Why Would You Ever Want a High-Deductible Health Plan?
Let me tell you a secret others don’t know. A high deductible health insurance plan (HDHP) might just save you a boatload of cash AND leave you a tidy nest egg for your retirement without you even having to think about it.
“What?” you say? “Those plans make me pay thousands of dollars before they even kick in.”
Uh, well... if that’s the case, you’re doing it wrong.
You see, with a high deductible plan, you are given the option of setting up a Health Savings Account (HSA), and that is where the magic happens. Let me tell you how.
A few years ago, when my husband and I first had the opportunity to choose an HDHP, we sat down and did some math. We had three choices:
A managed care program that cost a lot of money, limited the medical professionals we could go to, and kept our per visit cost down by forcing the in-network professionals to accept a minimal amount for their services.
A preferred provider plan that would allow us to keep our current medical professionals (very important when you have a child with special needs and very specific doctors who can help him), but would cover the out-of-network providers at a lower rate.
A high-deductible plan (HDHP) that would not put all the restrictions on who the members of my family saw, but I’d have to pay a lot of money “out of pocket” before the insurance even kicked in to pay for my medical expenses. Or is it really out of pocket?
At first, we didn’t consider the high deductible plan (I mean, it looked like we wouldn’t be covered for a good long while)… until we saw the price. Hmmmm, maybe this plan could work for us. Should we take the chance? To answer this question, we did some math. But first, we noticed the key ingredient of the high deductible insurance plan that changed everything--the Health Savings Account (also known as the HSA). Before I say more, I want to stress that an HSA is not the same thing as an FSA (Flexible Savings Account). It’s much much better!
With a Health Savings Account, you can put part of your income into a special bank account. In many cases, your employer might even match a portion of what you put in. All of these monies are saved for medical expenses, AND--now watch this--it is not taxed. Why is this important? Because the money you spend on copays and percentages throughout the year with the other plans comes from money the government already took a piece of. The HSA protects that money from this type of cost.
“Yeah, but can’t I write off medical expenses on my taxes?” you ask.
Yes, you can, to some degree, after you’ve met a bunch of criteria the government thinks is important before you’re allowed to get a portion (and only a portion) of that money back. AND why the heck would you prefer to do all that work to retrieve only the taxed portion when you could be using all of it before the government has a chance to see it?
And that is not even the best part!
Unlike the Flexible Savings Account (which is a misnomer if you ask me, cuz it’s not flexible at all), you are not forced to use this money before it’s taken away at the appointed time. In fact, the HSA encourages you to SAVE IT, leaving you with added cash available in the event of a medical emergency. Even years later! In fact, years later, the HSA becomes like an IRA. The money you put in there, pre-tax, grows and grows until you use it. Which means if you don’t use it, it just keeps growing. Later I’ll tell you why this particular characteristic not only helps you pay for medical bills, but can also help reduce the COST of healthcare in general. For everyone! I bet you can’t wait for that information. Until then, the following is how it will help you more.
Okay, so now I bet you’re asking the next logical question …
“How is this going to save me money if now I need to ALSO pay into a Health Savings Account?”
This is where the math comes in. Remember, when you were a kid and wondered why you needed to learn all that stuff about numbers? Numbers are important! And I’m not just saying this cuz my daughter is an aspiring math teacher.
When my husband and I looked at the choices we had, we saw that the plan we tended to like--the middle one that let us keep our provider at the lower coverage, but also allowed us to use a “preferred” provider at a lower cost--we saw that we would have to pay quite a bit more than we would for the high deductible plan. The question was, would the typical medical expenses we incurred make that plan worth it? To find this out, we would have to gather up receipts and figure out the difference in our usual costs between the two plans …
Wait! No. We didn’t actually have to do all that.
Instead, we asked ourselves what would happen if we used the money we saved from choosing a high-deductible plan (pre-tax, remember), and put it into an HSA. No receipts necessary. We considered how much his employer would match to add to this HSA. We discovered that the money put into the HSA would cover all of the expenses we could incur until the deductible was met--100%. That means, instead of paying a copay with this plan, I would be billed the full amount (which would be counted into my deductible expenses) and then I would pay the bill with my HSA credit card using money I put in there (instead of giving it to an insurance company), pre-tax, and NOT using money from my regular bank account. Neither the government nor the insurance company would see any of it--ever. Therefore, the money I put in upfront for my health care (remember, it was no more in total than what I would have put in with the supposedly higher-coverage care) was used to pay 100% of the cost of my medical expenses. I was not expected to use my “regular” bank account for any deductibles or copays or fees. It all came from my pre-taxed, pre-paid HSA. Then, once our family used up our deductible, the insurance would kick in and we would be expected to pay copays, percentages and/or other typical fees (like the other plans). If we had additional money in our HSA, we would pay for those with that account. If we didn’t, we would pay copays and patient responsibilities how everyone else does--out-of-pocket …. Only ….
We never got that far!
“What?” you say.
That’s right, we never got that far. Now, before I go any further, understand that even if we did surpass our deductible, we would have then been regularly covered by the insurance plan because that’s what happens when the deductible is met. And if there was money in the HSA at that point (which, actually, there would have been), we’d still be able to use it to pay our responsibility after the insurance pays. However, since we didn’t use all of our HSA, we got to keep the money that was left.
Let me say that again …
We got to keep the money that was left in our HSA.
And …
It accumulates year after year after year after year.
Did I mention it was tax free? That means the growth comes not just from the money earned, but from the money that the government would have otherwise taken out. It’s like earning interest on the money you paid the IRS … and keeping it!
So, if you have a rough year down the road, you have a medical savings account that has accumulated money that was put there BEFORE the government got its greedy little hands on it (they call that taxes) over the years waiting for you to use it when you need it. This does NOT happen when you give your money to an insurance company or a Flexible Spending Account. If you don’t use that money, it’s gone!
Gone!
Zero, zip, nada, the big Oh!
Vapor.
So you ask, “What if the first year I start the HSA is the rough year and I don’t have enough money accumulated in the account to pay the bills? What if every year is a rough year?”
Fair question. Here’s the answer …
As per my above description, if the money you save annually from signing up for a high-deductible plan (plus any employer matching funds) is the same as the high-deductible …. AND you put all of that money you save into the HSA (remember it’’s worth more than money in the bank cuz it’s pre-tax), you will still save more than had you gone with the PPO that required you to pay copays from the very beginning. You see, everything can be paid for by the HSA. So even though the bill may be large, the payment is coming from money that would have otherwise been given to the insurance company.
The difference? YOU have a choice where that money is spent! Not to mention more choices in medical professionals.
“What if the difference between the PPO and the High-Deductible plan (put into the HSA) does not cover my deductible?”
Okay, now you may have to do a little more math. This is when you may want to gather receipts, pour through your credit card statements and check out your insurance EOBs (explanation of benefits) to see what your typical year looks like with regard to medical expenses.
What do you expect to pay for medical expenses this coming year? How much of that could be paid for by the smaller amount you CAN put into the HSA? What is left after you subtract that HSA money from the total? How does that compare to the copays you’re paying now when you add them up? Even if it is dead even, you may still consider the HDHP in the event you can streamline and save some on any given year, because the money you save one year can be used in another. You will have the flexibility to do that.
Next question (if you’re still not convinced), “What about catastrophic coverage? A car accident? A terrible diagnosis?”
Remember, the “problem” people have with these high deductible plans is that they don’t want to pay the beginning expenses. That’s what the above discussion is all about--the beginning. Once you’ve gotten past the deductible (which you would with some chronic care issues and catastrophic events) the plan is often comparable to regular plans. Of course, you should read the plan in detail to be certain. Additionally, by the time you’ve reached the deductible, you’re closer to reaching the out-of-pocket maximums where the insurance covers ALL costs, anyway. Once you get there, both plans are the same.
When I did the math for our family, I discovered that no matter what our medical costs would be, up to the max, the HDHP saved us money EVERY time. I didn’t need to look at my current expenses to figure that out. I just considered how my insurance and HSA together would pay for annual costs of $1000, $5000 and $11,000/12,000, using both in-network and out-of-network providers.
I’ll spare you the math in this particular blog post. However, be on the lookout. I hope to show you my stunning results in blogs to come.
So how can this plan drive down the cost of healthcare in general? That is a larger issue which will take a blog post of its own to explain well. I plan to do so soon. However, the nutshell version is this: When people know what they are spending their money on, they are more careful how they spend it and who they spend it on. When they see the money coming out of their HSA, they will act to make it come out more slowly, unlike what happens when they let the HMO take care of it. Thus, medical products and personnel will need to compete for your business (cuz that’s exactly what it is) by being not only good, but cost-effective. They will charge less. AND they will be less likely to suggest things you don’t need that provide additional income to their office knowing the expenses are covered by your insurance and you won’t care to limit them. Right now, I bet most of those who have managed-care insurance don’t even know what the total expense to their insurance company has been over the years. That’s a recipe for price gouging in any business. I don’t mean to suggest that all medical professionals are only out for the money. Only that greedy people exist in every profession. And, it only takes a few to drive up the cost of insurance for everyone.
So make your math teacher proud and use some skills!
More on this to come …
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One Comparison: PPO vs. High-Deductible Healhcare Plan
Two articles that will tell you more about high-deductible plans and the long-term benefit of Health Savings Accounts
HDHP vs PPO: Which Is Right for You?
How to Make the Most of Your HSA Investment
