What's high deductible insurance?

An option that might work for you is high-deductible health insurance combined with a health-savings account (HSA) or a health-reimbursement arrangement (HRA). But make sure you understand what you're signing up for because those accounts are complex and have some disadvantages.

Don't confuse HSAs and HRAs with flexible-spending accounts (FSAs). Read more about FSAs.

How they work

You can withdraw money in a health-savings account or a health-reimbursement arrangement to pay for certain medical expenses tax-free. HSAs must be linked to a high-deductible health-insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) You might get a special debit or credit card for the HSA or HRA account, which makes it easier to pay bills and track expenses.

Here are some differences between HRAs and HSAs:

• HRAs. Only your employer can set up a health-reimbursement arrangement, and the company will make all the contributions. Employers can contribute as much, or as little, as they like. Your employer also owns the account. The company can reclaim any unspent balance, though most employers let the money roll over from year to year.
• HSAs. You can set up an HSA on your own and contribute to it. Your employer can contribute, too, but doesn't have to. Most important is that you own the money in an HSA even if it was set up by your employer and includes employer contributions. And you can roll over any money in it from year to year, and the interest income in the account remains untaxed. But there are some strict rules governing HSAs. For example, in 2011, you can contribute up to $3,050 for individual coverage and $6,150 for a family, though you can add another $1,000 if you're between 55 and 65.

For more information, see the website of HSA Educator.

Will you save money?

The higher your deductible, the lower your premium usually is. But the savings of going with one of these options compared with a standard HMO or PPO plan can vary substantially depending on your age and medical circumstances, and what area of the country you live in.

For example, in a national survey of job-based health-insurance plans, the worker's share of the annual premium for a high deductible-HSA plan was $3,457 compared with $4,357 for an HMO (family coverage)—a savings of $900.

For people buying any type of health insurance on their own, the savings are similar for younger people but higher for older ones, according to data from ehealthinsurance.com. On average, a 25-year-old man can expect to pay $2,712 annually with a $500 deductible and $1,800 for a $5,000 deductible, a savings of $912. But for a 55-year-old man, a $500 deductible plan is $5,496 a year vs. just $3,456 a year for a $5,000 deductible plan, a savings of $2,040.

Our advice

An HRA or HSA makes most sense if you're young or middle-aged and healthy, and can comfortably afford paying several thousand dollars out of your own pocket for medical expenses. If you have no medical expenses in a given year or minimal ones, you'll save money on premium costs and will essentially squirrel away tax-deferred dollars for future use. But the accounts require careful oversight of your medical bills and your account balances. And they probably aren't worthwhile if you expect medical expenses close to the deductible amount.