Halloween is approaching and it’s sure to be a scary time. Ghosts, goblins, and ghouls will be knocking at your door, waiting for a trick or a treat. Meanwhile, all the adults can think about is how much to contribute to their Flex Spending Account.
Okay — probably not.
Nonetheless, open enrollment season is upon us and some scary decisions have to be made.
Forget witches, monsters, and Dracula. You’re dealing with HSA’s, FSA’s, PPO’s and HMO’s. The endless amount of choices is sure to make you sweat more than visions of a creepy clown.
The most critical decision you’ll make for your family this fall will be choosing your medical plan. While choices are aplenty, there’s one plan you may not have considered – the high-deductible health plan (HDHP). You may have heard horror stories about high-deductible plans. The out-of-pocket expenses can add up to the thousands – a scary thought when you have two children who get colds in the middle of July.
But Momma was right. There are no monsters under your bed. It turns out that the high-deductible plan isn’t so freaky after all. Let’s take a closer look at how this often-overlooked plan can actually save you money.
Key features of a high-deductible plan
If there’s one thing I’ve learned with having kids, it’s that you will use the doctor. A lot. Stomach bugs, broken bones, and ear infections seem to be more common than Reese’s Peanut Butter Cups. And now that I’m 40, chiropractic adjustments seem to be picking up steam.
These visits aren’t cheap either. A quick glance at the claims tab of my Aetna plan shows that a standard pediatrician visit costs about $300 while x-rays for a broken wrist are closer to $1,000. Given the high out-of-pocket costs of medical care, choosing the medical plan with the lowest deductible appears to be a no-brainer for young families. However, that’s not always the case. In fact, the most cost-effective plan is often a high-deductible health plan coupled with a Health Savings Account (HSA).
How is this so when your doctor sees you so much, he knows what time your dog goes for walks on Sundays?
Since the deductibles on an HDHP/HSA plan are higher than traditional plans, the premiums are often lower than other options. Now, keep in mind that the out-of-pocket costs are higher too. You traditionally have to pay for the full price of care after you’ve reached your deductible. After that, you have to pay co-insurance, which is a shared expense with your insurance provider. Here’s the scary part — the maximum out of pocket expense can be up to $13,800 on a high-deductible plan.
But there’s good news. Given the competitive landscape for finding talent in the Bay Area, most employers have maximums much below this number.
Another attractive feature of high-deductible plans is that many employers will incentivize their employees to choose this plan by providing a contribution directly to their HSA plan. This is because HDHPs are typically cheaper for the company as they aren’t on the hook for paying your initial medical costs.
The tax break on an HSA plan can also be quite large. HSA contributions are tax-deductible at the federal level and state level in California. The most you can put aside in an HSA plan for 2020 is $7,100 for a family. For those in the 41% combined federal and state bracket, that tax benefit equates to nearly $3,000.
A real-life plan comparison
To illustrate the savings from a high-deductible plan, let’s take a look at a comparison chart of the medical plans offered by SAP North America.
Focusing only on the family of four plan for in-network providers, these are some of the details for SAP’s plan:
| HDHP 90 | PPO | Kaiser HMO | |
| Monthly Premium | $300 | $525 | $425 |
| SAP HSA Contribution | -$1,200 | $0 | $0 |
| Annual Deductible | $2,800 | $600 | None |
| Max Out of Pocket | $5,600 | $7,000 | $3,000 |
| Co-insurance after meeting the deductible | 90% | 85% | 80% |
| Tax Benefit | -$2,420 | $0 | $0 |
Now, let’s take a look at the annual costs on the HDHP 90 plan for three different families:
- Adams Family: Doesn’t go to the doctor all year except for preventative care.
- Kreuger Family: Goes to the doctor enough to run up an insurance bill of $10,000.
- Meyers Family: Has to go to the doctor so much they hit their maximum out of pocket expense.
| Adams (healthy) | Kreuger (somewhat healthy) | Meyers (cursed) | |
| Annual Premium | $3,600 | $3,600 | $3,600 |
| Deductible | $0 | $2,800 | $2,800 |
| Co-insurance | $0 | $720 | $2,800 |
| Company Contribution | -$1,200 | -$1,200 | -$1,200 |
| Tax Benefit | -$2,420 | -$2,420 | -$2,870 |
| Total Medical Costs | -$20 | $3,500 | $5,580 |
You’re looking at this correctly. A completely healthy family can actually profit from a high-deductible plan! Of course, this is not a likely occurrence. But even if they frequent the doctor more regularly the HDHP 90 plan is fairly cost-effective.
Now, let’s take a look at how the HDHP 90 plan compares to the PPO and Kaiser plan?
| Adam’s Family (healthy) | Kreuger Family (somewhat healthy) | Meyers Family (cursed) | |
| HDHP 90 | -$20 | $3,500 | $5,580 |
| PPO | $6,300 | $8,310 | $13,300 |
| Kaiser HMO | $5,100 | $6,600 | $8,100 |
In this particular scenario, this high-deductible plan coupled with an HSA is more affordable for the healthy, moderate, and worst-case health scenarios.
So before blindly choosing the plan with the lowest deductible and out-of-pocket expenses, do the math on if a high-deductible plan makes more sense. I mean, only do that if you like money.
One size doesn’t fit all
It might not always make the most sense to go with the high-deductible plan. It could turn out that your company doesn’t make a contribution or offers a very affordable HMO plan. Other factors could be at play too — the most critical being your preferred provider.
In the SAP example above, the HDHP allows you to choose the provider of your choice as long as it is in-network. For many, the choice of providers is not important. The Kaiser plan is attractive for those who prefer care under one roof. If you fit under this category, paying $2,500 to $5,000 more for an HMO might be worth it.
But before you write off the high-deductible plan completely, check what medical providers are covered. High-deductible health plans can be HMOs or PPOs. Kaiser may offer an HDHP too. You may be able to have your Kit-Kat and eat it too.
Other factors that come into play are your spouse’s plan. Sometimes employers offer a dirt-cheap or even no-premium plan to their employees but mark the price up considerably for their families. It may make sense to mix and match in this case.
While high-deductible plans coupled with HSA’s make sense for many, it doesn’t make sense for all. Be sure to do the math or speak with a real financial advisor before making this critical decision. Otherwise, you could be leaving thousands of dollars on the table.
Now, that’s freaky!
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