How a High Deductible Health Plan Affects Your Finances
Posted by January 19, 2016in Insuranceon
This piece is part of a series exploring different types of health insurance plans, the merits of high and low premiums and deductibles, and other important factors to take into consideration when choosing the best plan for yourself or your family. Check out the insurance section of our blog for additional articles on topics like Short Term Medical insurance, employer sponsored coverage, and open enrollment and the ACA.
Your health insurance plan is a major factor in your finance. If you've arrived here, you likely have questions about how you can save money on health insurance and medical expenses. No two situations are alike, so read on to determine whether a high deductible health plan is a good match for your needs.
Lower Monthly Premiums
The biggest benefit of a high deductible health plan, sometimes called an HDHP, is a lower monthly cost. All health insurance plans charge a monthly premium, which is like a membership fee to the insurance plan. Some plans offer very low deductibles, but come with a higher monthly cost. An HDHP typically has the lowest monthly cost of any health insurance plan in the United States.
The savings can be dramatic. For a single 30-year-old who does not smoke in Portland, Oregon, a plan with a $500 deductible and $1,000 out-of-pocket maximum has a premium of $306 per month (Health Republic · CoreCare Platinum Plan). Switch to a high deductible and an out-of-pocket maximum of $5,250, and the monthly cost is about half at $155 per month (LifeWise Health Plan of Oregon · LifeWise Exclusive Provider Bronze 5250 HSA).
Over a year, the difference is $1,812. For a healthy person who does not require regular care, that savings may be cash in your pocket at the end of the year.
The downside of high deductible plans is the high deductible. A deductible is the amount you must pay out of pocket before your insurance plan begins to cover the cost of healthcare each year. The IRS defines a High Deductible Health Plan as a plan with an annual deductible of at least $1,300 for an individual or $2,600 for a family. This amount can change annually.
The nature of a high deductible health plan means you will pay 100% of your healthcare expenses until you exceed your deductible amount in any one calendar year. If you anticipate expenses higher than amount you save with the lower premium of a HDHP, you may be better off with a lower deductible plan.
No one knows with certainty what their medical expenses will be, but you can look at prior years to get an idea of what you typically spend. If you are very healthy and rarely go to the doctor, a high deductible plan is more likely to make sense. If you have ongoing health issues and make regular trips to the doctor, or anticipate any hospital visits in the next year, a high deductible plan is typically not the best option.
In dollar terms, if you can save $1,812 in premiums by choosing a high deductible health plan, but your anticipated medical expenses are $2,000, you would be better off choosing a plan with a lower deductible. If your expenses will be lower than the $1,812 in the example above, you are better off with a high deductible plan.
Higher Out-of-Pocket Max
Once you reach your deductible, your health insurance plan will generally pay a portion of medical costs, but not everything. This is called coinsurance.
For example, high deductible health plans commonly pay 80% of all costs after you reach the deductible. If you have a $100 health bill at this stage, the health plan would pay $80 while you would pay $20.
This coinsurance split continues until the total amount you pay before and after meeting your deductible reaches your plan's out-of-pocket maximum. Once you reach your out-of-pocket maximum, your health plan will cover 100% of eligible medical expenses for the remainder of the calendar year. Monthly premiums do not count toward the out-of-pocket maximum.
Each insurance plan has a designated out-of-pocket maximum. Most HDHPs have a higher out-of-pocket maximum than plans with higher premium payments. Combined with higher deductible levels, this means you would pay much more out of pocket each year with a high deductible health plan. So again, an HDHP is best suited for individuals and families who expect relatively low healthcare expenses.
Health Savings Account
The government understands that paying healthcare expenses with a high deductible and high out-of-pocket maximum can be a strain on many families. Accordingly, the IRS offers a special type of investment account, called a health savings account, for anyone with a qualifying HDHP. To qualify in 2015, the minimum deductible is $1,300 for individuals and $2,600for families.
You can contribute to a health savings account (HSA) from your paycheck automatically each pay period. You may also make deposits from an existing checking or savings account.
Once your funds are in the account, they earn interest similar to a savings account. Some HSA providers also allow you to invest in stocks, bonds, and mutual funds similar to a brokerage account. You can build up a big balance in this type of account, and unlike a Flexible Spending Account, your funds do not expire at the end of the calendar year.
The money in an HSA can be used to pay for qualified medical expenses as defined by the IRS. Common qualified expenses include:
- doctor visits
- doctor ordered tests and labs
- hospital visits
- prescribed medications
Over-the-counter medications, vitamins and supplements, and household items like Band-Aids and ice packs are not eligible for HSA payments or reimbursements.
Potentially Lower Tax Bill
A health savings account offers similar tax benefits to a 401(k) or IRA. Any contributions to an HSA are tax deductible up to the annual limit. The 2015 limits are $3,350 for individuals and $6,650 for families. People 55 and older may deposit an additional $1,000 above these limits.
This deduction means you do not pay income taxes on money deposited into or withdrawn from an HSA as long as you use those funds for qualified medical expenses. If a family deposits their full $6,650 contribution limit and has a 25% marginal tax rate, the family would save $1,662.50 on their taxes.
When determining whether a high deductible health plan is right for you, consider whether you would use an HSA and how much in tax savings you could experience based on your contribution level. Consult a tax professional for advice on your specific situation.
Each Person's Needs are Different
Your healthcare costs are unique to you and your family, so picking the right plan is a personal decision. Look at your prior year healthcare costs and determine if you can expect changes for the upcoming year.
If you anticipate high annual healthcare costs on a continual basis, a plan with a higher monthly premium and lower deductible may make the most sense. However, if you anticipate low costs and can take advantage of the tax savings of an HSA, a high deductible health plan may be your best option.