Switching to a High Deductible Plan can save you big dollars in monthly premiums, but is the higher potential out of pocket cost worth the savings?
For many of my clients, November is open enrollment month and they’re seeing big changes with their healthcare options. Chances are you’ve heard about a health insurance option called a High Deductible Health Insurance plan(HDHP). Many employers have chosen to offer this as an option for their employees as the health insurance landscape has changed drastically in the wake of the affordable care act.
My wife and I had our first child this year, so as we looked at the increase in cost of using the HMO that we had previously selected, we investigated this option for ourselves.
Comparing the Options
Below are actual numbers that apply to us as a family of 3 through our plan for 2016.
As you can see, the HMO costs us over $400/month or about $315/month more than if we chose the High Deductible Plan. However, when you choose the HDHP, there are obvious tradeoffs in terms of the deductible and the out of pocket maximum. While our premium is much lower, we would be responsible for the first $3,000 of any medical expense before our plan kicks in. In our case, after meeting the deductible, we are then responsible for 20% of medical expenses incurred (as long as they are in our network of providers). The most that we would be responsible for in a given year is $5,500.
Enter Health Savings Account
When you choose to use a High Deductible Health Plan, you are then eligible to participate in a Health Savings Account. You contribute to this account before tax, meaning it reduces your income for tax calculation. As long as you then use this money to pay for ‘qualified’ medical expenses, you aren’t taxed on it as it comes out of the account. Most health savings account providers offer you a card that acts like a debit card – you build a balance in the account and when billed for medical expenses you provide the card information and pay out of your Health Savings Account.
The key when considering a Health Savings Account is the fact that it can be rolled forward, year to year. It is essentially like having an account that can be invested and grow for eventual medical expenses, much like an IRA or 401k does for retirement.
Because High Deductible Plans are much cheaper for your employer, they often offer an incentive for you to participate in this type of plan. In our case, my wife’s employer contributes $800 every January to our Health Savings Account if we choose the HDHP. In essence, this reduces our deductible from $3,000 to $2,200.
As a starting point for my comparison, I plan to save the difference in our monthly premiums to the Health Savings Account each month ($404.63-$90.68=$313.95).
Insurance Premiums are Gone Forever
If you’re having health premiums deducted from each paycheck, you can never get this money back. The insurance company is collecting this money each month in exchange for an agreement to pay some portion of your medical expenses should you need care. When you pay your premiums and don’t need care if you’re healthy, your premiums can never be recovered.
The Health Savings Account, by contrast, is yours to keep if you don’t end up spending it on healthcare. I’ve seen clients that have diligently contributed to Health Savings Accounts for years hit retirement with 6 figure balances in these accounts that will be there in their older years when health costs typically spike.
Looking at Real Medical Expenses Under Each Plan
For us, 2015 was an expensive year when it came to health costs. I had an outpatient procedure, my wife was seeing doctors regularly for prenatal care and our daughter was born in July.
I pulled our claims history for the year. Here’s a summary of total costs under the HMO we had been using:
Here’s a comparison of our costs on the HMO vs. what we would have paid if we had used the High Deductible Health Plan:
In our case, the High Deductible Plan would have actually cost less this year than the traditional plan even in a high expense year. The premium savings and the employer incentive make this reality.
Switching to the High Deductible Plan
After reviewing these numbers, I’ve decided to switch plans moving forward. Yes, it would have saved us a little this year, but for me, this is not the biggest factor. Instead, I’m interested in switching because if we are diligent about setting aside the premium savings each month, I hope to build up a balance in our health savings over the next few decades as another tax free pool of assets.
If I had saved the difference this year (~$315/month) we would have wiped out our entire Health Savings balance with the costs we incurred. However, this was an extraordinary year for us. My hope is that in future years, we don’t have such high costs and that we begin to build a balance in the Health Savings account without incurring extra costs.
My goal is to build up the balance in the Health Savings account to meet an entire year’s out of pocket maximum. At that point, we can decide whether to continue building the account or to then just pay the small premium and have extra monthly cash flow.
Depending on the specifics in your plan, a high deductible plan combined with a health savings account may or may not be the best option. You won’t know until you run the numbers and decide whether the higher out of pocket risk of the HDHP is worth taking in your situation.