Investing within a Health Savings Account

I’m excited that my company is finally offering a Health Savings Account, or HSA.  This is what the Medical Savings Account and Flexible Savings Account should have been, and what all health plans will probably become in the future after companies discover that other methods cost too much and enough employees start to wonder where all of that money they are putting into health insurance goes.  Here’s how an HSA works:1.  An employee opens up an HSA account.  This is his or her account, meaning it is not connected with the employer and is not lost if the employee leaves or the company goes bankrupt.

2.  The employer can choose to put money into the HSA.  The employee can also put money into the account, like an IRA.

3.  The employee can withdraw money from the account as needed for medical expenses.  Because the company is not involved in deciding what is or is not a medical expense, they no longer need to have your health information.

4.  Large expenses (long hospital stays, organ transplants, etc…) are covered by a major medical insurance plan either the employer offers or the employee buys.  These types of plans cover expenses after a large deductible – say $5000 or $10,000.  Because this is true insurance – most people won’t use it during any given time – instead of prepayment of medical services as is a PPO plan — this will cost a lot less.  Think of how reasonable car insurance is compared to health insurance.  The reason is that most people plan to make use of their health insurance each year and don’t care about the cost of the services provided, but only use their car insurance if there is a serious accident.

The reason I believe that HSA will work a lot better is that people will be saving up their own money for their own medical bills.  Unlike existing PPO plans, there is no “use-it-or-lose-it” feeling.  The money stays with you and builds up over time.  You can even invest it in mutual funds. 

This means that you are building up money while you are young that you can use when you are older and have more medical expenses.  Because it is your money, you should also have more choice on how you receive care.  For example, hiring a home nursing aid rather than going to a nursing home when you need a bit of help around the house.

As said, you can also invest inside the HSA once the balance builds up large enough (over $1000 in my case).  The question then arise, how to invest in such a case.

In an HSA, a good portion of the money must be available to pay for medical expenses during the year.  I therefore will allow funds to build up until I have about a typical 1-year’s worth of medical expenses in a money market before I start to invest at all.

There may also be some years that are worse than others and we’ll need to draw more.  For example, if someone breaks a leg or there is an appendicitis or something.  I therefore want to reduce the risk that the account will drop in value a lot right when I need the money.  Once I get to the point of investing,  will therefore buy a mix of bonds and other fixed income securities that will provide a steady stream of income and reduce volatility.  I will also buy some larger, well established companies that pay dividends (for example, an S&P500 fund).

Hopefully my family will remain fairly healthy and therefore the balance will continue to build up.  This means that eventually there will be so much money in the HSA that I can start to buy some stocks that provide more appreciation to make the balance grow faster while still having enough funds to take care of any expenses that come up.  For example, if I have $30,000 in the account, I will be able to take care of a couple of major medical occurrences (remember that the major medical insurance will cover the majority of these bills).  I therefore might spread some of the funds into a small cap fund or an international fund.

As always with mutual funds, expenses are the key.  I therefore will try to find funds in each category with a low turnover rate and low expenses.

Please send investment questions to or leave them in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

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