High-Deductible Health Plans: How to Think About Your True Costs
Lower premiums entice, yet they mask embedded costs you need to plan for
If you have health insurance through an employer, chances are the premiums are a big – and growing – line item in your household budget. The independent, non-profit Kaiser Family Foundation (KFF) reports that the average household with family coverage pays more than $500 in monthly premiums. Over the past 10 years, the workers’ share of family premiums has increased more than 70%. Inflation over that stretch: 20%.
That’s contributed to the rise of high-deductible health plans (HDHPs), which have the seeming allure of lower premiums. KFF reports that 30% of workers with health insurance were enrolled in an HDHP in 2019, compared to 20% five years ago. (Almost all of the millions of people buying coverage through Obamacare are also on HDHPs.) The average employer HDHP family premium in 2019 was $4,866 compared to $6,638 for families enrolled in old-school preferred provider (PPO) plans.
If you’re considering an HDHP, or your employer forces you into one, it’s crucial to understand that lower upfront premiums come with an agreement that you will cover a lot more in upfront costs. You’ll need a plan for what you’ll have to shell out.
When you are signing on for a high deductible, the cost you pay before insurance kicks in. (Many plans provide basic preventive care without a deductible.) The average annual deductible for single coverage in an HDHP was nearly $2,500 in 2019, more than double the deductible for a PPO. For families with an HDHP plan where each family member has their own deductible, the all-in average family deductible cost was nearly $4,800 in 2019, about $2,000 more than the average deductible for family PPO coverage.
What you save in premiums you can quickly give back if you actually use the plan.
Some employers offer help with upfront costs. A feature of HDHPs is that you are allowed to have a health savings account (HSA) as long as the plan follows a few IRS rules. Money in an HSA can be used to pay for deductibles and other qualified medical expenses.
If your employee kicks in some money, that’s obviously a big help, but find out what you are left to cover. And then make it the highest of priorities to have that much set aside in savings, or be prepared to cover it from regular cash flow.
If you need to save up money, the HSA is the way to go. You can contribute to the HSA through a payroll deduction, just like saving in a retirement plan. If your employer makes a contribution, the combined total that you both can stuff in a 2020 HSA is $3,550 if you have single coverage, and $7,100 if your HDHP covers your family. The limits are $1,000 higher for any enrollee who is at least 50 years old.
Uncle Sam offers up three valuable tax breaks if you contribute to your HSA, all covered in depth in this previous column on health savings accounts.
A study found that households that had an HDHP and an HSA were more likely to see a doctor than people with an HDHP but no savings fund at the ready to help pay for deductibles and other out-of-pocket expenses. This is a point sometimes lost in the debate over Medicare for All. Even if your preference is to retain access to private insurance through an employer, the prohibitive cost of actually using that insurance is an issue for millions of Americans.
In addition to the deductible, you also want to make sure you understand co-payments and co-insurance you could be on the hook for. The annual maximum out-of-pocket in 2020 for HDHP plans is $6,900 for individual coverage and $13,800 for family coverage. Those limits do not include premiums. That’s just the max; your employer may cap participants’ out-of-pocket at a lower level. For single coverage, KFF reported that 12% of HDHP enrollees in 2019 had a max out-of-pocket below $2,000, while 20% were on the hook for more than $6,000.
If you run into a year with big medical expenses and limited savings, you’re likely going to back yourself into the dreaded corner of paying on your credit card, where the average rate these days is around 17%. That’s going to be a big hit to your financial health. So, this is a good time to start building a personal emergency fund. If you’ve borrowed unwisely in the past, also a good time to think about responsible use of credit cards.
While we can all hope that Washington steps up and addresses the high cost of care for the insured, there’s the matter of protecting your household today from budget-busting medical bills. If you are going to use an HDHP, push yourself to build up savings to cover your deductible and maximum out-of-pocket, just in case. If you use the HSA, you will at least get some very valuable tax breaks.