"Paul Zane Pilzer Checks the Pulse of Healthcare Insurance," by MC News, Management Consulting News, February 2006.

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The New Health Insurance Solution:

An HSA has every single feature of an IRA or 401K plus one monster feature: money taken out for healthcare is never taxed. It’s the only permanent tax escape vehicle the IRS permits.

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MCNews: Can you explain the importance of a health savings account (HSA)?
Pilzer: What we’re talking about here is consumer-directed healthcare. You or your employer put say $5,000 a year into a tax-free vehicle. You get a deduction when you put the money in, and then whatever you don’t spend of that each year for healthcare rolls forward.

The HSA is like an IRA or 401K for healthcare. Either you or your employer put money into the account. Whatever you don’t spend rolls forward, but you own the account. About two million Americans have an HSA, while four million Americans have an HRA.

If the current growth rate of HSAs continues, we’ll all have them in ten years. IRAs came out in 1985 and now 47 million families have them. 38 million families have a 401K. There are 110 million families in America, and anyone who’s smart enough to have a 401K or an IRA will be able to figure out that they shouldn’t don’t put another dollar into a 401K or IRA until they fully fund an HSA each year.

MCNews: Can you only use the money in your HSA for medical expenses? Pilzer: You can also use your HSA to fund your retirement. An HSA has every single feature of an IRA or 401K plus one monster feature: money taken out for healthcare is never taxed. It’s the only permanent tax escape vehicle the IRS permits.

If you put money into a 401K or IRA, eventually you absolutely will pay taxes on it. And when you die it’s taxed as ordinary income on the day of death. If you put money into an HSA, you get the same benefits plus anytime you take money out for healthcare including Medicare supplements and death expenses, that money comes out tax free. You never pay income taxes on it.

MCNews: We’ve focused on company employees. How does your advice apply to self-employed individuals?
Pilzer: Many self-employed people are making the mistake I did when I became self-employed, which is participating in somebody else’s group plan. I had a friend who told his wife to continue working three days a month to get the family healthcare. Many people participate in a group plan in one way or another, thinking they are getting a benefit, while in reality they’re not.

They may not be aware that the individual health insurance market has become more efficient and cheaper in the last few years. Now it’s a better value than group insurance. Historically a self-employed person went into a group plan because the group rate was half the price of an individual policy.

Today that’s exactly flipped. Individual insurance is half the price of group. What changed? Over the last two decades, HIPPA and other laws mandated that groups must take anyone without discrimination of any kind regarding their medical condition and history, which has led to higher costs for the group plans.

Anyone can go to ehealthinsurance.com or to my site and get a quote on individual insurance, including those who are self-employed.

MCNews: If you have just a few employees, what are the best options for healthcare to make it economical for your business and the best for your employees?
Pilzer: Don’t offer a group healthcare plan. Hands down the best choice would be an allowance program, an HRA, which you would start with roughly whatever you are currently contributing or would contribute to a group plan. Every employee gets an HRA allowance to spend on health  insurance and other health items, and

Also, find a consultant to help your employees buy the right health insurance policies.

And then separately, offer the HSA just as you offer the 401K. You could match their HSA contributions. So if employees put $2,000 in their HSAs, you’ll put in another $2,000. But you don’t even need to match contribution.

MCNews: And you’ll still save over the group rate as an employer?
Pilzer: Right. The employer could also offer a salary redirection plan. So, in addition to their HSA contributions, employees could direct the employer to take another $2,000 from their salaries and add that to their HSAs. The employer saves on FICA taxes because it comes right off the top.

MCNews: I’m sure you’ve heard this a million times, but what about pre-existing conditions?
Pilzer: The recent changes regarding pre-existing conditions are the whole reason this thing works now. In the past, 10-20% of your employees had one family member with a preexisting condition that would not allow that person to qualify for an individual policy.

That’s no longer the case. Most states now have guaranteed coverage for people with preexisting medical problems. To put this in context, we’ve always had guaranteed coverage for seniors called Medicare. We’ve always had guaranteed coverage for poor people called Medicaid. And starting in 2005, we have guaranteed coverage in all states for people who have preexisting conditions and are not poor and not seniors.

Every state is different. That’s why I had to write a book with a 100-page appendix. But, in general, if you are rejected for health insurance or “uprated”—meaning charged a higher premium because of a medical condition—you become eligible for what’s called state-guaranteed coverage.

If you have a pre-existing condition, or a family member with one, what you should do is put just that person in the state-guaranteed pool and the rest of the family in a regular policy. It’s best to look at each individual in your family separately.

As of April 2005, 250,000 families were in state-guaranteed coverage. They’re not poor or elderly, but have figured out how the system works. I interviewed an official for one of the state-guaranteed programs who was concerned that I was going to tell people about this. But I feel that’s the state’s obligation, just like it’s your obligation to pay taxes and obey the law.

No one is telling people about their rights and that was my prime motivation for writing the book.

MCNews: Last question: If you could give someone one piece of advice about their healthcare insurance, what would it be?
Pilzer: Take total control of your health insurance, maximize your tax advantages, and take control of your healthcare. When you take control of your health insurance and maximize your tax advantages, you will end up with an HSA or other vehicle that allows you to save tax-free for tomorrow what you don’t need today.

You can spend less for health insurance. It’s really amazing to realize that we have Home Depot, Pet Depot, and Office Depot, and yet the biggest expense in America is medicine and when’s the last time you passed Medical Depot? It’s incomprehensible, isn’t it?

MCNews: This has been very helpful. Thanks for your time.