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Deciding If You Should Have a High Deductible Health Plan

Written by Nickel - 13 Comments

As a followup to Wednesday’s article on whether or not you should use your employer’s HSA custodian, I wanted to talk a bit about deciding whether or not to switch to a high deductible health plan (HDHP). For me, the decision was based entirely on a quick cost/benefit calculation.

Consider the premiums

The most obvious benefit of a high deductible health plan is the typically (and often significantly) lower premium. In our case, we save approximately $400/month in insurance premiums by opting for the HDHP over our regular PPO.

Looking at this over the course of a year, we’d save around $4800 in premiums by sticking with the HDHP. Yes, $4800. Crazy, huh? We’re insuring an entire family, but still… That’s a lot of money.

Consider the deductible

Of course, that savings comes at a cost… True to its name, an HDHP comes with a high deductible. For use, that means a $3000 family deductible vs. a $0 deductible if we stuck with the PPO.

Consider the co-pays

While our PPO option wouldn’t have a deductible, it would have a standard schedule of co-pays. The rates are $20 per office visit, $15 or $30 per prescription, and so on.

With the HDHP, on the other hand, we’ll pay 100% of the Usual and Customary Rate (UCR) until we meet our deductible, and then we’ll pay just 10% of the UCR thereafter. In most cases, this 10% works out to less than the standard PPO co-pay.

Consider the annual maximum

Another possible difference between HDHP and “regular” health insurance plans is the out-of-pocket maximum. Be sure to check your plan literature and find out the largest amount that you could conceivably wind up spending on medical expenses.

In general terms, HDHP have higher maximums than traditional plans. In our case, the annual maximum is $6000 for the HDHP, and $3000 for the PPO. In other words, with the HDHP, we could conceivably wind up paying $3000 on top of the $3000 deductible – but only if we had another $30k in medical expenses (recall the 10% co-pay).

Consider the coverage

In many cases, HDHPs offer somewhat limited coverage as compared to traditional health insurance plans, so be sure to look carefully at the coverage. In our case, that’s a non-issue, as the HDHP offers essentially the same coverage as the PPO.

Of course, I’m talking here about the types of treatments that are covered. I’ve already mentioned the differences in the deductible, co-pay, and annual out-of-pocket maximum.

Consider the other perks

One of the biggest perks of an HDHP is that you’ll gain access to a health savings account (HSA). This account can be used to get a tax break on your medical expenses, or… You can follow our lead and use it as a very tax-friendly investment account.

If you stick with a PPO or HMO, you’ll be stuck using a Flexible Spending Account (FSA), complete with it’s annual use-it-or-lose-it provision and generally lower contribution limits as compared to an HSA.

Another perk that many employers are offering their employees is seed money in their HSA to jump on the HDHP bandwagon. Since HDHP are cheaper for both employee and employer, it makes good sense for employers to incentivize the switch. While this may be a one-time thing, it’s still free money that shouldn’t be ignored.

Adding it all together

Since both the HDHP and PPO plans provide us with more or less equivalent medical coverage, our decision really comes down to the financial aspects.

With either plan, our best case scenario is that we never visit the doctor. That’ll never happen, but it’s theoretically possible. In that case, we’d come out $4800 ahead with the HDHP.

The worst case scenario is that we have health problems to the point that we hit the annual maximum. That max is $3k with the PPO and $6k with the HDHP. Thus, we’re risking an extra $3k in medical expenses with the HDHP, though that risk is against a backdrop of $4800 in savings.

While this is all a bit of an oversimplification, all signs point toward the HDHP being the best choice for us yet again this year. There were no ugly gotchas during the past year, and the premium savings are more than enough to offset the increased deductible as well as the higher out-of-pocket maximum.

What about you?

Are you considering an HDHP? If so, which way are you leaning? And what have been the deciding factors?

Published on October 29th, 2010
Modified on May 16th, 2012 - 13 Comments
Filed under: Insurance, Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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13 Responses to “Deciding If You Should Have a High Deductible Health Plan”

  1. 1
    Andrew Says:

    I love my HDHP, I love the idea as well as it is very consumer oriented. You can shop around of medical services, use any doctor you want, although HDHP providers will have an “network” of doctors that can give you the “in-network” discount, but it’s not a requirement to use them.

    Although it seems counter-intuitivie, I think that when people are exposed to the true-cost of medical services, they become better informed, and can make better decisions about their health care. when you know how much a test or procedure costs you’re going to want to know more about it, since you’re paying for it. “what does it do? what does it tell me? why does it cost so much? WHY DO I NEED ANOTHER ONE?!”

  2. 2
    BG Says:

    Nickel, count yourself fortunate. You insurance plans rock (though you didn’t give the specific dollar amount for the premiums).

    My plans have much higher deductibles, much higher percentages for copays (20%-PPO or 30%-HDHP), and double the out-of-pocket maximums. Oh, and there are no ’standard rates’ like your $30 prescription.

    I’m probably going to go with the HDHP again (w/ maxed out HSA), since it is still the better option for my plans. If it weren’t for the HSA tax savings, I’d go to the PPO.

  3. 3
    Welmoed Says:

    We love our HDHP. By examining our health care spending and budget, we were able to determine how much we were willing to spend OOP each year, and that let us choose a plan with extremely reasonable premiums. We’ve only gone over our deductible once, and it didn’t result in an increase in rates. In fact, six months later we got a rate reduction! Caveat: we don’t have young kids anymore and are both in good health. It’s comforting to know that no matter what happens, we will NOT spend more than our deductible for health care in a given year.

  4. 4
    Steve Says:

    Often co-pays don’t count against the out of pocket maximum. HDHP’s don’t usually have co-pays. So if you use a really large amount of health care (lots of individual visits, prescriptions, etc), an HDHP can actually save you money.

    In your case, it sounds like an HDHP saves you money every year, whether your health care use is $1, $1 million, or any amount in between.

  5. 5
    Jo/GaelicWench Says:

    The timing on this article couldn’t be more perfect. My employer-sponsored health insurance runs out the end of the year. I may have already mentioned this previously, so apologies in advance.

    Anyways, not having worked enough hours to qualify to re-enroll, I am now looking at buying my own. I’d like to go with an HSA as well, and possibly include my 22yo daughter on the plan.

    I think what makes me hesitate to do so is that I’ve had such a plan before, but come tax time, I find the “wording” rather daunting, as Turbo Tax seems to focus more on employer-sponsored HDHP with HSA, which wouldn’t be the case for me. I know the difference between a contribution and a distribution. In the end, even with my withholdings being S/1 and being in the 10-15% ta bracket, I still paid out the wazzoo in taxes because of my HSA. My medical expenses outweighed my contributions. So this time I will be a bit more careful on my decisions.

    Clear as mud? Anyways, thanks Nickel, on this great article…

  6. 6
    Kirk Kinder Says:

    HDHP is how the entire market needs to move. When consumers have to pay more out of pocket before insurance kicks in, they will be more demanding and cost conscious. This is the only way costs will come under control. The industry will change as more minute clinics, physician assistants and nurses will be used for routine ailments. Tests will be questioned by consumers, which will reduce costs. Competition will emerge in the industry. And, preventative care will become commmonplace so folks can avoid paying the higher deductible.

  7. 7
    Abe Says:

    Nickle,

    Can you discuss more of the benefits of maxing out your HSA account each year? I understand that these funds avoid income tax but how do you gain access to these funds or use them if your medical expenses don’t add up to the large balance you will accumulate in your HSA account?

    I can see a scenario where your HSA balance grows increasing higher if you are relatively healthy and don’t have many medical expenses, yet max out your HSA contribution each year.

    Thanks for your input.

  8. 8
    BG Says:

    #6 Kirk) I disagree. HDHPs is just the better option out of my employers plans on their race to the bottom.

    There is nothing “good” about any of my 2011 plans, as predictably, premiums went up, and coverage went down. The only good-thing about the HDHP is the HSA, and that is the tax-savings — has nothing to do with the insurance company, but all about Congress.

    As for reducing costs – have you ever seen a Doctors office publish the costs for visits or procedures? How are people supposed to ’shop around’ if you don’t know what something is supposed to cost and no doctor publishes that information?

    I guess that is one of the good things about insurance plans: at least you have a ‘negotiated-rate’ for everything — but make sure you don’t go to an ‘out-of-network’ doctor or you are screwed.

    Anyhow, the biggest reason that medical costs are so expensive, is because of Medical Errors. And I’m not talking about lawsuits, etc. I’m talking about one medical error leading to more expensive medical procedures, leading to more errors, etc. Depending on who you believe, the Medical System is either the 1st, 2nd, or 3rd leading cause of death in the USA.

  9. 9
    Olivia Says:

    When the denomination, (my husband is a pastor), dropped the group plan, everyone was left scrambling for individual insurance. Underwriter’s are much pickier with individual applicants. The church budgeted a certain amount to cover premiums, the only option was a very high deductible health plan. There wasn’t enough to do an HSA too. Everything is out of pocket full price, including yearly physicals. I suspect anyone applying for individual insurance is in a similar bind. We found out if you pay cash at time of service, you may be able to negotiate a discount, except on meds.

  10. 10
    Steve Says:

    @Olivia – you can “launder” the money through an HSA. You are paying the expenses anyways – might as well get a tax deduction on them.

  11. 11
    Olivia Says:

    Thanks Steve. Just to clarify. The church wasn’t able to put into the HSA but we did some by diverting his salary inflation adjustment into it. Still expenses far outstripped our HSA savings. We’ll see about this coming year. We can only put in what we have at the time. The upside, paying with a HSA debit card is considered cash, so that came in handy for the discount.

  12. 12
    jim Says:

    I’ve been happy with the HDHP / HSA plan for 2-3 years now. It is the cheapest option available to me at work in most situations. We have an HMO option thats cheaper in some cases but I don’t like the quality of that HMO.

  13. 13
    harry Says:

    Quick question!

    I have an HSA with an HDHP from Aetna. My deductible is $3,500. To meet the deductible, can I include all of my medical expenses: doctor visits, OTC drugs, chiropractic services, optometrist. Or do they only count actual medical services, such as doctor visits, broken arms, etc.

    If the latter is the case, if I go to clinics for all my doctor work and pay cash, since it is much cheaper, do I just save all my receipts and then send them to Aetna? Or do I have to go to only in-network doctors to be counted as hitting my $3500 deductible?

    Does anyone have actual experience with this?

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