Lions, Tigers and HDHPs, Oh My!
During your annual enrollment period, you typically choose from several health plans. Many people shy away from the High Deductible Health Plan (HDHP) due to its intimidating “high deductible”, but it may be the most cost-effective option for you.
Understanding Risk in Insurance
Insurance is fundamentally about managing risk. When we can't shoulder that risk ourselves, we pay someone else to handle it. By taking on some of that risk, particularly through a higher deductible, you can significantly reduce your premium costs. This concept is easier to grasp with auto or home insurance, but it applies to health insurance too. A higher deductible often leads to lower premiums.
Many employers offer HDHPs because they usually costless. Since employers typically cover a significant portion of the premium, opting for a higher deductible can lead to lower premiums, allowing them to contribute more toward your coverage and possibly to a Health Savings Account(HSA).
If you understand how HDHPs work and are prepared to manage a higher deductible, they can offer substantial savings and other benefits.
The Healthy, Wealthy, and Wise
Some view HDHPs as ideal for the “Healthy, Wealthy, and Wise” for these reasons:
1. Healthy: Those who are healthy use fewer healthcare services and can save money by choosing a plan with a lower premium.
2. Wealthy: Individuals with financial flexibility can cover pre-deductible costs and benefit from tax advantages through HSAs.
3. Wise: Savvy consumers recognize that lower premiums, combined with employer HSA contributions, can help cover healthcare expenses before reaching the deductible. Even high utilizers of healthcare can benefit from 100% coverage after meeting the Out-of-Pocket Maximum, which may not be available in traditional plans.
Comparing Plans
Many employers provide tools to help you select the Plan that is best for you. One of the best I have seen is “ALEX the Benefits Advisor” resource from Jelly Vision, but there are other tools that work in a similar way.
When evaluating if a HDHP is right for you, consider the following:
1. Pay-Period Contributions: Assess the premium differences between the HDHP and other options.
2. Deductibles and Out-of-Pocket Maximums: Compare these figures across the plans you’re considering.
3. HSA Opportunities: Check if your employer contributes to an HSA, and how those contributions are made.
4. Healthcare Utilization: Estimate your expected healthcare usage and associated costs.
Cost Differences
Employers have varying approaches to subsidizing medical benefits, but HDHPs generally cost less per pay period. If you choose the HDHP, consider contributing the premium savings to your HSA.
Deductibles and Out-of-Pocket Maximums
With an HDHP, you pay 100% of non-preventive healthcare costs until you meet the deductible. After that, you're responsible for a coinsurance amount (usually around 20%) until you hit the Out-of-Pocket Maximum, after which the plan covers 100% of your costs.
In traditional plans, you might face a lower deductible but encounter copays that don’t count toward your deductible or Out-of-Pocket Maximum, potentially leading to continued out-of-pocket expenses.
HSA Contributions
If you enroll in an HDHP, plan to contribute your premium savings to your HSA. This approach helps maintain equivalent total deductions while allowing you to lower your taxable income through HSA contributions.
Many employers also provide HSA contributions, which could be matching (requiring your to contribute) or as a lump sum (in the form of an initial or periodic installments). Remember, you can only use funds from your HSA once they have been contributed.
Typical Healthcare Costs
Understanding your usual healthcare expenses can help you determine when you’ll pay 100%, when coinsurance applies, and when full coverage kicks in. Ideally, you’ll use HSA contributions to cover costs in the pre-deductible and coinsurance phases.
Summary
As you consider the HDHP option, ask yourself: “If I face unexpectedly high healthcare costs this year, do I have savings to cover those expenses until I reach the deductible?”
If the answer is “No,” you may want to choose a traditional plan, recognizing you’ll pay a higher premium for that security.
However, if you’re a strong candidate for a HDHP but are uneasy about the higher risk, keep these points in mind:
1. The first year maybe challenging, but if you and your employer’s HSA contributions exceed your out-of-pocket costs, those savings carry over to the next year. Over time, you can build a sufficient balance for unexpected situations.
2. If you find the idea of increased out-of-pocket costs emotionally taxing, it’s perfectly fine to opt for a more expensive health plan. Paying more for peace of mind can be worth it.
If you are interested in learning more about health plans work, you can review some prior posts on the topic:
· What Makes Up Your Medical Insurance Costs (a three-part series)
· What’s the Deal with Preventive Care?
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers.
Benefit Boosts by Brian Mitchell© – Vol 2024-018
You may also like these articles:
