When is a High Deductible Plan a Slam Dunk? (Answer: Almost Always)

Slam Dunk

I recently had to take my son to the doctor for a few tests.  When I handed over my insurance card, the woman remarked that it had been a while since she had seen someone with a high deductible insurance plan.  That was puzzling to me, because when I compared the different plans my employer offered, the high deductible comes out on top almost every single time.

I’m guessing most people get scared by the thing right there in the name: a high deductible combined with higher out of pocket costs.  What they miss is that most high deductible plans have much lower monthly premiums and some employers even give you money just like a 401k match if you participate.  Combined with an HRA or HSA, they can be incredibly power tools for managing your finances with respect to healthcare.

While your plan options are most certainly different than mine, I’d like to walk you through how you can evaluate whether this plan might work for you.

A little background on HDPs

High deductible plans (for space I’m going to shorten to HDPs from now on) are one of the options for health insurance that is thought of as “consumer driven”.  The thinking was that by making consumers pay more of their healthcare dollars directly, they would cost compare among different providers, which would lead to increased competition and, ultimately, lower prices for everyone.

A common analogy was people wouldn’t use car insurance to pay for oil changes; it was more efficient for them to pay those costs directly and save insurance to pay for more catastrophic (and expensive) accidents.  Imagine how much more expensive your car insurance would be if it had to pay for every time you changed the oil!

I’m not going to debate the pros and cons of this from a politics/health outcomes perspective, but instead focus on the financial impact to an individual, namely me!

How Medical Insurance Works

There are four key things you need to look for when evaluating insurance options

  1. Premium – How much it costs to buy a particular plan, typically expressed in cost per month.
  2. Deductible – How much you have to pay towards medical expenses before a plan starts paying.  Deductibles are typically annual, meaning the clock resets back to zero at the start of the year.  Each individual on your plan has a deductible as well as an overall family deductible.
  3. Co-Insurance – The percent of medical costs your plan will cover after meeting your deductible, you pay the remainder.
  4. Out of Pocket Maximum (OoPM) – The most you can pay (not including monthly premium) towards medical costs in a single year between your deductible and what’s not covered by co-insurance.  Just like deductibles, there are out of pocket maxes for individuals and an overall one for the family.

To summarize, you pay everything up to the amount of the deductible, then a percentage of costs up to your out of pocket max.  Any costs above the out of pocket max, your plan pays for 100%.

My Insurance Plan Options

I get insurance coverage for my family through work, where I have three options to choose from: a PPO, an HMO and an HDP.  Below is a summary of the key terms of each plan.  Your plan options should look somewhat similar.  Please note that for simplicity, I’ve just included the family deductibles and in network coverage.

Deductible 800 700 3,000
Co-Insurance % 85.0% 85.0% 85.0%
Out of Pocket Max 4,600 4,000 10,000
OoPM Threshold 26,133 22,700 49,667

Here’s how it looks when you graph it out comparing how much I’d pay out of pocket for different levels of medical expenses:

As you can see, the HDP costs me a whole lot more than either the HMO or the PPO.  I have spend $3,000 before the plan starts paying anything and 15% of anything on top of that.  I could end up paying as much as $10,000 in a single year, but I’d have to have nearly $50,000 in medical bills for that to happen.  To my point above, I think this is what scares most people off.  If you have medical expenses, you’ll always pay more of them with an HDP.

I thought you said this was a slam dunk

So why would anyone ever willingly pay more?  It must be because they’re getting something of greater value in return.  With an HDP, you do: substantially lower premium.

Monthly Premium 252 325 118
Annual Premium 3,024 3,900 1,416
HRA Contribution 0 0 1,000
Effective Annual Cost 3,024 3,900 416

I only pay $118 a month in medical insurance premiums for my whole family.  That works out to about $1,400 a year vs. more than $3,000 for the PPO and $3,900 for the HMO.  In addition, my employer give me $1,000 in an Health Reimbursement Account (HRA) every year just for choosing the HDP.  This effectively lowers my annual cost to $416 or less than $35 a month.  It’s crazy that because I’m willing to pay more of my family’s medical expenses, my monthly health insurance premium costs less than a tank a gas.

Look at how the graph above changes when you include premium in with the out of pocket costs:

All of the lines shift up, but the HDP line moves a lot less than the others.  Now the HDP has the lowest out of pocket cost for anything up to nearly $30,000 in medical expenses (3x annual per person average medical costs in the US).

Absent something truly catastrophic, I’m almost always better off with the HDP.  And that is why it’s a slam dunk.

Bonus for Devil’s Advocates

Let’s say something catastrophic does happen and I happen to have a $50,000 medical bills one year.  By choosing the HDP, I’m putting at risk about $2,500, the difference between the out of pocket costs of the HDP and the other plans.

Now look at the difference between out of pocket costs if I have zero medical bills one year: also about $2,500.  That means for every year with low/no medical expenses, I save enough using the HDP to cover the incremental cost of catastrophic year.

What You Can Do

  1. At annual enrollment time, do a detailed comparison of your plan options.  While your inputs will inevitably be different than mine, you can still figure out what plan is best for your circumstances.  If you track your expenses online, you should be able to relatively easily see how much you spend on medical expenses.
  2. If you don’t have an HDP as an option, ask your employer to explore adding one.  All options have value.
  3. If you go with an HDP, bank the premium savings, preferably in an HSA.  You’ll need them to pay for the higher deductibles and out of pocket costs.
  4. Go to the doctor if you need to.  One of the biggest arguments against an HDP is that people who have them stop going to the doctor.  It’s painful to shell out a few hundred for an office visit when you’re used to a much lower co-pay, but you have to do it.  Just keep reminding yourself that you’re saving money on premium every month and will likely still come out ahead.
  5. If you or a family member has significant ongoing medical expenses, you’re likely going to be better off paying more premium each month and getting something other than an HDP.

Download the PVF Health Insurance Comparison Model

You can download the PVF Health Insurance Comparison Model that I used to create the charts and graphs above.  Populate with your own assumptions to see how your different medical insurance options compare across a range of potential medical costs.

In Conclusion

I know it’s a lot, but I hope this has been helpful for you to evaluate options for health insurance.  Does your company offer an HDP?  How much do you think it could save you?

John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.  

He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.

One comment

  1. You have explained I very well. I downloaded your excel tracker. our annual benefit selection window is going to be open shortly for 2018. I’ll use the spreadsheet for comparison. I see that I pay around 7k in premium even with my HDP premium Aetna plan and my F500 employer pays only $800 in my HSA.

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