How does a high deductible health insurance plan work?

Do you want to save money on your monthly insurance premiums and have the opportunity to open a health savings account? If so, you should know How does a high deductible health insurance plan work? (High-Deductible Health Plans HDHP). Below we will explain what these plans are like, their advantages, disadvantages and the moments in your life when an HDHP is convenient or not.

How does a high deductible health insurance plan work?

Under IRS rules, an HDHP is a health insurance plan with a deductible of at least $1,350 if you have an individual plan (rising to $1,400 in 2020) or a deductible of at least $2,700 ($2,800 in 2020) if you have a Family plan. The deductible It is the amount you will pay out of pocket for medical expenses before your insurance pays anything. In addition, the plan’s out-of-pocket maximum must not be more than $6,750 ($6,900 in 2020) for an individual plan or $13,300 ($13,800 in 2020) for a family plan. The out-of-pocket maximum is the maximum amount you will have to pay in a year for medical expenses covered by your insurance plan.

How does a high deductible health insurance plan work?

Advantages of a high deductible health insurance plan

An HDHP will typically have lower premiums than an equivalent health insurance plan with a lower deductible. People who don’t expect to have a lot of medical expenses next year should minimize their premiums and choose an HDHP. There’s a good chance of saving money, maybe several hundred dollars or more over the course of the year, this way.

Just make sure you can pay the maximum out of pocket in the worst case scenario. If not, you could end up with medical debt, and the added interest will make it even more difficult to pay your bills. A health insurance plan with higher premiums but an affordable out-of-pocket maximum might be a safer option if the HDHP’s out-of-pocket maximum is more than you can afford.

Comparison of annual health insurance premiums and deductibles, HDHP vs. Non-HDHP

HDHP Non-HDHP
Cousin $1,500 $3,000
Deductible $3,000 $1,500
Total cost before coinsurance $4,500 $4,500
HSA Eligible Yes No

The comparison above shows a situation where it clearly makes sense to go with the HDHP. With either plan, you’ll end up spending $4,500 of your own money on premiums and deductibles if your medical expenses for the year are at least as large as your deductible. But with HDHP, you’re only guaranteed to spend $1,500 in premiums unless you know for sure what your next medical expenses will be.

Plus, having the HDHP allows you to contribute to a health savings account. If you’re in the 24% federal tax bracket and have $3,000 in medical expenses, you can use your HSA to pay for them with pre-tax dollars. If you use pre-tax dollars, that same $3,000 in medical expenses could cost you $4,000. If you choose the lowest deductible plan, you could potentially pay $2,550 of your $3,000 in medical expenses with a flexible spending account (FSA), if your employer offers one. Then you would have a similar tax savings with the non-HDHP.

However, most real life situations are not very clear as to whether you should select a high or low deductible plan. You’ll have to do the math for your own circumstances, taking into account your likely medical expenses for the year and the premiums, deductibles, and out-of-pocket maximums for available plans.

High Deductible Health Plans and Preventive Care

If you choose the high deductible plan, you will still have 100% coverage for preventive services from network providers before you meet your deductible due to Affordable Care Act requirements. Quite a few services fall into this category, and you are not responsible for any copays or coinsurance for any of them. Here are some examples taken from Healthcare.gov:

Adults

  • Abdominal aortic aneurysm: one-time screening for men of specific ages who have ever smoked
  • The use of aspirin to prevent cardiovascular disease in men and women of certain ages
  • blood pressure check
  • Cholesterol screening for adults of certain ages or at higher risk
  • Colorectal Cancer Screening for Adults Age 50 and Older
  • depression screening
  • Screening for diabetes (type 2) for adults with high blood pressure
  • Certain adult vaccines, such as the flu shot

Women

  • Routine screening for anemia in women who are pregnant or who may become pregnant.
  • Comprehensive breastfeeding support and counseling from trained providers, and access to breastfeeding supplies, for pregnant and lactating women.
  • Contraception: Food and Drug Administration-approved contraceptive methods, sterilization procedures, and patient education and counseling, as prescribed by a health care provider for women of reproductive potential (not including abortion medications). This does not apply to health plans sponsored by certain exempt “religious employers.”
  • Breast cancer mammogram screenings every 1 to 2 years for women age 40 and older.
  • Cervical cancer screening in sexually active women.
  • Osteoporosis screening for women over 60 based on risk factors.
  • Well visits for women, in order to obtain the services suggested for women under 65 years of age.

Kids

    • Screening for autism in children aged 18 and 24 months.
    • Behavioral evaluations.
    • The blood pressure check.
    • Screening for depression in adolescents.
    • Developmental screening of children under 3 years of age
    • Hearing screening for all newborns
    • Shots for diseases like whooping cough, flu, and chicken pox.

HSA Eligibility

As already noted, the other big advantage of having an HDHP, aside from the typical lower premiums, is that it allows you to contribute to a health savings account. Because HSA contributions come from pre-tax dollars, You can save a considerable amount on your medical expenses when you pay them with your HSA. For example, if you are in the 24% federal tax bracket, a $100 medical bill will effectively cost you only $76. You must have an HDHP to be eligible to contribute to an HSA and to be eligible to receive any employer contribution to your HSA.

In fact, “free” money in the form of optional employer contributions to your HSA is another great benefit of having an HDHP and HSA. Plus, you don’t have to keep your HDHP indefinitely to take advantage of an HSA in future years. Contributions roll over from year to year, and you can invest your contributions to help them grow, too. In the future, even if you no longer have an HDHP, you can use money previously deposited in your HSA to pay for health expenses.

Disadvantages of High Deductible Health Plans

The big drawback to choosing an HDHP is having to incur significantly high out-of-pocket costs over the course of the year. As of January 1, 2020, the Affordable Care Act rules state that the most anyone can pay for “out of pocket” is $8,150 for in-network benefits. The family maximum is $16,300. Previously, insurance plans could require that a person on a family plan meet the family maximum. This new rule limits your risk if you have a family health insurance plan. Once any family member has $8,150 in medical expenses, their costs will be 100% covered for the rest of the year.

Another problem with joining an HDHP is that you might try to skip doctor visits because you’re not used to having such high out-of-pocket costs. Don’t choose an HDHP if there’s a high chance you’ll get sick or have a difficult recovery process because you want to save money in the short term by avoiding doctors, procedures, or prescriptions. It will cost you more in the long run, plus you will be more physically compromised.

You and high deductible health plans

Whether or not it makes sense to have an HDHP depends on the stage of your life and the associated medical expenses you are likely to incur. If you’re young and healthy and rarely go to the doctor or take prescription drugs, you’ll probably save a lot of money by choosing an HDHP because the premiums are lower. If you’re planning to have a baby in the near future, an HDHP might not be a good option because the costs of hospital delivery are high and your out-of-pocket costs could easily exceed the plan’s annual out-of-pocket maximum. On average, though it varies from state to state, commercial insurers paid $18,329 for a vaginal delivery and $27,866 for a C-section in 2010, according to a 2013 Truven Health Analytics study.

An HDHP may not be the best option if you have young children, as they tend to visit the doctor frequently. When your children are older and if you and they are healthy, an HDHP might make more sense. On the other hand, if someone has a chronic condition that needs ongoing treatment, a plan with a lower deductible might be more convenient.

yesf you are older, statistically you are more likely to have higher medical expenses. Therefore, it is preferable not to risk hiring an HDHP. But if you’re still in good health and have no reason to anticipate high health care costs, an HDHP might be a good fit for your circumstances despite your age.

Whether an HDHP saves you money always depends on the details of the specific plans available to you and your projected medical expenses for the year. An HDHP is not automatically a better or worse option than an insurance policy with a lower deductible just because your circumstances fall into a certain category. You will always have to analyze your own situation.

How a High Deductible Health Insurance Plan Works (Concluded)

An HDHP can save you money in the form of lower premiums and the tax relief you can get on your medical expenses through an HSA. It is important to estimate your health expenses for the coming year and see how much you will have to pay out of pocket with an HDHP before you enroll. In some cases, a plan with a lower deductible will save you money, although it will generally have higher premiums and won’t allow you to have an HSA. Plus, if your employer offers it, you can use an FSA to get tax savings on your medical expenses with a plan with a lower deductible.

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