- On July 14, 2016
By Geoff Owens, Employee Benefits Consultant
Health insurance is a huge source of frustration for the average American—it is costly, it is confusing, and many folks feel like it doesn’t cover anything.
Because of consistent cost increases, High Deductible Health Plans, or HDHP’s, also known as qualified plans or HSA plans are becoming a “standard” Health insurance option, in fact 24% of all Americans currently have one either through their work or the individual marketplace. Despite the prevalence of these plans, they are often misunderstood and many people still view them as worthless coverage; however they are a very effective solution for many people once you crunch the numbers.
High Deductible Health Plans (HDHP’s) are very straightforward in that the insured person pays the cost of their medical care (Most preventative care excluded, as it is covered 100%) to the point where the deductible is met; then the insurance coverage actually kicks in. Once the deductible is met, in some cases the coverage is 100%, while in others there might be co-pays or co-insurance amounts required even after the deductible is met. If this sounds familiar it is because auto insurance works in the same way. For someone accustomed to a so-called traditional plan that might just include co-pays, the HDHP is certainly a significant change. The reason the HDHP’s can be such a culture shock is that many of us have NO IDEA of the actual cost of medical services; rather we are very comfortable with the idea of having a set co-pay.
For example, paying $30 at the doctor’s office, paying $50 for a brand name drug, paying $50 for an x-ray, or paying $200 for an emergency room visit. In fact the REAL cost could be $150 for that same doctor’s office, $300 for the generic drug, $110 for the x-ray, or $1,000+ for the emergency room visit.
The potential for higher out of pocket costs with an HDHP are frightening to the average individual, which supports a continued negative perception of an HDHP. Understanding that the potential downside of an HDHP is higher out of pocket medical costs, there are several upsides that for most people will more than balance out and make the HDHP a better overall option.
- Health Insurance premiums are non-refundable: For a standard health plan, once the premiums are paid, the $ is gone to the insurer. If you are healthy and require limited medical service throughout the year, you do not get a refund on any of that premium. Purchasing an HDHP allows you to pay lower premium and thus keep more $ in your pocket which you can use for the additional out of pocket expenses if need be, and if you don’t require as much medical care in a given year, you still keep the money!
- Don’t Compare Apples And Oranges: A common mistake is that individuals compare a plan and cost they had in the past with current day plans, such that they compare their favorite plan with the $5 co-pay and lower cost they had 5 years ago with current HDHP plan and price. I often hear someone say that they had a plan with no deductible years back that cost $300, and they compare that with a current day HDHP with say, a $3,000 deductible that might cost $400 right now. What is forgotten is that “favorite“ plan from five years ago might now cost $1,000 or more. The cost of health care is rising dramatically each year, and significantly outpacing inflation and earnings growth. Thus inexpensive plans with full coverage are a thing of the past.
- The Taxman Cometh: Before we get paid, we must pay our various taxes, which, depending on our bracket, reduces our take home pay by 20-40%. The Health Saving Account (HSA) is one of very few tax breaks that would allow you to keep 100% of your earnings without being taxed, so long as you put it into an HSA and then use that money to pay qualified out of pocket medical, dental, and vision related expenses. In 2016 you are allowed to put $3,350 for yourself or $6,750 if your family is covered as well. The money in this account is owned by you as the employee and can be carried over from year to year without limit. The favorable tax treatment further reduces the potential out of pocket costs associated with the HDHP plans.
- Educate yourself: People spend more time shopping for a big screen TV than they do picking their health plan each year. Annual Health insurance costs will generally be well into five figures for an average family, thus it is critical to do your research and use any resources available. If you are an individual call a broker, the costs on the marketplace are the same whether you speak to a broker or not, so for you it is free advice. If you get health insurance from your employer, the insurance broker should have resources available to assist you in your decision-have them call us if they don’t.
- Total $ Concept: When considering plans it is important to factor in the monthly premium costs, along with the potential out of pocket co-pays, deductibles and etc. When you only look at the potential higher rout of pocket costs that come along with a HDHP, we often fail to realize that the premium savings with the HDHP would more than make up for the higher out of pocket costs.
Vandalay Industries is an architecture firm, and they have attracted and maintained top employees by offering a high quality health benefits program over the years. In recent years they have seen the cost of the health insurance plan go up by 10-20% every single year, and as their second largest expense after payroll, the cost increases are no longer tenable for the company. They were introduced to the concept of an HDHP years ago, but feared the increased out of pocket costs would make their employees unhappy. This year’s rate increase was very steep and they had no choice but to offer an HDHP as one of the options to their employees, while still giving them the option the “buy-up” to a more traditional plan. The buy-up plan includes co-pays for all medical treatments. The HDHP plan has a $2,500 individual deductible, and once that deductible is met everything is covered at 100%. Vanadalay will pay for 100% of the employee premium for the HDHP, and will ask the employees to pay the difference if they elect to buy-up to the other plan, which will be $130 per month for a single employee. In addition, to further ease the transition to the HDHP, all those employees who chose the HDHP will receive $1,000 per year placed into their HSA bank account to help them offset the out of pocket costs. We talked to 2 individuals who vary greatly in terms of their overall health, to see which plan would be best for them:
Tim Watley is married with four kids under the age of 10 and just turned 40. His spouse does not get coverage at work so he is looking to cover the entire family. They in general are healthy, but with the urgent care and sick visits for the kids along with the prescriptions to help with these, their medical costs can add up in a hurry. In addition he has a sore back and Dr. Heisenberg thinks it is better to treat it with Physical therapy and medication for now, but he worries it may ultimately need surgery. Last year Tim did keep all of the Explanation of benefit statements he received in one place, as everyone should, so we were able to go through the expenses as he felt it was a fairly typical year in their household for medical. Below we factored in three sick visits to the primary care, two trips to the urgent care, a few prescription antibiotics for various sicknesses in the family, as well as two trips to the orthopedic for him along with six trips to Physical therapy at the end of the year.
|Company Contribution to HSA||$0-Not elligible||-$1000|
|2 visits to Orthopaedic||$100||$500|
|3 sick visits to Primary Care||$90||$360|
|5 prescriptions for various illnesses||$50||$200|
|2 urgent care visits for x-rays||$150||$750|
|Total Cost to Tim||$1,860||$810|
*In this instance Tim would have used all of the $1000 that the company funded towards the HSA, and would be responsible for an additional $810 out of her own pocket, and he would have the option to pay that $810 on a pre-tax basis by putting her own $ into the HSA account, while the $300 in out of pocket costs on the traditional plan would be paid with post tax $.
Art Vandalay is the company owner and started the business 40 years ago; he just turned 63, and does have some health issues. His wife recently turned 65 and went on Medicare, so he is looking for a solution the bridge the gap of the next two years before he becomes Medicare eligible. He did not want to go into detail of his health costs, but with an upcoming surgery and other health issues he assured us that he will easily surpass $2,500 in medical expenses with prescriptions and follow up visits.
|Company Contribution to HSA||$0-Not eligible||-$1000|
|Hospital Stay||$500 per day $2,000 total||$0 Deductible already met|
|4 Prescriptions per month (3 generic)||$1,140||$1,140 After Deductible|
|Monthly specialist visit||$600||$0 Deductible already met|
|Total Cost to Art||$5,800||$2,640|
*Art will hit his deductible early on in the HDHP, however the traditional plan will continue to nickel and dime copays to ultimately lead to a higher total cost
 Kaiser foundation 2015 survey http://kff.org/report-section/ehbs-2015-section-eight-high-deductible-health-plans-with-savings-option/
 A listing of covered preventative care can be found at https://www.healthcare.gov/coverage/preventive-care-benefits/