Use these six tips to decide whether a high-deductible health plan is good for you. These plans have an accompanying Health Savings Account (HSA) that you can use to save for medical expenses that you will have to pay before the plan begins to pay its share.
High-deductible health plans are worthy of consideration by the healthy with few projected medical expenses, folks with substantial cash flow who are looking to shelter more income from taxes in a HSA, and those who can’t afford the high premiums associated with coverage that pays right away (“first-dollar coverage”) but who need protection against big medical bills.
It is even more important for you to understand your health insurance options now that you are becoming increasingly responsible to watch and control your own health care costs.
I urge you to check your health care plan choices even if a high deductible plan is not right for you.
Background of High Deductible Health Plans
High deductible health plans make you pay for your medical expenses unitl you’ve met the deductible. A deductible is a fixed dollar amount specified by the plan that you must pay out-of-pocket once you start using health care services. Once you reach the deductible, the plan covers eligible health care expenses. In most cases, you must meet the deductible each year.
For example, if you buy a plan with a $3,000 deductible, you will pay for the first $3,000 of your medical expenses yourself. After that point, your plan will start paying some share of the expenses you incur. If you fill a prescription, you might pay a flat $15 (a “copay’) and the plan will pay the rest of the prescription’s cost. If you need surgery and you spend the night in the hospital, you may pay 20 percent of the hospital bill (“co-insurance”) and the plan will pay the other 80 percent.
All high-deductible plans, as with all other health plans, have a hard cap on the amount of money you spend out-of-pocket. For calendar year 2016, the out-of-pocket maximums are:
- $6,550 for self-only coverage, and
- $13,100 for family coverage.
The out-of-pocket maximum is the most you will pay out of your pocket for health care that you use during the year, not including premiums. The out-of-pocket cap includes the deductible and the copays and coinsurance you will continue to pay after you hit the deductible. If you hit your out-of-pocket maximum for the year, your insurance will pick up 100 percent of costs through the end of the year. The out-of-pocket maximum caps your spending for the year once you start using health care services.
To help set aside money to pay expenses up to the deductible amount (and the out-of-pocket maximum), you can contribute to a Health Savings Account (HSA). Contributions to HSAs are pretax, so they lower your income tax liability. You can carry your HSA balance from year to year and you can invest the money for tax-free growth.
HSAs must accompany plans that have at least $1,300 deductible for individual coverage and a $2,600 deductible for family coverage.
The maximum contribution for 2016 is $3,350 for individuals and $6,750 for family coverage. If you are over 55, you may add an extra $1,000/year to your account (like a catch-up contribution to an IRA or 401k plan).
Is a High Deductible Health Plan Good for You?
Ask yourself these questions to see if a high-deductible plan with a HSA is good for you.
1. How much do you have in your emergency fund?
This money would be used to meet the deductible and/or out-of-pocket maximum. It is best to have at least the annual deductible amount in your emergency fund, and even better to have the out-of-pocket maximum in cash that you can lay your hands on quickly to meet these expenses if they arise.
If you have a robust emergency fund now, contribute the annual maximum ($3,350/individual) to your HSA in 2016 and let it grow tax free. You will receive an income tax deduction for this contribution.
2. Will you contribute the premiums savings to your HSA?
One way to build up your savings is to save the premium differences between a high-deductible health plan and one with a higher premium but that doesn’t have a deductible. Contributing the premium savings to your HSA can help build your emergency fund tax free. In addition, some employers will contribute money to jump start your HSA.
You may not be able save enough in your HSA in one year to meet your deductible. But it may make some sense to use a high-deductible plan with an HSA anyway if you are healthy and have low expenses. You will be able to build your emergency fund in the HSA over a couple of years.
3. Do you have ongoing medical expenses?
It may be better to use a low- or no-deductible plan if you have a costly medical condition that requires frequent doctor or therapist visits, or that entails several costly medicines. The lower premiums associated with a high deductible plan may not be worth it. You would get a better deal with a plan that provides first-dollar coverage rather than one in which you are on the hook for your medical expenses right away.
4. Do you know what expenses count toward your deductible?
Make sure you know what counts and doesn’t count toward your deductible. Some plans have multiple deductibles – one for prescription drugs and one for professional services. And if you have a plan with a limited network of providers, check for an “in-network” and “out-of-network” deductible.
Using a high deductible health plan increases your responsibility for knowing the ins and outs of your plan. There have been recent reports of consumers using an in-network hospital but some of the service providers (radiologists, anesthesiologists) are not in-network and they end up paying out-of-network charge for those services.
One way to avoid any unexpected charges is to know ahead of time which emergency room or urgent care center is in your plan and to see if your coverage includes ambulance transportation. The reality, however, is that plans are not 100 percent transparent as to what they cover.
You may not want a high-deductible plan, especially one with a limited network, if you don’t want to bother with this potential hassle once you use health care services.
5. Can you switch back next year?
In most cases, choosing a high deductible health plan is not irrevocable. You can always switch to a traditional low deductible plan next year (assuming you have the choice of a plan with first-dollar coverage.
Also, you won’t lose any of the money saved in your HSA if you switch back to low-deductible plan in a later year.
6. How will you invest your HSA?
Generally I suggest that you don’t invest your HSA money in the market until you have the out-of-pocket limit maximum amount in the HSA or in your emergency fund. You don’t want to risk market losses if you need the money to deal with a health emergency. Keep your HSA in cash (or on a prepaid debit card) until you have that amount.
But because HSAs provide another tax-preferred savings vehicle for those with high incomes, you may want to pay medical expenses with your regular savings rather than using your HSA. You can then invest your HSA dollars aggressively for future growth and use them at a later date when your health care costs increase.
In sum, if you are young and/or healthy then it may make sense to use a high deductible plan. If you don’t have the amount of the deductible already in savings, you risk a year or two of paying for medical expenses that a low-deductible plan would have paid. This risk, however, may be very small if you are healthy and rarely see a physician.
If you choose a high deductible plan this year, there is nothing stopping you from switching back next year. The choice is not irrevocable (as long as you have choice). And if you contributed to a HSA, you can keep that money and use it to pay future copays.