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When we fill our drug prescriptions, undergo a medical procedure, or visit the emergency room, how many of us actually investigate the cost of that drug or procedure? Since the insurance company ultimately foots the bill, most of us are more concerned with meeting our deductible and making the co-payment than figuring out the actual costs paid by the insurance company. In paying our health insurance premiums, we have essentially outsourced cost containment to our insurance carriers.

Spending on hospital visits, medications, and other health care items now accounts for an estimated 18% of GDP, an enormous swath of the U.S. economy. What if consumers played a more active role in evaluating health care costs and negotiating fees as they do with most every other expense? This is precisely the theory behind the Health Savings Account or HSA.

Tracing its roots back to the earlier Medical Savings Accounts or MSAs, today’s HSA was approved by Congress in 2003 and passed into law in January 2004. A Health Savings Account acts like a savings account, where participants can periodically set aside their own money for future healthcare needs. HSA accounts can be established only in conjunction with a qualified High Deductible Health Plan (HDHP) and one cannot be enrolled in any other non-HSA qualified health insurance plan, including Medicare or Medicaid. For individuals, the 2016 HDHP minimum deductible is $1,300 and $2,600 for families; the deductible will vary depending on the actual plan purchased. The maximum 2016 HDHP out-of-pocket expense is $6,550 for individuals and $13,100 for families.

In owning the HDHP, one becomes eligible to open an HSA account with an approved trustee, like Charles Schwab or HSA Bank.  In 2016, individuals can contribute $3,350 and families may contribute up to $6,750 to their HSAs.  Individuals age 55 or older may contribute an additional $1,000 per year. Contributions can be made from various sources including the individual, the employer, and even other family members. Regardless of the source, contributions from all sources cannot exceed these limits.

What is really exciting is the triple-tax-free status of the HSA. Contributions made to the HSA are tax-deductible in the year of contribution. Any capital appreciation and income generated from investments within the HSA are tax-free, and withdrawals for qualified medical expenses are also tax-free. In contrast, retirement savings vehicles such as IRAs and 401(k)s offer tax-deductible contributions and tax-free growth, but the withdrawals are taxed as ordinary income. Roth IRAs offer tax-free growth and tax-free withdrawals, but the contributions are not deductible. For us in California, 529 Plans offer tax-free growth and tax-free withdrawals for qualified education expenses, but contributions, similar to Roth IRAs, are not deductible. Yes, the HSA is the only triple-tax-free vehicle around, a true trifecta!

HSA owners can use available funds to meet annual health care costs, thereby reducing the actual maximum out of pocket expense in any given year, or save and invest these funds for the long-term. In theory, the HSA has the potential to become a self-funded long-term care policy. We realize that these plans are not for everyone, especially those already faced with high annual health care costs. However, for younger and healthier individuals, the HSA offers a wonderful investment opportunity. Further, the more individuals take advantage of HSAs, the greater each individual can help collectively stem the seemingly endless rising curve in health care costs.