A recent article by Chief Mom Officer on High Deductible Health Plans (HDHPs) and Health Savings Accounts (HSAs) spurred a Twitter discussion/debate after her post on the topic. This is a semi-counterpoint to her well-reasoned post on the topic (“semi” because I think we agree on the topic). At the end we’ll discuss why my family has been using my employer-sponsored HDHP for several years, despite having “traditional” plans available.
What is a HDHP?
A HDHP is a health insurance plan with a “high” deductible. High is in quotations because many people forget there are official definitions. The numbers are not always as high as you think. I’ll borrow from Chief Mom Officer here to make sure we have the same general definitions for insurance costs:
“The deductible is how much you need to pay out of your own pocket before the health insurance starts to pay anything. The out of pocket maximum is the total amount you may need to pay every year – after you hit that, you’re in what I call the “double bonus round” where all – 100% – of your health care costs are covered by your insurance company.”
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A couple things not mentioned here:
The premiums are the annual cost you pay for insurance — the amount you spend to have access to insurance, before you’ve ever received spent a dollar on healthcare. This is no different than your car insurance. When presented with multiple insurance plans from a single company, the HDHP should have the lowest premium. Why? Because you’re expected to pay a larger share of the healthcare costs. Just like raising your collision deductible on your car lowers that premium as well. Co-insurance/co-payments represent the cost sharing you do with the insurance company after you’ve met the deductible.
Yes, this is basic, but people occasionally forget to pay attention to their health insurance premiums when evaluating the cost of their health insurance. This is often true for those purchasing through employers.
How high is “high?”
Per the IRS definitions, for 2017, a HDHP for a single person must have a deductible of $1,300 or higher, and a family must be $2,600 or higher. The out of pocket (OOP) expenses can not exceed $6,550 for an individual or $13,100 for a family.
So $13,100 sounds pretty high.
The key is that the max the OOP expenses can be are $13,100 — it can be lower. While a family has to have a deductible of $2,600 or higher, the OOP max could be $6,000 and qualify as a HDHP. You owe a max of $3,400 after you hit your deductible, but you’re cost sharing with the insurance company at that point.
The OOP max and your monthly/yearly premium are the biggest keys to deciding if it’s the right decision for you (along with prescription costs, which we aren’t exploring here today). Along with the Health Savings Accounts (HSAs) we mentioned earlier and will discuss next, a HDHP can be a good financial decision, as I’ll demonstrate in my personal case study.
What’s an HSA?
People sometimes confuse HSAs with Flexible Spending Accounts (FSAs), which have some similar positive attributes but miss major upsides.
Both HSAs and FSAs let you take pre-tax money and stick it into a savings account to pay for qualified healthcare expenses. When you have a healthcare expense (a prescription, a doctor visit, etc.) you can pay with your credit card (or cash or check or whatever), submit the receipt, and get paid back with your pre-tax dollars.
They essentially make the healthcare expenses tax-deductible — that’s great, because most people otherwise don’t meet the requirements to itemize their medical expenses on their tax returns and are paying with post-tax dollars.
HSAs: $3,400 contribution limit if you’re on an individual plan, and $6,700 if you’re on a family plan. If you use the money for a non-qualified expense, you pay a 10% penalty plus income taxes.
FSAs: $2,600 contribution limit, regardless of the type of plan you are on. Penalties on improper use seem harder to decipher, but generally it sounds like your employer may just make you pay income tax.
Employers can (and often do) fund portions of these for participants, though anecdotally HSA contributions seem more common (likely to entice people onto the HDHP, which can have much lower employer costs).
To contribute to an HSA you must be on a HDHP. Once that money is there, it’s yours forever — it doesn’t expire at the end of the year. If you pay out of pocket in January for a doctor’s visit, you can save your receipts, and submit them at any point in the future (5 months, 5 years, 25 years) and be paid back.
Even if you leave the HDHP for a regular plan, you can still access the HSA money to pay for qualified expenses when you’re on a non-HDHP. Even if you don’t save your receipts, your future medical expenses when on a non-HDHP plan can be paid for by HSA money.
HSAs let you invest your ca$h. If you contribute to the HSA and do not use the money to pay back expenses, you can invest that ca$h the way you invest in any other account. Unfortunately investment options may be limited by the brokerage options your HSA bank custodian allows. Sometimes the options are great.
Those investment gains can be sold whenever you want and that cash is then available in the HSA to pay for current/future expenses. So your $6,700 contribution could grow a few hundred dollars (or more) a year and make you money. Over 20 years, with ongoing contributions, it could have more money than a Roth IRA given the higher contribution limits. That’s why some people like to refer to it as a Stealth IRA.
It could also lose money — so keeping a cash buffer or having enough cash on hand to pay some bills can be important.
FSA money expires — in most cases if you do not use it that calendar year you use it. Some plans now offer options to carry $500 forward a year or give an extra couple month grace period the following year, but that’s not a requirement. So if you contribute $2,600 to the FSA and have zero healthcare expenses, you are potentially losing up to $2,600 of your income! That encourages you to go utilize healthcare that you may not need before the money disappears. As we’ll discuss later, HDHP’s sometimes encourage the opposite.
If you are using a HDHP and don’t have cash to pay bills, you definitely need to use the HSA to help pay for your expenses. Paying medical bills on your credit card with a 20% interest rate is far inferior to an HSA.
I don’t have a HDHP — who cares
If you are a physician (or NP or PA or someone who gets to order stuff like tests and medications and hospital stays and procedures/surgeries), you should know about these, just as you need to know how the US healthcare system works in general.
It’s unfortunate that many physicians, including those who’ve completed training, are not familiar with HDHPs.
Many patients use these plans, and they are becoming more common. Medicine is long past the stage where you don’t have to worry about the cost of testing, or where you don’t have to consider downstream implications of ordering unnecessary tests.
Taking care of a patient with a HDHP with no money reserves to pay their deductible or OOP expenses is somewhat similar to caring for patients with no insurance. Every unnecessary test or prescription harms them in the pocketbook — just because registration entered into the electronic medical record (EMR) that the patient has insurance, it doesn’t mean they can afford what you are about to do to them.
When you can put someone into bankruptcy by clicking a few buttons in the EMR, you need to be aware of what you’re doing. That sounds dramatic, but since most people in this country can’t cover an unexpected $1000 expense, even fewer can cover a $6,000 deductible.
HDHP Case Study
We’ve been using my employer-sponsored HDHP for several years. First year it was just me, then I added the kid(s) (switch from my wife’s plan), then I added my wife (abandoned her plan completely). We’ve had 2 more kids over this time, many unforeseen expenses (Rogue One swears he didn’t put the eraser in his ear), and changes in my wife’s work status. For us, the math still favors the HDHP..
My employer puts their faculty benefits online, so none of this is secret information. We’ll keep it straightforward and just compare the 3 plans offered through United Healthcare. We’re only looking at plans, and “in-network” care only. The first 3 rows are the most relevant ones for our discussion. I did not reproduce all the numbers or permutations, as it’s too much. I didn’t go into the details of HMO or POS plans — read about it here.
|Out of Pocket Max||$3,000||$3,000||$5,500|
These premiums may be significantly lower than those of you buying on the open market (it’s one of the few monetary advantages I receive as salaried employee of an academic institution that’s affiliated with a big healthcare system, but the premiums are often even lower at large, wealthy companies).
As you hopefully spot quickly, the POS plan makes no sense. The premiums alone are around $1500 more than the max you could ever pay in the HDHP. The HDHP, including premiums, has a max cost of $6674. I have no idea why anyone uses the POS plan unless you run into a situation where you have to see a doctor who is part of the POS but not the HDHP plan (not common). This isn’t even the worst one — our employer offers another plan that has even HIGER premiums that I did not list.
So the only real comparison here is with the HMO. The premiums are $4000 higher than the HDHP! That means after meeting my $3000 HDHP deductible and after my co-insurance has kicked in, I would have to rack another $5000 in medical expenses (assuming I pay 20%, that’s $1000 out of my pocket) to get to the $5241 I’ve just paid in premiums alone for the HMO.
But wait! My employer puts $800 automatically in my HSA when on the family HDHP. If I am using this money for expenses (and not saving/investing it), effectively making my OOP max $4700.
That means even if I reach the OOP max on my HDHP and use the $800 in the HSA to offset my costs, I’ve STILL only paid $600 more than just the premiums on the HMO plan.
If I max out the HSA and use my own money to pay expenses (which we’ve done off and on some years), I’m getting a tax deduction on those expenses. While the HMO premiums are paid pre-tax, the out of pocket expenses are paid after-tax, unless I’ve set up an FSA. Comparing those numbers is a bit much for this space, but ultimately the numbers come out even or better in favor of the HDHP.
For me, there really is no math where it makes sense to do anything but the HDHP. I still haven’t figured out why my co-workers do not all use it. Worst case scenario, if I anticipate maximal expenses every year, the HDHP probably is even with the HMO when you consider that I can deduct 100% of my medical expenses every year by using the HSA. Since my HSA holds MORE money than my out of pocket max, at worst I can carry forward another several hundred $ to start offsetting next years costs, or invest that money.
We generally pay our bills with our Citi Doublecash card (automatic 2% back on everything), so more money in our pocket as well. A couple times we’ve paid parts of big bills out of the HSA when our cash flow was temporarily lower for other reasons, but in hindsight we should’ve just used a tiny amount of our “emergency” funds and replenished later, so we could leave money to invest/grow in the HSA.
A few years ago we withdrew some HSA money (after saving receipts from earlier expenses paid out of pocket) and used it to help fund one of our Roth IRAs. I later realized we were losing the investing potential of investing in both the HSA and Roth. This requires having the income to max both, which is not possible for many people. For now we’re doing the ideal thing, and maxing out out Roth IRAs and HSAs. We pay medical expenses out of pocket, and only use HSA cash if we really need it.
Investing the HSA money when the market has been booming certainly has helped this decision, though another recession may make me put more back into cash if we want to use it to pay bills in the short-term.
Due to multiple unexpected expenses (Rogue One — eraser in ear, chin laceration; Rogue Two — nursemaid elbow), multiple surgeries (Rogue One — T&A; Rogue Two — ear tubes), and one baby (no comment on whether Rogue Three was expected), we hit the out of pocket max the previous two calendar years.
Based on my math — which admittedly could be faulty, so please correct me — we’ve still done the right thing.
How Has the HDHP Changed My Behavior?
It’s made me a more price conscious consumer. A few years ago when my hospital billed me a $600 facility fee for an outpatient ultrasound (after the insurance discount) that Rogue Two probably didn’t need, I was perturbed. I price shopped around and discovered he could have had the same test 25% cheaper somewhere else (I also emailed the hospital president).
As a pediatric ER doc, I’m qualified to take care of many minor kid illnesses (read about being Dr. Dad) on my own, but even without that, we wouldn’t rush to the doctor every time Rogue Two gets an asthma attack. We follow his asthma action plan — it works (most of the time). It’s a pain to drop everything and run to the doctor. Why do it for something we can handle ourselves and which the doctors want us to handle ourselves?
That goes for non-medical people also — don’t ever stay at home with crushing chest pain! Do consider staying at home with 3 hours of a 100 degree fever when you’re a healthy 21 year old.
It’s made me backload my own healthcare (the “double bonus”, as CMO said earlier). Since we hit the OOP max two years running, I took full advantage of our free healthcare the final few months. I have a tendency to injury myself playing sports and then to ignore the subsequent issues that develop. Free healthcare = time to address those issues. We’ve still used our free preventive care (thanks Obama!) when appropriate.
Price Conscious Doc
It’s made me a more price conscious doctor/prescriber. US healthcare costs are outrageous. When you’ve paid them out of pocket, you’re more mindful of incurring those costs on others. We’re fortunate that we have a “cheap” HDHP and can afford to pay our expenses — many families cannot. I have this conversation with residents, and some are open to it and some scoff. No one wants to order unnecessary tests, but in academia, some people justify it by citing a journal article with the ROC curves. Sometimes you can just remember that a $600 viral swab that doesn’t change management is a bad idea because it probably hurts the family financially. Many parents will tell you not to worry about the cost (and maybe they aren’t paying anything), but we still have a responsibility to consider it in some circumstances.
The American Academy of Pediatrics has released statements against HDHPs, as have other organizations. When HDHPs cause people to avoid seeking care that they otherwise do need, that’s a bad thing, and that’s the major concern. T
Blaming HDHPs isn’t really the right answer — people want lower deductibles, but they often pay for it with MUCH higher premiums. Overall costs are high because we have a healthcare system with fundamental flaws in the pricing structure.
However if a consumer on a HDHP saves the money from having lower premiums (whether in an HSA or regular bank account or both), then HDHPs can be reasonable financial decisions in some circumstances, even when the math isn’t as clear as it is for me.
It’s when people are forced into situations where they simply can’t afford any healthcare in general that we have issues (or when people do not save money for unexpected expenses). Tripling the premiums to get a lower deductible doesn’t solve that — lowering the overall cost of care will.
What are your thoughts on high deductible health plans and HSAs? As always, this is a blog and you are not my patient and I am not a financial advisor.