We’re in the midst of open enrollment, which means that it’s time to reconsider our health insurance options for next year.
I’ve mentioned in that past that we have a high-deductible health plan (HDHP), though I’ve never really discussed why we went with this option in the first place.
We’re actually heading into our 5th year with our HDHP and we have yet to regret making the switch from a traditional health insurance plan. I’m thus starting to think that we made the right decision.
So… Today I wanted to share with you the thought process that we went through before making the leap. I’m hoping it will be helpful to those of you facing a similar decision, either now or at some point in the future.
Not surprisingly, a high-deductible health plan comes with a much higher deductible than a traditional PPO, HMO, or similar plan. How high?
Well, as of this writing (in both 2013 & 2014), the IRS requires “high-deductible” plans to have a minimum deductible of $1,250/year for an individual or $2,500/year for a family. These values are indexed to inflation.
In the case of our HDHP, the deductible is $1,500/year for individual coverage or $3,000/year for a family. For the equivalent non-HDHP plan, the deductibles are $300/year or $900/year, respectively.
So yeah, we’re taking on a fairly sizable (potential) obligation by using the HDHP.
The silver lining is that the premiums associated with your HDHP should be lower than with a traditional health insurance plan. In some cases, the premiums could be much lower, effectively offsetting the difference in deductible.
In our case, the premiums for family coverage are ca. $390/month less than the for the non-HDHP version of the same plan. That works out to nearly $4,700/year in savings, which is way more than enough to offset the higher deductible.
Setting aside the higher deductible, it’s also important to compare the coverage offered by the plans that you’re choosing between. Once the deductible has been met, how do the coinsurance and/or copays compare? What about in-network vs. out-of-network coverage? What about the out-of-pocket limits?
In our case, the HDHP compares quite favorably, though it won’t be quite as good in 2014 as it used to be. The silver lining is that the premiums won’t be going up, so we’re effectively trading slightly reduced benefits for cost savings.
In the past we were responsible for 10% of the negotiated rate with in-network providers, but that’s increasing to 15% this year. In contrast, the traditional plan has a $20 copay for office visits and we’re responsible for 10% of the negotiated rate for other covered expenses.
So yes, we now come out marginally behind (paying 15% vs. 10%) for things like lab tests, etc. but we’re still ahead of the game on office visits, where our 15% will typically work out to $10-$15 vs. the $20 copay with the other plan.
Both plans provide reduced benefits for out-of-network providers, though the HDHP is actually a bit better, paying out at 70% of the negotiated rate vs. 60% for the traditional plan. We’re responsible for any excess costs.
One big bummer for next year is that in-network and out-of-network providers will now be subject to separate deductibles. In the past they shared a deductible. However, that’s true of both plans, so there’s not much we can do about it.
As for out-of-pocket limits, the HDHP caps things at $3k/individual or $6k/family vs. $1k/$2k for the traditional plan. So here again, we’re taking on a larger (potential) obligation — but only in a worst-case scenario.
Oh, and pharmacy coverage. I almost forgot that. With the HDHP, our prescriptions expenses go toward the deductible and we pay 15% of the allowable cost beyond that. With the traditional plan there is a $10 (generic) or $35 (brand name) co-pay.
Beyond the above, the available plans offer similar levels of coverage, as well as access to the same provider network. Note that there’s also an HMO, but that’s not a workable option due to the small number of local providers that participate.
Access to an HSA
Last but not least, having an HDHP gives you access to an HSA, which provides tax savings on medical expenses. It works a bit like a healthcare FSA, in that you fund it with pre-tax dollars and can use it to reimburse your ongoing medical expenses.
Importantly, the annual contribution limits for an HSA are considerably higher than for an FSA, and you can also carry over your HSA balance indefinitely. With an FSA you have to spend out the balance each year though, thanks to recent rule changes, you may be able to carry a small amount forward.
Thus, when combined with the ability to invest your HSA funds, the HSA becomes a powerful investment vehicle. Better still, my employer matches our first $750 in HSA contributions each year. Free money is always welcome.
Related: Read my comparison of HSA Bank vs. HSA Administrators.
One minor caveat: funding a general-purpose (healthcare) FSA makes you ineligible for an HSA. That being said, assuming that your employer offers a limited-purpose FSA, you can still use that to stash away up to $2,500/year for dental and vision expenses.
The final decision
Four years ago, after sorting through our options and running the numbers, we crossed our fingers and went with the HDHP. And, as noted above, we haven’t regretted this decision once.
The only real downside is that we have fairly significant out-of-pocket expenses early in the year until we meet our deductible. But we come out way ahead in the long run — plus we now have a sizable (and growing) chunk of money in our HSA.
If you have access to an HDHP, I encourage you to run the numbers and see if it makes sense in your situation. You might be surprised by the result.