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Rosely HSA decision: relevant costs sunk incremental costs

A BusinessWeek article titled, "HSAs Could Keep You in the Pink," by Christopher Farrell describes the use of health savings accounts (HSA). HSAs were authorized by Congress. The HSA plan has two parts. First, individuals buy a health insurance policy with a high-deductible. Second, participants open an HSA, a tax-sheltered account, funded with pre-tax contributions. The account's earnings are not taxed-nor are the withdrawals when they are used to pay for qualified medical expenses. However, the HSA is not the best decision for everyone. The decision process for Brad Rosley was described in the BusinessWeek article as follows:

Brad Rosley, who has a wife and three children ......made the switch. His previous insurance policy to cover his family cost him $660 a month, or nearly $8000 a year, with a deductible of $1000.

Rosley replaced that plan with an HSA. He went for a policy with a $5,100 deductible and put that much into the tax-sheltered account for his family. His premium for the policy is $260 permonth, or $3,120 annually. He uses the $400 a month he's saving over the previous policy to fund his HSA. Rosley figures he could well end up with a six-figure account, since any money left in the HSA can be rolled over from year to year. That money can pay for everything from long-term care insurance to a new hip during his golden years.

a. Describe any opportunity, sunk, out-of-pocket, and/or relevant costs that figured in Rosley's decision. How did Rosley calculate the $400 per month savings?

b. Opponents of HSAs say that these are designed for the healthiest and wealthiest consumers. First only wealthy people will have the cash to fund the HSA. Also, these plans are inhospitable for anyone with preexisting conditions such as cancer or diabetes. Thus, the traditional plans will be stuck with a sicker pool of people to insure and this will cause them to be more expensive. Write a short paragrah about the ethics of the HSA legislation

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Solution Preview

1. See analysis of both options with the labels next to the amounts to find the opportunity, out-of-pocket, and/or relevant costs. There are no sunk costs (until the decision is made and then the premiums are sunk costs).

2. HSA gives flexibility to the individual to keep the unused health costs if they do not incur them. With the low deductible, the premiums are lowered by $4,800 but the deductible is ...

Solution Summary

See analysis of both options with the labels next to the amounts to find the opportunity, out-of-pocket, and/or relevant costs. Your discussion about the ethics is 256 words.