The Investing Merits of the High-Deductible Health Plan

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The HSA is triple tax-exempt in that the money is contributed pre-tax, then it grows, the gains are tax-free, and you can withdraw it tax-free for qualifying medical expenses. So it's an even better deal than the 401(k) from a tax perspective.

Hello and— oh boy, this voice. Meta. Hello and welcome to the Barron Streetwise Podcast. I am not an old creaky tree branch bending in the wind, and I'm not a chain-smoking bullfrog. I'm Jack Howe. I've got a bit of a voice issue this week, but put that aside for the moment. The voice you just heard earlier, not me, the other one, that's Elizabeth O'Brien. She's my colleague at Barron's. She writes about personal finance, and we're going to be talking with her today about a story she wrote recently on high deductible health plans and health savings accounts. It's an investing topic, I promise, potentially a good moneymaker for long-term savers. Listening in is our audio producer, Meta. Hi, Meta.

Hi, Jack.

So the plan here is to keep this voice to a minimum. I'll answer one listener question. I'll keep the answer short, and then we'll get right to my conversation with Elizabeth. How's that sound?

That sounds good.

Who's, uh, who do we have for a question?

We have a question from Alexander, and it's not recorded. It's in print.

Oh, right. There's, it's a two-parter. The first part is about— let me read a little bit of it. He recently made the decision to move his emergency fund into 4-week T-bills via TreasuryDirect. And he says the idea is to put any emergency spending on a credit card and then pay the credit card off at the end of the month when the T-bill matures and the funds are back in the bank account. He says this strategy will return him Looks like close to 5.4%, and he says that's a good chunk more than the 4.15% my high-yield savings account is giving me. Okay, that's the first question. The second one we'll get to in a moment. I see what you're going for here, Alexander, and it certainly is a good time to shop around for better yields on short-term money. I'm not sure that I would want to put of my emergency funds in even T-bills. I think of an emergency as something where maybe you need to get your hands on cash right now. I know that this is increasingly a digital society. You pay with credit cards everywhere. But the thing about emergencies is you don't get to pick the type of emergency you're going to have before you have it. Maybe it's a repair at your house that needs someone with special skills, and that someone doesn't take credit cards. Maybe you'll need to bail someone out. I know, Alexander, that, uh, you know, you travel with a polite crowd and people don't get into trouble. So do I. Would you believe that once during my life I had to bail someone out? It's not a bad person.

It was one time, Jack, and I paid you back.

It wasn't a bad person, and it wasn't like a super duper bad thing. But what happened in this particular circumstance was it was a Friday and I went to a courthouse and an officer for the court said there was bail. I think it was $1,500. And he said, you have a couple of hours to come back with the money before we close. And if you do come back with it within those couple of hours, then he can leave here now. And if you can't, then he has to stay the weekend because they don't do business over the weekend. So I was able to come back with the money and, you know, everything worked out fine. And yes, I said he, and no, it wasn't Meta.

It's good to know for the future that you're kind of the guy to do that, you know? Noted.

Yeah, just, just, just call up good old Jack. If you ever need bail money, reach out to the Barron Streetwise Podcast. No, that's not the message I'm looking to put out there. The point, Alexander, is it's good to be able to put your hands on some cash, like, right away. And I don't know how much is the right amount for you. For one person, it might be a few thousand dollars. For another person, more. It depends on your lifestyle, your responsibilities, and so forth. There's another little thing about this strategy that, that worries me, and it's that although we live in an increasingly digital world where you can pay with a credit card just about anywhere. Do you notice, like I do, an increasing number of merchants that are adding credit card fees onto the bill? 3%, 3.5% to cover the transaction cost? I see them at just about every restaurant I go to now. A restaurant visit is not really an emergency, but there are loads of other merchants that charge them, uh, gas stations, I've seen it with some suppliers for stuff that you might need for like a home renovation or repair or something like that. So I guess my point, Alexander, is you wouldn't want to have a strategy where you're making an extra point on your money, but then you're losing 3 points when an emergency pops up. So maybe keep a little of that money just in regular cash, but congratulations to you for having an emergency fund to begin with. Now, for the second part of your question, you write that you want to put the rest of your non-emergency savings into T-bills, and you're envisioning reinvesting a bond ladder, and it's made up of 4, 8, 17, and 26-week T-bills. After that, you write, the curve is inverted and the rates go lower. Is it a mistake to not buy longer-term bills or notes? My investing horizon is about 2 years until a house purchase. Love the show, informative and entertaining. Very kind of you, Alexander. So is it a mistake to keep your bonds short because the yields on longer-term bonds are lower? Well, yes and no. In your case, no, it's not a mistake to keep your bonds short. I mean, you certainly want to stay inside that 2 years if if you have something coming up where you need to spend the money. You're buying a house, you don't want to take a chance on a 10-year bond, even a Treasury, and run the risk that some sort of swing in interest rate would reduce the value of the bond and you'd have to cash it in early at a loss and you wouldn't have as much to spend on the house. Let me put some numbers behind this. I'm looking at Treasury yields. A 3-month Treasury recently paid 5.6%. If I go out to a 2-year Treasury, I'm down to just over 5%, 5.03%. And if I go all the way out to 10 years, now I'm down to 4.88%. So you buy those longer Treasuries, you have to lock up your money for longer. There's more interest rate risk in the sense that longer bonds are more sensitive to swings in interest rates. If you have to cash those bonds in early, you take more of a risk that you might have to do so at a loss or, you know, or a gain, something different from the maturity value that you imagined. But there's a risk staying very short too. It's called reinvestment risk. And the risk is that yields broadly move lower. You have money that comes due in just a couple of months. You have to reinvest that and now you can't get as good of a yield as you saw before. In fact, maybe you won't be able to get as good of a yield as you're seeing now on those longer bonds. And that is in fact what this inverted yield curve is saying. It's saying that the bond market believes that yields are going to move lower in the years ahead. So that's the reason why someone would buy one of those longer-term bonds even though it has a lower yield today. They'd think to themselves, you know what, I better lock these yields in for longer in case I can't get yields this good a couple of years from now. Whatever the case, you mentioned the term ladder, and I think that makes sense for a lot of different investors. Ladder just means you buy bonds of different maturities, so you have some come due maybe in 6 months, maybe in a year, couple of years, 5 years, and so forth. That gives you diversification. It gives you a mix of bonds with different attributes, and you have money coming in the door Maybe rates will rise. In that case, the money coming in the door, you'd be able to reinvest at higher rates. And if rates fall, you'd be glad you bought some of those longer-term bonds. But in your case, Alexander, keep doing what you're doing on those short-term bills, and best of luck with that new house 2 years from now.

2 years from now, how many people will Jack Howe have bailed out of jail?

You love that little fun fact, don't you?

Just curious.

In next week's episode, I'll talk about how to create your own cigarette futures exchange program in prison. All right, enough. How about we move on to Elizabeth?

Let's do it.

Elizabeth O'Brien writes about personal finance at Barron's. And as I said earlier, she wrote recently about high deductible health plans. This is open enrollment season. That's when people make choices for their benefits or changes to their benefits for the year ahead. One of the things they might do is choose whether they're to stick with or change their health plan. And some people will see a choice of something called a high deductible health plan or a consumer-driven health plan. And that's a plan where your premiums are significantly lower, you know, cost you less money out of each check for your health plan, but you might be on the hook for a larger share of the healthcare spending. And that's not attractive to many people. That sounds risky. And so I think people shy away from that. But I think that the math is in your favor in most cases, not all cases, but for a majority of people. So I think more people should consider these plans, especially because they unlock access to what's called a health savings account., which is nothing like a flexible spending account. In fact, it is a powerful tool, I believe, for retirement savings. That is a, a case that I have made in the past to maybe some friends or coworkers. Um, but now there's a study out that sort of backs that idea up, and that's what Elizabeth wrote about. So I reached out for a chat. Hi, Elizabeth.

Hi, Jack.

This is that, uh, special time of year. Halloween has just ended. People are sorting through their candy. They are not yet making their preparations for Thanksgiving. And this is a holiday we call open enrollment, when everyone gets on the computer and goes through all the choices for their benefits plans and packages and perks and whatnot at work, and they try to make the best choices.

Indeed.

And you have written something about one of those choices and it's called a health savings account, or maybe it's called a consumer-driven health plan, or maybe it's called a high deductible health plan. There's, you have to sign up for one of those things in order to get the other. So what's the deal with a high deductible health plan?

Okay, so a high deductible health plan is a plan with a deductible. The deductible is the amount that you have to pay out of your own pocket before every year before insurance kicks in and covers it. So a high deductible plan, as the name suggests, is higher than your average deductible for next year. It's $1,600 for an individual and $3,200 for a family, right?

That's the minimum it has to be to meet the definition. But some plans would have higher ones, right?

Exactly. That's the IRS minimum for being paired with the health savings account. So not all employers offer the high deductible option, but in the ones that do, you have that high deductible option alongside a traditional PPO, if you will, with a lower deductible. So a lot of people just say, You know what, I can't deal with this deductible. I'm going to go with the traditional PPO. And these consumer-driven health plans, high deductible health plans, call it what you will, tend to get overlooked.

As you point out, it's not a very marketable name, right? Do you want to, you know, take a lot of money out of your pockets plan or—

No thanks. As one of my sources said, the branding is bad, but they come with some serious Tax breaks, the HSA that you mentioned earlier, the health savings account that gets paired with these high deductible plans is a really good vehicle.

Metta, how about a quick break here? We'll gather ourselves, do some deep breathing, maybe listen to an advertisement. When we come back, we'll talk more about the high deductible health plan as an investment opportunity.

Yeah. That sounds good.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. Let's get back to HSA accounts with Elizabeth. I have a confession. I was a believer before I saw your, your story. And your story points out, or the headline is, 75% of employees would be better off with a high deductible plan and HSA. That's according to a study. Who did the study and why would they be better off? Just lower spending overall?

Exactly. So Voya Financial did the study and they looked at what people of different ages would pay in a traditional PPO, like a lower deductible plan versus a high deductible plan based on the typical plan design that the Kaiser Family Foundation does. So it was a good methodology. And they found shockingly that— well, shockingly to me, I was surprised that the number was so high— that 75% of employees of all ages or average of all ages would be better off, would have lower spending in the high deductible plan. But there is a big assumption in that number, and that assumes that you pair your high deductible health plan with an HSA and that your employer kicks in money. So a lot of employers, about 80%, seed your HSA every year with some money.

Yeah, I'm going to come to that HSA in a moment. That's the answer to the question that people might have in their heads right now is why is my investment podcast talking about health insurance? And the reason is, is because It's an investment opportunity in disguise in the form of that HSA.

It absolutely is.

I think there's a lot of confusion about how these plans work. One thing I want to point out that might go overlooked is when you have insurance, I'm using, you know, mine as an example. You know how there's like the two prices you go for some sort of health care and then the hospital or the doctor or whatever says, okay, that'll be $34,000. And they turn the bill into the insurance company and the insurance company laughs at them and says, okay, we're going to pay you $800.

Yeah, right, right.

Maybe that's an exaggeration or whatever, but that same thing still happens with this type of plan. In other words, anybody, if you've got a health insurance company that has the regular full benefits, full cost plan, or they have the high deductible plan, you still qualify for that negotiated price that comes from the insurance company. And that's important because it's a major difference in how much you spend.

You spend a lot less. Exactly. So even though you're paying the full price before you hit the deductible, you're paying exactly like you said, the full negotiated rate that your health plan has negotiated with your in-network provider. So you're not getting in the walk-off-the-street-with-no-insurance price.

So people out there might know about a flexible spending plan, and I think some people confuse that with an HSA. How are they different?

Yeah, there's some understandable confusion because there's a lot of alphabet soup, but the big difference between a flexible savings account and a health savings account is that your FSA, it's a use it or lose it. You know, you've got to use that money up by the end of the calendar year, or some offer a little bit of grace period into the following year. But whatever it is, you've got to use it by the deadline or you basically forfeit it. It goes back to your employer.

This is like a case of, they call it the flexible plan. Sometimes when you see an adjective, it's like, Okay, so it's not that. That's what you're telling me. You know, it's like, it's like, here, we've got a fresh sushi over here. Well, why are you telling me about the freshness? Shouldn't that go without saying? What's going on? So this is the less flexible of the plans because you have to spend it in that year.

Yeah. And a lot of, you know, there's a lot of last-minute spending sprees, people buying contacts or solution or what have you to use it up by the end of the year. But HSA, totally different story. It is with you forever, and it's not linked to your employer. So even though you, you open one up when you have a high deductible health plan through your employer, the HSA portion of this deal is portable. So you put the money in there, you can use it to pay medical costs now all the way through retirement. So if you leave that job where you no longer have the high deductible health plan, the HSA is still yours. It goes with you. So you don't have to use the money by the end of the year. You can use it through retirement.

I'm going to read one of the comments that's under your story from a reader. He says, uh, HSAs are another way to fund your healthcare needs in retirement. He says, I started my HSA back around 2001 and have maxed it ever since and never took a dime out of it. That balance is approaching $200,000. And he goes on to say that he's on the cusp of retirement and he's going to retire on the younger side. And so he's going to sort of use that money to hold him over until he's eligible for Medicare. Fantastic. That's an example of what can happen with one of these plans if you get into this and you're in it for, you, you know, a lot of years, it can build up like a 401(k). I was trying to rank in my mind what, you know, where does this fall in the hierarchy of things? Like a 401(k) seems like the best deal under the sun. If you get that employer match and, you know, you put the money in, it's an immediate tax dodge and then it, and then it grows tax-deferred. But as you point out in your story, an HSA is similar to a 401(k) in that you can invest the money in stocks and bonds and whatever you like. Right. But you said there's some advantages over a 401(k). Exactly.

So the HSA is triple tax-exempt. So with the 401(k), you're paying ordinary income taxes either on the way in or the way out. If it's a Roth, you pay on the way in. If it's a traditional, you pay on the way out. But you are paying ordinary income taxes on that money. The HSA is triple tax-exempt in that the money is contributed pre-tax, then it grows, the gains are tax-free, and you can withdraw it tax-free. For qualifying medical expenses. So as long as you use that money, the IRS has a huge laundry list of approved expenses for HSAs. As long as you use the money toward one of those, you don't pay taxes. So it's an even better deal than the 401(k) from a tax perspective.

With your 401(k), obviously you can't take money out right away to pay for healthcare and then have that be tax-free. That's something you can only do with the HSA.

Exactly. And so you're in effect getting a discount on your medical bills because that money is whatever your tax rate is, right? So you're paying your medical bills with, in effect, you know, if you're in the 22% bracket, you're getting that kind of discount on your medical bills when you pay through the HSA. So it's a good deal.

This is a way for people when they do their taxes, a lot of people have had the thought, well, can I deduct all my medical expenses? And then you look into it and you realize, well, there is some deduction there, or there has been in the past, but it's just a heck of a lot of spending. Like, it's really hard to qualify for it. But the, the HSA is a way to get every dime of that healthcare spending as an immediate tax deduction if you wish. Exactly. And the, the contribution limit for the HSA for next year for individuals, $4,150, for families, $8,300. So that's, you know, You're, you max out your 401(k), some people might look to, you know, if they're able to, to an IRA or to something else. This is probably something they should be looking at first, right? Maxing out this HSA if they could do it.

Definitely. And back to your point, that reader comment about that person who has that huge balance, a lot of advisors say, you know, if you can afford to, don't use the HSA for your medical expenses. Yes, you can. I do. I have, I took the HSA plunge last year and I do use it to pay for my medical expenses, but some say if you you have outside funds, let your HSA grow, invest that money, you know, just like you would with your 401(k), either, you know, you can invest it in any kind of mutual funds or whatever and just let it go. So there is a school of thought that it's such a powerful tool that just save it in retirement 'cause that reader, you're gonna need the full $200,000. You know, Medicare doesn't cover anything. So there is that school of thought that you should just let it sit and wait till retirement.

We should point out that not nearly all workers out there have this as an option. Very true. Their employer might not offer a high deductible plan. That's like your admission ticket to an HSA account. You can't just open an HSA account. You have to start by taking out a high deductible health plan.

This is true. It's unfortunate that there is one, according to a MetLife survey, about 45% of employers offer it. So most don't yet. Now, large employers would tend to offer it more. I think that 45% is an average, but yeah, Plenty of workers don't have this option, which is too bad.

By the way, the mechanism by which this is a better deal for people is the premiums are very low compared with a regular health plan. So in a year where you don't have much spending, you're saving a lot of money on the premiums, you're socking away money in the HSA, and, uh, you know, you're not worried about the high deductible because you're not spending a lot. So that's easy. That's a slam dunk. In a year where you have a lot of spending, you would think that it would be really punishing. But when I looked at it, I found, you know what, it's not that far off. I mean, I think that employers really would like to steer more workers into these things so they make the math kind of not too onerous.

Is that your sense? That is my sense. Yeah, yeah. The math really is not as onerous as you would think because those, as you said, the lower premiums are really, you know, you get a lot of savings through the lower monthly premiums, Plus, if you're fortunate and your employer puts a contribution in, that also helps offset your costs. Now, I had an experience last year where I took the HSA plunge when I joined Barron's in June, really excited to get going. Just a month later, my son had a serious sports injury. So suddenly we are racking up huge bills and we didn't— we actually were getting those bills, but because I had just joined the plan, we didn't have money in the HSA to cover them. So that's the only tip I would say to folks is if you don't have money outside to cover your deductible, just in case something like that happens, make sure you have at least the deductible in a rainy day fund.

Another kind of person— I don't know, maybe if there's— maybe if it's someone out there who knows that they're going to have high medical spending every year, maybe it's a closer call for them.

Yeah, there are some people who know that they're going to hit the out-of-pocket max every year. Like, you just— and ours, I think our plan, for example, is $8,000. Every plan has a different out-of-pocket max.

But by the way, this is, this is separate from the deductible. The deductible is the lower dollar amount that you hit in order for the coverage to kick in and the insurance company to start shouldering part of the cost. And then there's a later higher maximum out-of-pocket where you don't pay any more after that.

Yeah, as long as you stick in network, there are some conditions, but yeah, for covered services, after a certain dollar amount, you don't pay anything. And we actually hit that last year for the first time ever because of my son's injury.

So how is he doing, by the way?

Oh, he's better. Thank you. Yeah, he tore his meniscus. It was bad. He had surgery, but thank God he's recovered. Thank you. So I guess the calculus is that if you know you're going to hit that out-of-pocket max every single year, then you might as well take the lower premiums of an HSA. Because let's say the lower deductible plan and the high deductible plan have the same out-of-pocket max, you might as well take the high deductible, lower premium plan. However, if you're in this gray area between the deductible and the out-of-pocket max, perhaps you're better off not picking the high deductible plan plus HSA.

And sometimes when you, when you sign up for these things, they'll have like software where you can estimate what your spending is and it'll sort of guide you. To sum up, high deductible health plans, terrible name, but, um, for most people, they're a pretty good deal, especially because they give you access to an HSA account, which is one of the most powerful ways to save for not just healthcare, but for retirement. Um, are there any things, uh, that we've left out here?

Yeah, don't be scared by the name. Really, like you said, try to map out some scenarios to test out which is better. During open enrollment and spend time on your open enrollment. I'll add that to— I think Voya found that the average employee spends maybe 17, 18 minutes on open enrollment related tasks every year. Just spend a little more time.

What you do is you grab the kids' trick-or-treating candy, you get yourself, get yourself some mini Butterfingers, you know, get yourself a nice sampling, and then you sit down and you take your time and read all the material and make good choices.

Right. Power through. It can really make a difference.

Thank you, Elizabeth, and thank you, Alexander, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone. You can use the voice memo app and you can send it to jack.hough@barons.com. That way you're going to hear it in your voice, not this rusty old squeeze box that's been left out in the rain and walked over by donkeys. Right, Meta? Right. Meta Lutzhaft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write us a review. And that's all I got. See you next week.

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