Last week reader David posted a question on Get Rich Slowly’s Facebook page, asking what our thoughts are on high-deductible health insurance plans. We turned to Barbara Marquand, staff writer at Insure.com, to answer his question. Here’s her answer:
High-deductible health plans (HDHPs) have become more prevalent in the last few years, but whether one is right for you depends on your health care needs and financial situation.
The reason we’re seeing so many of these plans boils down to one thing: cost. Generally the higher the deductible, the lower the health insurance premium. As health care costs climb, employers seek ways to save money on benefits, so a growing number are turning to high-deductible plans.
This year 38 percent of people with work-based health insurance are covered by a plan with a deductible of $1,000 or more, compared with 18 percent five years ago, according a 2013 Kaiser Family Foundation study. High-deductible plans are especially popular with smaller employers. Among people with employer-sponsored coverage at companies with fewer than 200 workers, 58 percent are covered by high-deductible plans.
Besides their low premiums, HDHPs are touted for encouraging consumers to shop carefully. Proponents say you’re more likely to compare costs and avoid needless medical services if you pay a sizable part of the tab. Employers like the idea of insured workers having some skin in the game.
The plans also can be paired with tax-advantaged health savings accounts, or HSAs, which let you save money for out-of-pocket medical expenses. The accounts offer three tax benefits:
- They let you set aside pre-tax dollars for health care.
- The savings earn interest tax free.
- And as long as you spend the money on medical expenses, you pay no taxes on the withdrawals.
Both you and the employer can contribute to an HSA, and, unlike a flexible spending account, the savings roll over from one year to the next. You get to keep the account, even if you change employers or health plans. You can even use the money for general expenses in retirement. After age 65, you pay regular income taxes and no extra penalty on withdrawals for non-medical expenses.
To qualify for an accompanying HSA in 2014, a plan must have a minimum deductible of $1,250 for an individual and $2,500 for a family. The most you and your employer can contribute to an HSA in 2014 is $3,300 for an individual and $6,550 for a family.
What’s best for you?
Think about your health care needs for the following year and then crunch some numbers to determine whether a high-deductible plan is a good choice.
Consider the annual premium, or the portion of the premium you pay for an employer-sponsored plan, as well as the out-of-pocket costs you’re likely to face. If you’re healthy and usually see the doctor only once a year, you probably won’t use enough health care to reach the deductible. Remember, too, that unless the plan is grandfathered (established before the Affordable Care Act was passed), it must cover preventive care for free, which means you pay no deductible, co-payment or co-insurance for those services.
Run a worst-case scenario, too. How much would you pay for the premium and in out-of-pocket expenses if you wound up in the hospital for a week? Check the plan’s cap on total out-of-pocket expenses. Under federal rules, a health insurance plan can’t make you pay more than $6,350 as an individual or $12,500 as a family for the deductible, co-payments and coinsurance. Could you afford to pay more than $6,000 for health care in one year, not counting the premium?
Finally, on the plus side, consider the tax benefits of contributing to an HSA and factor in any contributions your employer promises to make.
Generally, a high-deductible health plan may be a good choice if you’re healthy, don’t plan to use much health care, want to build tax-advantaged savings and can afford the deductible in case you get sick.
A high-deductible plan is a poor option if you have a chronic illness, can’t afford the deductible, and the high out-of-pocket costs prompt you to delay needed care.
Do any of you have a high-deductible health plan? How’s that working for you?