Is a High-Deductible Health Plan Right for You?

by Michael on Nov 18, 2013 · 12 comments

Image of Health Insurance

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.

Higher deductible

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.

Lower premiums

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.

Coverage comparison

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.

1 Money Beagle November 18, 2013 at 12:02 pm

2013 was the first year I chose to take on HDHP/HSA for our coverage. Our payroll deductions went down around $2,500 and so far our out of pockets has been around $400, so unless something bad happens in the next six weeks, it’ll end up being a win for us.

Next year, our employer is changing and coverage changes, and unfortunately they don’t offer an HDHP, so I won’t be able to take advantage. The good news is that regular coverage has roughly the same payroll deductions, so it should end up being better coverage overall.

2 cowboy Mike November 18, 2013 at 1:13 pm

Very good article. I was wondering if you know what exactly qualifies as an HSA-compatible HDHP? We have one now with BCBSFL and we contribute to 2 individual HSAs.

However, the one time I was able to login to marketplace there were many plans that met the IRS’s criteria for a HDHP but were not listed in the market place as HSA-compatible HDHPs.

So it seems like maybe there is something that must be done from the insurance carriers side?

My point is we were interested in a couple of plans that met the IRS’s criteria and I was wondering if we enrolled in a HDHP that was not listed as HSA compatible and contributed to our HSA if we could get in trouble or end up sideways with the IRS somehow?

Happy trails, Mike

3 Michael November 18, 2013 at 1:48 pm

Mike: Good question. According to IRS Publication 969, there are two requirements. The first is a minimum deductible, as outlined above. The second is a cap on the annual out-of-pocket expenses.

For 2013, the maximum allowable out-of-pocket expenses (includes deductible but excludes premiums) for a plan to qualify were $6,250 for individuals and $12,500 for families.

So maybe the plans you looked at had high enough deductibles but allowed too much in the way of out-of-pocket expenses?

4 cowboy Mike November 18, 2013 at 4:12 pm

Hi Michael,
The plans qualify on the out-of-pocket expenses as well.
Happy trails, Mike

5 Michael November 18, 2013 at 4:46 pm

Hmmm… Not sure then. Maybe review Publication 969 for other explanations. Or perhaps these plans qualify and the website just doesn’t say that they do… Not sure. Good luck.

6 krantcents November 18, 2013 at 8:29 pm

I am fortunate to have medical coverage for the entire family for free. It sounds like a super benefit, but I have not had a raise since 2008 and for the last 4 years, I sustained furlough days.

7 Gary Heldren November 22, 2013 at 4:48 pm

Dear krancents, medical coverage for your entire family at no cost to you is beyond “super”. That little benny is probably worth $1000 a month minimum and growing 8-10% each year. Given the depressed rate of inflation since 2008 and the shaky job market, you are blessed to be employed and have such a benefit. Regarding furlough days, the time freed up for you could be utilized to develop self-employment income, donate your time to charity, or help a disabled neighbor. Be grateful my friend. (My insurance plan was just cancelled by Obamacare.)

8 SuburbanFinance November 20, 2013 at 8:23 pm

Luckily, I am in Canada and dont have to worry about needing this type of plan, because also my work benefits cover anything that isn’t free through our government. I think it would depend on the health and age of the individual looking into it.

9 dagnabit November 24, 2013 at 1:52 pm

Re: your comment that “my work benefits cover anything that isn’t free through our government”: Goverments, even in Canada, cannot provide a single thing to its citizens without some portion of its citizens providing that government with the funds to do so, namely by paying mandatory taxes. The notion that governments provide “free” stuff to any of its citizens is patently false. It’s not free; it’s just being paid by someone other than yourself. The government then decides how and to whom to dole it out, retaining a sizeable cut of course to cover its “overhead costs”. An example helps illustrate: You earn $1,000 in wages, your government takes $400 of this in the form of various taxes (leaving you with $600). Out of the $400 in taxes collected out of your wages,your government then provides you with benefits having a fair market value of $300. Is the $300 worth of benefits you receive from your government “free”? The correct answer is “NO”.

10 Steve November 22, 2013 at 4:40 pm

“funding an HSA makes you ineligible for a healthcare FSA”
Actually, it’s the other way around. Funding a (non-limited-purpose) healthcare FSA makes you ineligible to fund an HSA. The reason is that the FSA is counted as a kind of “insurance” since you could use it to pay the first dollar of non-preventative healthcare expenses. It’s the same as if you were covered under both an HDHP and your spouses’ non-HDHP health insurance. It’s not just being covered by an HDHP that makes you eligible to fund an HSA; but also NOT being covered by any other non-HDHP health insurance.

11 Michael November 22, 2013 at 5:04 pm

Good catch, thanks. I wrote it the right away a couple of days ago when discussing limited-purpose FSAs and then got it backwards in this article. Oh well, fixed it. Thanks. 🙂

12 Stephen November 24, 2013 at 10:27 am

Michael — I’m a big proponent of HSAs but am still confused about the eligibility of HDHPs with respect to prescription drug coverage. Why is drug coverage involved at all in determining eligibility of plans? Would you please do an article on just this aspect of the requirements? Thanks for your clearly-written and up-to-date website.

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