Don't Have an HSA or HRA? Here's How to Pay for Extra Healthcare Costs

Spending money on medical bills is not fun, but for many Americans, it's a fact of life. As of 2021, according to the Peterson-KFF Health System Tracker, the average American spent $1,315 per year in per capita out-of-pocket healthcare costs. That means an average family of four could have annual healthcare costs of $5,260 that aren't covered by health insurance.

Let's look at a few good ways to pay for out-of-pocket healthcare costs in 2024.

What are out-of-pocket healthcare costs?

If you have excellent health insurance through your employer, you might be protected from out-of-pocket healthcare costs. But for Americans like me who are self-employed or own a small business, we have to pay for a lot more of our own healthcare. Other people might have out-of-pocket healthcare costs even if they have decent insurance from their job or have Medicare (which doesn't cover everything).

Out-of-pocket healthcare costs can include:

• Co-pays for doctor's visits or prescriptions
• Your health insurance plan's annual deductible
• Costs for types of treatment that might not be covered by your insurance, such as orthodontics, therapy, or massage therapy
• Costs for out-of-network care (depending on your health insurance plan's network of providers)

Why an HSA or HRA is the best way to pay for out-of-pocket healthcare costs

Some health insurance plans will let you use tax-advantaged accounts like a health savings account (HSA) or health reimbursement account (HRA) to pay for out-of-pocket healthcare costs. There are a few key differences between HRAs and HSAs, though.

Health reimbursement accounts

Your employer owns the HRA and puts money into the account for you. You don't get a tax break from the HRA money, but your employer does. Your employer also has a lot of control over the rules for how you can spend the HRA money.

Think of an HRA as another form of tax-free income that doesn't show up on your tax return, just like the money your employer spends on your health insurance premiums. If you're lucky, your HRA might cover all of your out-of-pocket healthcare costs. But an HRA is not truly "yours" -- the account belongs to your employer, and you can't take it with you if you change jobs.

Health savings accounts

HSAs are a powerful, versatile tax-advantaged way to save for healthcare or even invest for your future retirement. Opening an HSA lets you put money aside for healthcare costs while reducing your taxable income. For 2024, you can get a tax deduction for HSA contributions of up to $4,150 for single coverage, or $8,300 for family coverage.

But not every health insurance plan qualifies for an HSA. You need to have a high-deductible health plan (HDHP) where the deductible is within a certain range:

• Single coverage: Deductible must be $1,600 to $8,050
• Family coverage: Deductible must be $3,200 to $16,100

If your health insurance plan's deductible is too low -- or too high -- you do not qualify for an HSA.

What happens when you don't qualify for an HSA

I found this out the hard way: In 2023, my family had an HSA, but in 2024, our health insurance changed -- and our 2024 deductible is now too high to qualify for an HSA. This is not ideal from a tax-planning standpoint. But fortunately, we have a decent emergency savings fund, we're generally in good health, and we still have some good options to pay for our out-of-pocket healthcare costs.

For people (like me!) who don't qualify for an HSA in 2024, here are a few ideas to pay for out-of-pocket healthcare costs.

1. High-yield savings account or money market account

Save for healthcare expenses by putting extra cash into a dedicated account. The best high-yield savings accounts are paying over 5% APY as of Jan. 25, 2024. Or you can use a money market account if you want a debit card and check-writing ability to make it easier to pay medical bills directly from your savings.

You won't get a tax break like you do with those sweet HSA tax deductions, but sometimes getting a dedicated savings account can help clarify your savings goals. And you might as well earn some yield on your savings while you're waiting for your next medical bill.

2. Travel rewards credit card or airline credit card

If you expect to have a few thousand dollars of healthcare expenses in 2024, this could be a good time to sign up for a rewards credit card. The best airline credit cards have generous welcome offers, with up to 60,000 bonus frequent flyer miles or reward points.

For example, if you know that your child needs braces in 2024, open a new travel rewards credit card. Spend $3,000 or $4,000 in the first few months to meet the introductory requirements to earn the full amount of bonus miles. Then you can make monthly orthodontist payments with the card and earn more points or miles. You won't get a tax break, but you can get free flights or other travel rewards.

3. Low- or no-interest payment plan

Many medical clinics, hospitals, and dental practices offer flexible payment plans. If you rack up some costly healthcare bills, you don't have to panic. Ask for a payment plan and see if you can pay it off over time with $100 a month -- or less.

Bottom line

Out-of-pocket healthcare costs don't have to wreck your personal finances. Even if you don't have an HSA, consider getting strategic with credit cards to pay your bills and elevate your travel experiences.