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How to Save Money with High Deductible Health Plans

While many of you go through open enrollment [1] and others search for private health insurance [2], we thought it would be a great time to delve deeper into specific benefit options that can help you save money on health care [3]. Today we’ll look into High Deductible Health Plans, or HDHPs.

What is a High Deductible Health Plan?

A high deductible health plan is a health insurance plan with lower premiums and a higher deductible than traditional plans. The IRS sets the minimum deductibles for plans to be considered HDHPs. For 2010-2012, HDHP policies for individuals must have a deductible of at least $1,200. Policies for couples, individuals with children, or families must have deductibles of at least $2,400.

The IRS [4] also limits the maximum amount that an HDHP can require you to spend out-of-pocket. In 2012 the maximum amount is $6,050 for individuals and $12,100 for all others.

An HDHP is usually offered in concert with a Health Savings Account, or HSA. I’ll talk more about these tomorrow, but the bottom line is that they allow you to save for and pay for health expenses tax-free.

How can an HDHP work for you?

High deductible health plans often cover 100% of preventative care such as annual physicals and screenings such as mammograms or prostate tests – that means you have no out of pocket costs. Your deductible will only apply to things like hospital/ER visits, prescriptions, and other physician visits. Even some percentage of these expenses may be covered by your insurer.

This means that if you stay relatively healthy over the course of the year, you could have little or no out-of-pocket expenses. Even if you have a few doctor visits and/or regular prescriptions, you could come out on top. As I said above, the HDHP limits your total out-of-pocket expenses, so the most you will pay in one year is your annual premiums plus that out-of-pocket limit. If your employer contributes to an HSA on your behalf, you will reap even more benefits from this plan!

HDHP Example

My HDHP at work this year will cost $50 less per month than a traditional in-network plan. That’s $600 per year! In addition, my employer will contribute $750 over the course of the year to my HSA. The $600 is mine to do whatever I want with. The $750 can go towards meeting my deductible.

All preventative care is 100% covered, so as long as my prescriptions, hospital visits, and other doctor visits cost less than $750, I make money by choosing an HDHP. My expenses can add up to $1350 ($750 from my HSA + $600 premium savings) and I’ll still break even with a traditional plan. Once my expenses hit the max out-of-pocket limit, all future expenses will be covered at 100% – compared to a traditional plan where I will have co-pays throughout the year, regardless of how much I spend out of pocket.

When should you avoid HDHPs?

A high deductible health plan is not right for everyone. The number one reason to avoid choosing an HDHP is if meeting the deductible places a huge burden on you. This may be the case if you do not benefit from HSA employer contributions. Depending on the terms of your HDHP and the other insurance options you might have, you also might want to avoid choosing an HDHP if:

  • You have a chronic illness that requires frequent doctor visits and/or multiple prescriptions.
  • You are older/in poor health.
  • You are pregnant or plan to become pregnant during the insurance term.

In the above situations frequent medical care means you will almost certainly need to spend your whole deductible, possibly negating any premium savings.

Making the Choice

Before you decide on an HDHP or more traditional health plan, pull out a piece of paper and a calculator and follow these steps:

  1. Write down all the medical expenses you expect to have over the course of the next year, including prescriptions. You can use this year’s expenses to estimate.
  2. Calculate how much each event/expense would cost you under both a traditional plan and an HDHP, taking into account any co-pays, deductibles, and out-of-pocket limits. If the HDHP costs are less than the traditional plan costs, an HDHP is definitely for you. If not, continue to step 3.
  3. If the HDHP costs are more than the traditional plan costs, subtract the traditional plan costs from the HDHP costs. This is the increased out-of-pocket cost with an HDHP.
  4. Subtract HDHP premiums from traditional plan premiums. This is your savings from choosing an HDHP.
  5. If your number from Step 3 is greater than the number from step 2, your savings outweigh additional expenses and you should choose an HDHP – this will be the case for most people who have limited health issues and use insurance sparingly. If not, stick to a traditional plan.

If an HDHP makes sense for you, it can be a great way to save money without compromising your health care! That’s money in your pocket that can be used for savings, dept payment, investing, or just a little breathing room in your budget.

Check back tomorrow for a more-detailed explanation of Health Savings Accounts. Employer and/or personal contributions can add even more savings when combined with an HDHP!