What Is the Difference Between Medical Insurance & a Medical Savings Account?

Medical insurance and medical savings accounts can both take some of the sting out of health care costs. The fundamental difference between them lies in where they get their money. A medical insurance company pays your medical bills from a pool of premiums paid by a large group of policyholders. A medical savings account pays bills with money you've contributed yourself.

Medical Insurance

If you're covered by a medical insurance policy, an insurance company pays some or all of your bills when you receive medical care. People get coverage through plans offered by their employers, through government programs such as Medicare, or through individual policies purchased directly from insurers. Under a typical policy, you pay regular premiums to the insurer to maintain your coverage. When you need medical care, you file a claim with the insurer, which then either pays your health care provider directly or reimburses you for money you've spent. Depending on your policy, you might have to pay a certain amount out of your own pocket each time you receive care; your share is called a co-pay. And you might have to pay up to a certain amount of your medical bills before your policy begins paying your claims for the rest of the year; this is called a deductible.

Pooled Risk

Medical insurance, like all insurance, is based on the idea of "pooled risk." If you got really sick, the premiums you're paying probably wouldn't be nearly enough to cover the costs of your medical care. But there are a lot of people paying premiums into the system -- including people who aren't sick. Their premiums will help cover your costs, just as the premiums you pay when you're healthy help pay for treatment for those who need it.

Medical Savings Account

A medical savings account is a special account in which you can save up your own money for health care expenses. Typically, the money isn't subject to income taxes when you deposit in the account or when you take it out, as long as you use it to pay health care expenses. People can set up medical savings accounts themselves. Some employers also offer them, and some even match employees' contributions up to a certain point.

Health Savings Accounts

In the United States, a medical savings account is more commonly referred to as a "health savings account" or HSA, because that's what the tax code calls them. Under U.S. law, you can open an HSA only if you participate in a medical insurance plan that requires you to pay a significant amount out of pocket. As of 2013, for example, a single person could open an HSA if her insurance deductible was at least $1,250; for families, the amount was $2,500. This is because HSAs are intended to supplement medical insurance, not to substitute for it.

HSA vs. FSA

Health savings accounts shouldn't be confused with "flexible spending accounts." So-called flex accounts are similar to HSAs in that the money you contribute is tax-free as long as you use it to pay health care bills. But money in a flex account can be spent on copays and deductibles, in addition to things insurance might not cover, such as eyeglasses or cosmetic surgery. However, the balance of an HSA carries over from one year to the next. Money in a flex account must be spent by the end of the year, or you lose the unused balance.

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