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?