When Open Enrollment comes around, a lot of people simply choose the health insurance option that has the lowest deductible rather than completing an in-depth analysis of the benefits of each of the available plans. Although they’re becoming more popular, many people shy away from High Deductible Health Plans (HDHPs) due to the seemingly large cash outlay required. Even the name sounds scary.
However, HDHPs can often actually be cheaper options over the course of a year and can be great selections for many when combined with a Health Savings Account (HSA). Keep in mind that not all HDHPs are HSA-eligible. Check with your benefits provider to find out if yours is.
High Deductible Health Plan (HDHP)
The minimum annual deductible for self-only HDHP coverage in 2018 is $1,350 while the minimum annual deductible for family HDHP coverage is $2,700. However, most employer-provided health plans will require higher deductibles than these amounts. The 2018 out-of-pocket (OOP) maximum for self-only HDHP coverage in 2018 is $6,650 while the OOP maximum for family HDHP coverage is $13,300. Medical plans can have lower OOPs than this, but they cannot be higher.
Looking at these numbers is the main reason most people shy away from these plans.
But why do you care if you’re healthy and only visit the doctor a couple of times per year for minor things? The premiums of a HDHP will be lower than a PPO or HMO. If you only go to the doctor a couple of times per year, then you’ll only have to pay the premiums and medical bills that you incur, which will be at a lower cost as negotiated by your insurer. However, if you do have a catastrophic health event that results in large medical bills, then the HDHP could be more expensive.
Health Savings Account (HSA)
My colleague, Aaron Williams, wrote a great blog post about the power of HSAs titled, Announcing The King Of All Savings Accounts: The HSA. HSAs are the most tax-advantaged account available today and many HDHPs allow you to open an HSA to help save for medical expenses.
Money that you put into an HSA goes in pre-tax, including pre-FICA taxes (Social Security & Medicare taxes) if you make contributions through payroll, can be invested within the account and grow tax-free, and can be withdrawn tax-free for qualified medical expenses. Money that you put into your retirement account doesn’t even go in pre-FICA and I can’t think of another account that you can essentially use as a tax-free savings vehicle.
Not only do HSAs have tremendous tax benefits, but you could also strategize and pay all of your medical expenses out of pocket, save all of your receipts, invest your HSA account and allow it to grow tax-free, and reimburse yourself at some point in the future for those receipts that you’ve been saving. There currently aren’t any laws that prohibit this. However, this strategy requires deeper explanation for another post.
Another advantage is that many employers contribute to employee HSAs just like they would contribute to your retirement account. You can take that money as a contribution to your savings or you can use it to pay for any medical bills. Regardless, any employer contribution should be factored into the cost comparison of health insurance options.
I recommend reading Aaron’s article for more benefits to using an HSA.
Analyze The Costs
Oftentimes, choosing the high deductible health plan option over the other options offered, including PPOs and HMOs, is cheaper when comparing all costs for those who are relatively healthy and won’t incur many healthcare expenses. However, most people simply don’t take the time to do the analysis. Yes, the deductible on a High Deductible Health plan will be higher than the other plans, but that can be made up for with lower monthly premiums, tax advantages, and, potentially, employer contributions to your HSA.
Open enrollment for many employers is around the corner and while I can’t say that choosing a HDHP with an HSA is the best choice for everyone, it’s probably worth looking into if you don’t typically incur many healthcare expenses.
