If you are paying for your own health insurance, you may be able to save money by switching into a high deductible health plan and using a health savings account. According to research by the trade group America’s Health Insurance Plans, about 8 million Americans were enrolled in a high deductible health plan in 2009. That’s only a tiny fraction of the 253 million insured Americans that year. Here is how to decide if a high deductible health plan is right for you.
Health Savings Accounts (HSAs): Many people are unfamiliar with HSA-compatible high deductible health plans since they are still a relatively new plan choice. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 created this new opportunity for individuals and employers to fund tax-deductible health savings accounts. Withdrawals from these accounts are tax-free when used for qualified medical expenses. Unlike the medical reimbursement accounts that you may be familiar with, these accounts do not have to be used up each year. The balance can grow tax-free and be used in later years as medical costs arise. However, they are only an option if you are enrolled in an HSA-compatible high deductible health plan.
Deductibles: Your deductible is the amount that you must first pay each year before your insurance company will begin paying your health care bills.
Co-pays: Most insurance plans do not require you to start paying towards your deductible for certain types of medical visits. Instead, you co-pay, usually between $15 and $75 per visit and the insurance company picks up the rest. For new health policies issued after 2010, the recently enacted Affordable Care Act sets the co-pay at $0 for certain preventive care expenses.
Out-of-pocket maximum: Each health plan has a provision for the maximum amount you will pay out of your own pocket each year. For 2011, the annual out-of-pocket maximum for a qualified high deductible health plan is $5,950 for an individual and $11,900 for a family.
Coinsurance: Coinsurance is the percentage of medical expenses that you will pay after you reach the annual deductible set under your plan. This percentage is generally between 0 percent and 30 percent depending on your coverage. Once you reach your out-of-pocket maximum, you will no longer pay coinsurance.
Network: Each policy covers a different network of doctors. When shopping for a plan, you should be sure that your doctors are in-network. You will generally pay much less for health care that is in your carrier’s network.
Compare plans: There are many online resources for comparing health insurance policies. Most carriers have their own websites, and sites such as eHealthInsurance allow you to compare many different insurers in one place. You can see a side-by-side comparison of plan costs and benefits, allowing you to compare all of the features described above.
While a traditional low-deductible plan with low co-pays may be the right choice for someone who is a heavy user of medical services, a generally healthy individual is likely to save money by choosing a high deductible health plan instead. Here’s how my individual HSA-compatible plan stacks up in a typical year against the traditional alternative offered by my carrier:
Traditional PPO/HDHP PPO
One preventive care visit: $0/$0
Annual Mammogram: $0/$0
Generic Prescription Drug: $180/$360
Total Annual Cost: $5,760/$2,784
In a typical year I save nearly $3,000 over the premium PPO plan. And I can use this savings to fund a tax-deductible HSA to pay for health care expenses down the road. The maximum out-of-pocket expense in my HDHP is $5,500, an amount covered by my HSA with just two years of premium savings. And that doesn’t take into account the additional tax savings I enjoyed in the years that I made tax-deductible contributions to my HSA.
By opting for a high-deductible plan, you benefit from the insurance company’s negotiated rates for in-network health care, you save significantly on annual premiums, and you secure the safety net that your health insurance will take over should you have an unusually unhealthy medical year.