High deductibles are, at first glance, a bad thing. Nobody wants to have to pay a ton of money on top their premiums before insurance starts to have a benefit. But as premiums skyrocket, high deductible health plans (HDHP) are becoming the most appealing and wisest option for the savvy healthcare consumer. Let’s explore why.
What is an HDHP?
As a refresher, remember that a deductible is the amount you must pay before insurance begins contributing to your medical bills. The deductible is separate from the monthly premiums.
For individuals, a health plan can qualify as “high deductible” if the deductible is at least $1,350, and the max out-of-pocket cost (the most you’d pay in a year for medical expenses, with insurance covering everything else) is at least $6,750. For families, the deductible has to be at least $2,700, with a $13,500 max out-of-pocket.
Many high deductible plans actually have a much higher deductible ($5,000-$7,000). Sounds terrible, right?
Consider this: according to research from the Kaiser Family Foundation, “annual premiums for employer-sponsored family health coverage reached $19,616 this year (2018), up 5% from last year, with workers on average paying $5,547 toward the cost of their coverage.”
That’s almost $20,000 per year, per every employee with a family! Granted, the employees don’t have to pay all of that, but wouldn’t it be great if some of that insurance money actually stayed in the company, or went to the employees?
Consider a specific case. Say you pay $800/month in premiums for you and your family, with a $1,000 deductible. That’s $9,600 per year, plus an additional $1,000 if you actually need medical care. So you’d need to have medical bills in excess of $10,000 for your health insurance to actually provide benefit. In one year.
The truly heart-wrenching part of the plan above is that about $10,000 a year disappears into thin air. It’s gone. Many are turning to Health Savings Accounts (HSA) as a way to lower those evaporating premium dollars and still protect themselves.
It works like this: you get a health insurance plan with a high deductible, which means lower monthly premiums. Then you open up an HSA, which is essentially a tax-advantaged savings account for medical purposes. The money you save on premiums can be put into the HSA, and you can contribute more on top of that (the max annual contribution for individuals is $3,500, for families: $7,000).
So let’s say you save $200/month with a high deductible plan, and that money goes into your HSA. At the end of one year, you now have $2,400 in your HSA. This money is yours, and rolls over from year to year. Now, you’re still covered for catastrophic accident or illness, but you pay less in premiums, and you have funds that you control to be used for any needed medical expense. In just a few years, you have a substantial cache of money for health expenses.
HDHPs combined with HSAs allow consumers to be responsible for their healthcare, to take ownership over it, and to save money.