of pocket expense of $6,000. Your HAS might have $500 to $1,000 placed in the account annually. When you visit the doctor for a well-visit, you pay nothing per the terms in your PPO. But should you need to rush to the emergency room, you might be expected to pay 20% of the total bill. Rather than paying out of pocket, you can use the funds in your HSA to cover the costs. This leaves you less in your HSA account should you have additional medical expenses throughout the year, but keeps your own funds in your pocket for the first $500 or $1000 owed.

Advantages of HSAs

One of the immediate benefits of the HSA is that it costs less than a low deductible PPO option offered by a company or individual insurance carriers. Using a low deductible PPO you’ll spend far less out of pocket if you have a procedure that requires spending the maximum out of pocket expense, often $2,000 or less. But your monthly costs can be hundreds more than a high-deductible PPO with a HSA.

The HAS and associated PPO costs less each month, but can wind up costing more if your medical costs are higher than the amount placed in your HAS account. In many cases you can contribute additional funds to the account over time as well.

HSAs also roll over all or a portion of the funds each year if they are not used. If you start 2010 with $500 in your health savings account and wind up not needing any medical services other than a basic wellness exam or an annual OBGyn visit that are covered at 100% through the PPO, you end 2010 with that same $500. The funds then roll over indefinitely in most cases meaning you start 2011 with $1000 in your account - $500 from 2010 and a new $500 for 2011.

This pattern can continue indefinitely, giving you a sizeable investment in your HAS by the time you retire or reach a point where you need to pay for a more expensive procedure. This makes HAS accounts very popular with healthy young individuals who rarely visit the doctor and are not pregnant or anticipating major medical expenses. They pay less now and have thousands accumulating to be available for any future procedures or expenses that might be incurred down the road.