The high deductible health plan (HDHP), the up side, the down side and what you should know

Let’s take a close look at this high deductible health plan idea and what it may mean to you.  First, if you have no health insurance and this type of plan is affordable in terms of premiums, it will provide a good measure of protection from catastrophic expenses.  Second, if your employer only offers a high deductible health plan, it is certainly better than no coverage at all.

Now, if you are currently in a typical PPO or Point of Service (POS) plan with a standard deductible, including a prescription drug plan with co-pays or modest coinsurance and your employer says, “we have a deal for you” we are converting to a high deductible health plan (HDHP) and adding a Health Savings Account (HSA), but your premiums will be lower, you might want to check your wallet.   As an example, following is the design of a typical HDHP from a major insurer (some HDHPs have  lower deductibles).  At first glance it does not appear all that different from a traditional plan except for high deductibles.  However, take a closer look.

1. With a traditional plan there is an individual deductible and a family deductible.  The family deductible can be met by two or more individuals.  Let’s say there is a family of four with a $500 individual and $1,000 family deductible, if two individuals reach their $500 deductible, the $1,000 deductible is considered satisfied for the rest of the family members.  Not so with a high deductible health plan.  If there are two or more members of a family, no benefits are payable by the HDHP until the family deductible ($5,000 in this example plan) is met. Even if one individual reaches the $2,500 deductible, there is no benefit payable because the family still has another $2,500 to satisfy toward the family deductible.
2. Under the high deductible health plan virtually all services are subject the deductible and coinsurance. This means that there is no separate prescription drug coverage, rather prescriptions are subject the deductible and coinsurance.  
3. To put it simply, except for some preventive services covered at 100% and not subject to the deductible, a family will spend at least it’s deductible before any reimbursement from its health plan.  In this example plan, the family is also at risk for 20% of the first $25,000 in expenses after the deductible is met. In other words the potential family expense for eligible charges is $10,000 per year.
4. Just like a traditional plan, a HDHP may have a network of doctors.  If you go outside that network, you may have no coverage or be required to pay a higher coinsurance.

The idea behind all this is if you are at risk for a large deductible out-of-pocket, you will be a more prudent consumer of health care, thus saving money.  The key question is can you afford do to that?  Keep in mind that the premium you pay for this coverage and likely the payroll deduction your employer takes will be considerably less than with a traditional plan.  However, you still must pay your deductible.  To help you pay for all this, you can establish a Health Savings Account (HSA) if you are enrolled in a qualified high deductible health plan.  Such a plan must have at least a $1,200 single and $2,400 family deductible and cannot have an out-of-pocket limit higher than $5,950 for single coverage or $11,900 for family coverage (including the deductible).  To the extent your premiums are lower in the HDHP, you might want to consider placing the premiums saved into a HSA.

High deductible health plans have one big drawback, they are not income sensitive.  If your family earns $50,000 a year, a HDHP may be a serious burden regardless of the lower premium. If your family earns $250,000, a HDHP may, coupled with a HSA, be a boon to saving for health care costs in retirement.  Will the upfront costs under a HDHP discourage you from obtain necessary health care for you and your family?

A Health Savings Account allows you to save  tax-free money (and potentially earn tax-free interest on the account) to help offset your out-of-pocket expenses. Because the unused money can roll over from year to year (unlike a flexible spending account) you may be able to save money for health care costs in retirement.  For 2011, a single person may save up to $3,050 in the HSA and a family $6,150.  If you are 55 or older you can add an additional $1,000.  The annual limits include any employer contributions.  However, a HSA is not for individuals 65 and older or anyone eligible for Medicare.  Before you rush out to set up an HSA, better check all the rules carefully.  Here is a link to the IRS publication on HSAs.

A negative view of HDHP and HSAs

If you want the dark side of these plans, at least as perceived by one writer, read this. Although I must point out that while he blames insurers, the fact is a substantial portion of the movement to these plans is among large employers that are self-insured.

Sample High Deductible Health Plan