Is a High Deductible Health Plan Right for You?

Health Savings Account, HSA, FSA, Flexible Savings Account, HDHP, High Deductible Health PlansIt’s open enrollment season!  Benefits enrollment periods typically run from late October to Mid-November for employees at many companies.  Your company may have many benefits to choose from, but the one I get the most questions about is High Deductible Health Plans, or HDHPs.

What is a High Deductible Health Plan (HDHP)?

A high deductible health plan is a health insurance plan with lower premiums and a higher deductible than traditional plans.

The IRS sets the minimum deductibles for plans to be considered HDHPs. For 2013, the annual deductible for an HSA-qualified HDHP must be at least $1,250 for individual coverage and $2,500 for family coverage (up from $1,200 and $2,400 respectively, in 2012).

An HSA is a tax-advantaged account that’s paired with a high-deductible health plan (HDHP).  For 2013, you can contribute up to $3,250 to an HSA for individual coverage (up $150 from 2012) and $6,450 for family coverage (a $200 increase from 2012). This annual limit applies to all contributions, whether they’re made by you, your employer, or your family members.

Once you’ve satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan’s annual out-of-pocket limit). In 2013, a qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,250 for individual coverage ($6,050 in 2012) and $12,500 for family coverage ($12,100 for 2012). Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

High deductible health plans often cover 100% of preventative care such as annual physicals, children’s immunizations and screenings such as mammograms or prostate tests. The deductible applies to things like emergency room visits, prescriptions, and other physician visits.

Why Does My Company Offer an HDHP?

These plans are generally less expensive for companies to administer.  If a company must cut costs to stay in business, an HDHP may be the only option available to employees.

There may be other cost benefits as well.  Since HDHP enrollees must pay more initial costs out of pocket, they should be more likely to seek lower cost or in-network providers, or eliminate unnecessary treatments.  More cost-conscious consumers may encourage more competition among health care providers over time.

Why Might I Switch to a HDHP?

Your premiums may be significantly lower (or even zero at some companies) with this type of plan.

In addition, your company may offer financial incentives such as cash deposits to your Health Savings Account (HSA) throughout the course of the year.

Deposits to an HSA are made with pre-tax dollars.  Withdrawals for medical expenses are paid with pre-tax money.  The higher your tax bracket, the more valuable this is.

Money in your HSA may be invested or used in retirement.  It is not “use it or lose it” like a Flexible Savings Account (FSA).

If you stay healthy over the course of the year, you could have little or no out-of-pocket expenses, which could save you money. If you have a real catastrophe or serious illness, your costs are limited to your out of pocket maximum.

The savings are less certain when you fall somewhere in the middle.  If you have a few doctor visits and regular prescriptions, you could still come out ahead, but you might not.  Future medical expenses are more difficult to estimate for a family than for a single person.  This makes the decision to switch more difficult. 

My Story

Last year my family switched to a HDHP for 2012.  I must say that it made me more conscious of our spending on health this year, which is probably a good thing.  Keep in mind this decision may not be right for you.  Each family’s situation is different and you should consult the appropriate professional prior to making any decisions.

Here is the process I used to make the decision:

  1. I downloaded health care claims data from our insurance company website for previous years (2010 and 2011).  My new spreadsheet included columns for date of service, provider, claim amount and patient responsibility under the previous plan.
  2. I added columns to calculate what the insurance company would have paid and what we would have paid out of pocket with an HDHP.  I kept a running total so I could see when (or if) we would have met the deductible.
  3. I compared actual out-of pocket costs with the old plan to what out of pocket costs would be under the HDHP.  Estimated out of pocket was more with the HDHP for both years.
  4. I compared our premium savings to the difference in out of pocket costs.  Switching reduced our premiums by $1900 per year, and the employer contributed $500 to our HSA.  Our out of pocket costs were more under the HDHP, but still less than $2400, so we would have come out ahead.
  5. Finally, I “grossed up” the contributions to our HSA to take the tax benefit into account.  There is a benefit to paying out of pocket costs with pre-tax rather than post-tax funds.  That increased the savings even more, so we decided to do it.

It didn’t work out exactly as I estimated, but I plan to stick with the plan for next year and hopefully build up the balance in our HSA.  But I’ll be comparing how we “would have” done under a different plan in 2012 over the next few weeks.

Is a High Deductible Health Plan right for you?

Please note, changes in tax laws may occur at any time and could have substantial impact upon each person’s situation.  You should discuss tax or legal matters with the appropriate professional.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Sara Stanich and not necessarily those of RJFS or Raymond James.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Investing involves risk and investors may incur a profit or a loss.

photo credit: Alex E. Proimos via photopin cc

About Sara Stanich

Sara Stanich, CFP®, CDFA™, works with people who are building their lives – growing a business, raising a family, moving toward personal achievements – to help them build solid financial plans for the future. Have a financial question? CLICK HERE TO ASK SARA!

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