The world of health care is filled with confusing acronyms and terminology, and it can be difficult for the average consumer to sort it all out. When you shop for health insurance, either through your employer or on your own, you will encounter terms like HMO, PPO, HSA and others. Understanding these terms and what they mean can make you a smarter insurance shopper.
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The acronym HMO stands for health maintenance organization. Many companies offer at least one HMO to their workers, and HMO plans are also available on the individual health care market. With an HMO you typicaly choose a primary care physician, and that doctor then coordinates your health care services, including referrals to specialists within the HMO network. HMOs will not cover you for services by providers outside the HMO network. Insureds are typically charged copays for certain services, and some HMOs, particularly on the individual market, may have deductibles as well.
A health savings account, or HSA, is intended to provide consumers with a tax advantaged incentive to be smarter consumers of health care. The idea is that consumers who are spending their own money will be more price conscious and more likely to shop around for non-emergency medical care. You can fund your HSA with pre-tax dollars, and then use that accumulated money to pay for prescription drugs, doctor appointments and a host of other medical services not covered by your health care plan. You can even use those HSA funds to pay for over-the-counter medications if your doctor prescribes them. The IRS does limit the amount you can put into your HSA each year, so check with your human resources department for group plans, or an accountant or tax expert, for individual plans, regarding the allowable limits.
One of the major advantages of a health savings account, besides the ability to put money aside for medical care, is the fact that you get a tax break for your contributions. If you have access to an HSA through your employer, the money you contribute through payroll deductions comes out pre-tax, meaning it is not included in your income for tax purposes. If you contribute to an HSA on your own, you can take a tax deduction for those contributions when you complete your 1040 form. That makes an HSA an excellent tax savings vehicle as well as a good way to save for health care expenses.
High Deductible Health Plan
A health savings account can only be paired with a high deductible health plan. These plans are known as HDHPs in the insurance industry, so if you are shopping for insurance on the individual market, be sure to tell the agent you need an HSA-eligible plan. If you get your health care through your employer, check with your human resources department the next time open enrollment rolls around. Your human resources department can tell you which of their plans qualify for an HSA. If your employer does offer an HSA-eligible health plan, the firm might also fund some or all of the HSA. If not, you can fund the HSA yourself through payroll deductions.