During autumn, that magical time of year, many people have the option during Open Enrollment for choosing the health plan best suited to their needs through open enrollment. The options include low and high deductible health plan options, with the latter often coming equipped with a health savings account (HSA).
Fall is also when the leaves change to shades of red, yellow and orange as they fall to the ground to form perfect heaps for children (or adults) to jump into. The golden afternoons fill with smells of pumpkin spice, baked cinnamon-covered apples, and warm cider.
This is my wife’s favorite time of year. Aside from deciding how we want to meet our insurance needs, she relishes the chance to place a seasonally-appropriate wreath on the door, add nutmeg to our coffee, and bake “cozy” desserts. She plans her autumn decorating, baking, and wardrobe year round. If you can’t tell, she lives for this time of year.
For me, I prefer the spring, but I get it. We live in the south, where you welcome any change that ends the persistent heat and humidity. By the end of September, you’re ready to wilt. This cooling feeling can bring a better sense of what you want out of your insurance plan. Let’s take a look at the available options presented during open enrollment, how health insurance plans differ, and what to consider when choosing between a low and high deductible health plan.
What is Open Enrollment?
While all of this change is great, there’s another part of our lives that bears attention this time of year: open enrollment. Autumn is open enrollment season at workplaces for millions of Americans, meaning it’s again that time for you to choose the benefits right for you.
Typically, most workplaces allow employees to make changes to their benefits packages in October and November for the coming year. Benefits have become an important lure for finding the best employees.
Employers try to attract and retain employees through offering competitive benefits that meet employees’ ever-changing needs.
Among those benefits are health insurance plans. This post examines the different types of health plans found in most employer-sponsored benefits packages: low- and high-deductible health plans.
Hi(gh)-Low, Hi(gh)-Low, It’s Off to Work We Go
High deductible health plans encourage customers to shop around for health care. They do so by making the insured (that’s you) responsible for medical costs upfront instead of having an insurer cover the costs. A high deductible plan definition could be a plan in which you bear responsibility for costs up to a point and in exchange, pay little-to-no premiums during the year.
Said differently, high deductible health plan participants must meet an annual deductible before qualifying for reimbursement. The logic here being if you do a little more work to find the most cost-effective treatment, you could end up saving money.
Before going further, I offer a word of caution. According to the Urban Institute, high deductible health plans tend to reduce costs, however for the wrong reasons. Instead of having better health outcomes, most people on high deductible health plans skip out on care altogether as opposed to finding the lowest cost.
On the other hand, low deductible health plans come with lower deductibles and higher premiums, or the monthly price you pay to have health insurance whether you use it or not. These plans also come with more predictable costs and more favorable coverage because of lower out-of-pocket limits.
The downside here is that high deductible health plan premiums are low or non-existent and can fit into a monthly budget rather well. Whereas low deductible health plans have premiums that can vary in expense depending on the level of coverage and the number of people covered under the plan.
My wife and I are what the health insurance industry calls “invincibles,” or young folks not in critical need of regular medical care. Most insurers want to cover as many young, healthy people as possible as a way to spread the higher risk from older, typically more ailing individuals. For the near future, this plan makes the most sense for us for reasons we’ll get into below.
When weighing whether to choose a low or high deductible health plan during open enrollment, make sure that you do so with your health in mind. Forgoing necessary medical treatment to save a buck won’t pay off in the long run.
Before getting into the high deductible health care plan pros and cons, let’s dive in a bit deeper to get an understanding of some of the major terms we’ll discuss.
Health Insurance Key Terms
I’ve used a few terms above that might be best to define separately below.
Health insurance uses some fairly common terms across multiple plans. By understanding what they mean you will be better able to make an informed decision about which type of plan is right for you.
- Premium – As described above, premiums are monthly costs that cover part of your cost of insurance, whether you use your insurance benefits or not during the benefit year.
- Deductible – This is the amount the insured must pay upfront before receiving any reimbursement or coverage from the insurer. Some exceptions include annual wellness benefits and free preventive care like flu shots and blood tests.
- Out-of-pocket limit – This is an annual number that says how much money the insured will have to spend on qualified medical care in his or her network of health providers, not including premiums, before your insurance company will begin assisting with payments. Once meeting the limit, the insurer has a requirement to pay for 100% of your in-plan-network healthcare.
- Coinsurance – The percentage of costs of a covered health care service you pay (20%, for example) after you’ve paid your deductible.
How Coinsurance Works
Let’s say your health insurance plan’s allowed amount for a health care service is $100 and your coinsurance is 20%. In this case, if you’ve paid your deductible already, you will pay 20% of $100, or $20. The insurance company covers the rest.
If you haven’t met your deductible, you pay the full amount, or $100.
High Deductible Health Plan Example
Let’s look at an example which combines all of these terms above.
In this example, you have a medical treatment which costs $12,000 and you have a $3,000 deductible, an out-of-pocket maximum amount of $6,850, and a 20% coinsurance rate.
First, you’ll pay your entire deductible ($3,000) and then you’ll pay 20% of the remaining $12,000 ($12,000 – $3,000), or $1,800. Your total out-of-pocket costs would be $4,800 – your $3,000 deductible + $1,800 coinsurance.
If you receive more medical care during the year, you continue paying the coinsurance rate of 20% until you reach the $6,850 out-of-pocket limit. From there, the insurance company would pay for any remaining covered services that you use for the rest of the plan year.
Generally speaking, healthcare plans with lower monthly premiums have higher coinsurance rates while plans with higher monthly premiums have lower coinsurance rates.
High Deductible Vs Low Deductible Health Plan
The two obvious differences between the plan types are premiums and the deductible amounts. Let’s take these two separately.
First, premium costs can vary. Some high deductible health plans have no insurance premiums like my wife and I’s separate high deductible health plans discussed below, while some have monthly premiums lower than an equivalent low deductible health plans.
Second, deductibles can also vary by plan type. High deductible health plans quite often have deductibles closer to their out-of-pocket limits. These can sometimes amount to $5,000 or more per year. Low deductible health plans, on the contrary, have lower deductible limits which are allowed through your payment of premiums.
A good rule of thumb for premiums and deductibles: if you have a higher premium, you should expect a lower deductible and vice versa. These items tend to be inversely related.
What is a Health Savings Account?
Another upside to a high deductible health plan? They offer health savings account benefits (HSA). But what is an HSA? These accounts are only open to people with qualifying high deductible health plans and can hold funds that are contributed directly from your paycheck tax-free.
A high deductible health plan with HSA combination can put you in a great financial situation, depending on your circumstances.
You can add money up to the health savings account annual limit for 2018 ($3,450 for individuals ($3,500 for 2019), and $6,900 ($7,000 for 2019) for families covered under qualifying family medical plans) post-tax and deduct taxes later when you file your tax return.
I should caution, not all high deductible health plans qualify for the use of an HSA. In that case, what qualifies as a high deductible health plan for an HSA?
There are high deductible HSA rules. To meet them, your high deductible health plan must meet both of the following criteria in 2018 and 2019:
- Minimum deductible of $1,350 for an individual ($2,700 for a family)
- Out-of-pocket limit of ≤$6,650 for an individual ($13,300 for a family)
Should You Pick a High Deductible Health Plan?
As mentioned earlier, high deductible health plans tend to save consumers more money despite having greater out-of-pocket costs. Consider the following items when deciding if a high deductible health plan is right for you:
- Are you an “invincible”? Are you healthy and rarely get sick?
- Can you afford to pay your full deductible either through your HSA or your own after-tax funds?
- Can you make regular contributions to your HSA?
Low deductible health plans are great for their predictability. The regular monthly premiums can fit neatly into your budget while you have a lower threshold to begin receiving coverage benefits. Some questions to answer when deciding if a low deductible health plan is right for you:
- Do you have on-going medical treatment from a chronic condition?
- Do you take expensive prescription medications? Or maybe just one really expensive drug?
- Are you expecting the birth of a child? A lot of medical care comes with pregnancy.
- Do you or your family participate in any risky activities that might make you more susceptible to needing medical treatment?
Your best choice is likely the plan which allows you to answer “yes” to more of the above questions.
What Works For Us – High Deductible Health Plan(s)
My wife and I got married last year (cue the AWWWWs) at a wonderful venue in Northern California near her hometown of Sacramento. My father officiated the event and we had a beautiful, well-attended Traditional Persian meets New Orleans-themed wedding. It went off without a hitch. Lucky us.
But when the romantic feelings of that blissful day wore off and we came back down to earth, we had to file some paperwork. A buzzkill if I’ve ever heard of one.
It turns out getting married comes with a lot of paperwork required to combine bank accounts, add authorized credit card users and life insurance beneficiaries, change inheritance rights on investment accounts, and much, much more. Another form we had to submit when we came home was a “life event change” declaration alerting our employers to our marriage.
Up to that point, we hadn’t considered the impact of our marriage on our health insurance. After doing some digging, we discovered our benefits wouldn’t change if we combined under one plan. However, by switching from two insurance plans to one (for either employer), we would be forced to begin paying premiums for the same level of coverage.
We wanted to avoid that outcome at all costs. Why pay for something you had been getting for free? We dodged a bullet for now and saved roughly $250/mo in premiums. This may change when we have our next life event, the birth of a child. Until then, we’ll be sipping our nutmeg coffee in a seasonally-appropriate living room going it alone, but together.
About the Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.
Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions, tax reform in 2018, or other useful tax topics. I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.
Please continue to watch the site for more to come and post below with your questions or comments.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.