Mental Accounting and HSAs

It's open enrollment time for Mrs. Done by Forty and me, a strangely exciting time for a board game geek like me, since open enrollment decisions are like a very nerdy puzzle. One to be noodled over, guessing at how likely certain outcomes will be, weighing costs and tax benefits, and picking the right combination of options between our choices for optimal benefit outcomes.

I think I need to find a new boardgame.

In the meantime, we get to stare at the beautiful puzzle of our combined benefits.

Some of the benefit choices are simple. Mrs. Done by Forty and I will both need eye exams and frames, so vision is in. All three of us, including Baby AF, will need to see the dentist, so we'll want to pick up the dental coverage. We just compare the plans each of our employers offer, and pick the best one.

Healthcare, with its big premiums and potentially big out of pocket costs, is where the choices get hard. As I tend to do with hard analysis, I try to let the math do the talking.

Warning, spreadsheets ahead.

First I thought I'd take a look at our Health Savings Account ("HSA") options, which Baby AF and I have been using. They give considerable tax-advantages to high earners (a bad system that gives more tax breaks to those that earn more, but one that admittedly favors us).

On top of that, both of our employers contribute considerable sums to each of our HSA if we participate: $1,440 to hers (if both she and Baby AF are on the plan), and another $500 into mine.

I also included a different option that Mrs. Done by Forty has that's an in-network only, Exclusive Provider Organization ("EPO") plan with a very low deductible, but not eligible for an HSA. The deductible is, amazingly, only $200 ($400 for family) and then very low co-pays for each visit kick in ($20 for most visits, $250 for admittance to a hospital). But since it's an in-network only plan, any costs provided out of network are not covered (e.g. - surgery with an in-network hospital, but with an anesthesiologist who is out of network, would mean the anesthesia is not covered at all).

Here is how the math shakes out, if we assume $500 in medical costs for the year.

Wait, is that too many numbers for a Monday morning? Let's ease the blow a bit...with adorable baby animals.

Okay, still here?

For the past year and a half, our only medical bills are due to the somewhat frequent trips to the doctor for Baby AF when he gets a fever or some other sort of crud. I think they're around $500, so for this 'best case' scenario I'm using that as an estimate.

For the EPO-HSA combo, we end up with a net cost just over a thousand dollars. Not bad at all.

But with both of the HSA options, we actually have a negative cost: we end up coming out ahead due to our employers putting thousands into the HSAs and the federal government giving tax breaks for contributing to the HSA. These benefits are large enough that they cover both the premiums and the $500 medical cost, and still put about $1,300 in to our pockets afterwards.

HSAs have worked out for us because, other than the high costs of having a baby and one surgery I had, we've been lucky enough to go in for our annual visits, maybe a flu shot or vaccination prior to traveling, and that's it. Put another way, we've been very fortunate when it comes to our health: better lucky than good. To this point, I think the $500 scenarios above would be close to our 'median year' for medical costs. 

But what if we had a major, $10k medical event. Would the HSA options fare as well? 

Wait! That is the last chart, I swear. Don't leave yet! I have more animals for you. Behold!

So let's break down this eye chart a bit.

• With a $10k event (in the neighborhood of the costs when Mrs. Done by Forty gave birth to Baby AF), with an HSA, we'd hit Mrs' Done by Forty's $2,700 family deductible and then start paying 10% of the remainder of that ten thousand dollars. Somewhat surprisingly, this still only ends up with a net cost of $1,634: and it couldn't get much higher as we're only about five hundred bucks away from the out of pocket maximum.

• However, with the combination of an EPO plus an HSA, the costs could even be a bit lower: $1,365 if both Mrs. Done by Forty and Baby AF were on the EPO, and all the way down to $907 if Baby AF was on my HSA plan, since this would allow us to max out a family HSA, not just an individual HSA.

I should state that all of these estimates are based on a bit of a convenient fiction, too: that we can anticipate which of our family members would be racking up the medical costs ahead of time, and put them on the right plan in open enrollment. With a planned birth, like Mrs. Done by Forty and I are talking about, maybe that's possible. But just because you're planning on having a second baby doesn't mean something else, like a broken arm or an unexpected serious illness, couldn't occur at the same time. Unexpected medical events happen all the time.

Still, we work from the best projections we can. Since we're not planning on having a baby in 2020, we think that plan #1, with each of us signing up for our own HSAs, is the best fit for the upcoming year. If that year is typical for us, and we don't end up having major medical costs, we'll actually come out ahead on our medical premiums and expenses. We're talking about trying to give birth to our second, the soon-to-be-named MC Baby, sometime in 2021. 

But for the upcoming year, when we don't think we're going to have a baby (knocking on all the wood), we think it's likely we'll save money with an HSA. Even in the event that we have some major medical costs, we can have quite a lot of them before we hit a break-even with the other plan. 

But there is a hidden cost with an HSA, which is something we've been talking about. Since HSAs pair only with high deductible health plans, might we delay or avoid expensive medical care simply because we'd have to pay out of pocket?

That is to say, sure, our employers contribute money to this account for us and the government lets us avoid a lot in taxes if we max out the accounts. But once the money is in the HSA, and once it's invested in stock mutual funds, might we be hesitant to spend it? 

Do we stop thinking of the money in the HSA as "money for medical expenses" and instead see it as an "investment"? What if the stocks in the HSA were up, or down: would that have an impact on our decision to get care that we wanted to get?

And what about the simpler fact that with HSAs, you're having to pay more out of pocket to meet the high deductible. Does the fact that you're shelling out money from your own wallet, rather than pre-paying higher premiums as we would with a low deductible plan, change what decisions we'd make for our healthcare? Might we decide not to have some procedure done?

It's all our money, of course. Whether we pay higher premiums up front or pay higher out of pocket costs on the back end, it's really us paying, regardless. But it does feel different to go to the doctor and pay a $20 copay than a $100 out of pocket expense, knowing you're nowhere near your deductible. 

I know that a lot of the money in the HSA came from other sources: our employers and the federal government. And it's in there specifically for medical care. Still, even though it came from outside sources and is, in many respects, "found money", it still feels like I'm the one paying when I hand over the card. I still feel the pinch.

When this happens, I'm dealing with mental accounting: when we treat money differently based on where it came from, or the circumstances surrounding the transaction. Mental accounting is why we'll have different spending behavior with cash than we do with a credit card. It's why we'll gamble more freely with 'house money' in Vegas than we will with the money we just withdrew after the second trip to the ATM. Mental accounting is why we're more likely not to touch money that's placed in a separate savings account, than that simply left in checking.

And it's why, maybe, we may not want to spend the money placed in our HSA. If we posit that we're more likely to go to the doctor and opt for optional care when copays are very low, even if we'd technically paid more with premiums, isn't it possible that we'd opt out of optional care if it meant spending money out of our own pockets or the HSA?

It's hard to say.

I try not dismiss behavioral economics and predictably irrational decisions as something that only impacts other people. It's not like writing a little blog post about mental accounting means it won't happen to me: being aware of cognitive biases does not actually make them less likely to impact my behavior.

I want to believe that we'll take Baby AF, and ourselves, to get care any time we need it. We certainly have enough saved up in our HSAs over the years to cover our out of pocket maximums many times over. And if the money we've saved up over the years isn't there to cover medical emergencies, then what is it there for?

But we're human. We're predictably irrational humans, making sub-optimal decisions all the time, proving over and over that we are not so smart. We're bound to make some bad decisions when it comes to care.

My hope is that the love we have for each other will at least have us err in the right direction.

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*Photo is from Speaker Nancy Pelosi on Flickr Creative Commons.