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HSA vs. HMO: What’s the Difference?


A health savings account (HSA) and a health maintenance organization (HMO) are both intended to help people cover the costs of medical care. However, they take very different approaches. HSAs are tax-advantaged savings accounts that allow people to pay for healthcare using pre-tax dollars. HMOs are health insurance plans that limit policyholders to using healthcare providers that are part of a network. HSAs and HMOs can work together. HSAs are features of many health insurance plans, including some HMOs.

Consider working with a financial advisor as you sort through your options to afford the healthcare you need.

HSA Basics

Essentially, an HSA is a form of self-insurance. That means it is more attractive for people who don’t use health insurance very often. It’s also widely used by self-employed people who don’t have the option of getting health insurance through an employer-sponsored plan.

You can only have an HSA if you have health insurance. And only high-deductible health plans (HDHPs) can offer their policyholders HSAs as options. The size of the deductible required to qualify as an HDHP — is set at a minimum of $1,400 for an individual and $2,800 for a family for 2021. In practice, HDHP deductibles often are much higher. There is a ceiling on how high the deductibles can be. That limit is the same as the maximum out-of-pocket cost, which for 2021 is $7,000 for individuals and $14,000 for families.

One major benefit of a HDHP is that the premiums are lower than for plans with lower deductibles. However, the ability to have an HSA is another important feature of HDHPs. That’s because HSAs have unique tax advantages. Individuals can put money into HSAs pre-tax, which means contributions are deducted from current taxable income. Plus, earnings contributions generate from interest or investments also are not taxed. Finally, the funds in an HSA can be withdrawn tax-free as long as the money is being spent on qualifying healthcare costs. Eligible costs include deductibles, copayments and coinsurance, although HSA funds can’t go to pay health insurance premiums. The triple tax-free feature of HSAs makes them attractive for people saving money.

The IRS limits the amount that can be deposited in an HSA. For 2021, the amount an individual can put in an HSA is capped at $3,600. Families can contribute $3,650. The caps go up in 2022 to $3,650 for individual and $7,300 for families.

HDHPs arrange with banks to let their participants open HSAs. Participation ordinarily is optional for HDHP participants. However, some participants put the maximum amount in every year, because the triple tax-free features of the HSAs make it such a powerful saving vehicle.

HMO Basics

Stethoscope and piggybankHMOs encourage patients to get their care from healthcare professionals and organizations that are members of the HMO network. Patients who go out of the network may not have as much of their healthcare bill covered by insurance. Unlike preferred provider organization plans, HMOs also generally require members to get referrals from primary care physicians before seeing specialist care providers, such as neurologists or oncologists. Again, these specializes need to be part of the HMO network or the patient may have to cover a larger portion of the bill.

HMOs are popular choices for healthcare coverage because their premiums tend to be lower than other types of plans. Also, out of pocket costs for members may be lower as long as patients stick to providers that are in the HMO network. HMOs may have low or no deductibles for in-network care.

One downside of HMOs is that not all physicians or organizations will belong to a given HMO network. For patients who need to see specialists outside the network, the out-of-pocket cost of receiving care can be high. Also, HMO participants are often charged a copay or coinsurance charge when they see a doctor or get a lab test.

HMOs and HSAs Together

An HMO plan can offer an HSA to its members as long as the HMO meets the definition of a HDHP. Since HMOs tend to have low premiums, and having a high-deductible also generally means lower premiums, HMOs that are HDHPs can be cost-effective options for many people seeking health coverage.

Adding an HSA can help further to reduce out-of-pocket health costs. And because funds that are put into an HSA and aren’t spent on qualifying care can stay in the HSA until withdrawn, racking up earnings all the while, the combination of HMO and HSA can provide a useful tool for long-term retirement planning.

Bottom Line

Elderly woman calculates her healthcare costsHSAs and HMOs take very different approaches to funding healthcare costs. HSAs are tax-advantaged savings accounts available to people who have a high-deductible health plans. HMOs are health coverage plans that offer low premiums in exchange for limiting members to receiving care from members of the HMO network. An HMO can offer its members an HSA, as long as the HMO meets the high-deductible requirement.

Tips on Healthcare Funding

  • There are many ways to approach funding healthcare costs. An experienced and qualified financial advisor can help choose the most cost-effective and flexible approach for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
  • As you shop around for affordable healthcare, it is important to maintain a healthy budget. A comprehensive budget calculator can help you understand which options are good candidates for you.

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