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High Deductible Health Plans

This article is an original article from January 5, 2009.  It was written by Nick Perry.

We all know that health insurance is important, and many of us are only offered High Deductible Health Plans.  Without health insurance, we’re open to an unacceptable level of risk from unforeseeable, unavoidable health problems. But we know too that sometimes it can be tough to fit health insurance into our budgets. Trust me, I know – long ago, my family thought that we were spending a little too much money each month and thought it might be a good idea to save by cancelling our family health insurance policy. Well, after a while, my parents realized that perhaps this wasn’t the best idea – my mother hasn’t ever been the gambling sort, and she was worrying constantly about what might happen if one of us got sick without coverage. So my parents sat back down and decided that we’d just skip eating out a few times a month, maybe give up some of the premium channels in our cable package, and perhaps I didn’t really need to be taken to Toys R Us quite so often (I realize now that they made the right decision, but there’s no way you could have convinced me of that then!).

That was probably about fifteen or sixteen years ago. Since then, my parents’ combined medical bills have totaled in the millions of dollars. A fourteen year battle with Ménière’s Disease for my mother and a failed struggle with cancer for my father meant the bills rolled in fast and hard – and we didn’t see the onset of either one coming. Looking back now, I almost have to laugh. The amount we’ve paid in premiums is negligible compared to what the cost of her streptomycin injections and brain surgery would have been out-of-pocket. Paying for health insurance instead of HBO doesn’t seem like such a sacrifice when I realize it bought me a few extra weeks with my dad. The point is, I know it can be tough to find room in the monthly budget for health insurance coverage – but it can frequently be absolutely impossible to find room for those medical bills once they hit you.

We’ve used this example in another article, but it’s a good one that bears repeating. What do you use your car insurance for: to cover your expenses in the event of a wreck, or to cover the expenses associated with oil changes, new windshield wipers, fresh air filters, and a wash and wax every weekend? Of course, your car insurance is there to cover the big things – not the little tiny things like the ones we just listed. But if your car insurance did cover those little things, can you imagine how expensive your premiums would be?

Health insurance works the same way! If you want your health insurance to cover every bump and scrape, then your premiums are going to be higher. If, however, you are willing to take responsibility for some of the minor costs of your medical care, then your premiums are going to be much, much lower. There’s a way to do this, and it’s called a High Deductible Health Plan. Remember the story I told you at the beginning of this article about my own life experiences with the health care industry from the consumer’s perspective? Those bills didn’t come from check-ins with our pediatrician, or from a case of the sniffles. They came from surgeries, tests, and esoteric procedures – and those are the crucial risks you can’t afford to not be protected from.

A High Deductible Health Plan, or HDHP, is defined as any health insurance plan with a single-person deductible of $1100 or more (or a family deductible of $2200 or more) and a maximum out-of-pocket limit of $5600 or more (or a family out-of-pocket maximum of $11200). Usually, however, a HDHP is set up with a straight deductible around $2500 to $5000. You are responsible for your medical costs up to that point – after that, you’re covered at 100% of allowable charges.

What does this mean? Well, first off, it means your premiums are lower. Since you’re assuming more responsibility for the little costs of your personal healthcare, the insurance company doesn’t need to take as much money in the form of premiums to cover that risk.

Secondly, it means that your insurance is covering the things you truly need. If you have a cold, sure, you’re going to have to pay for that visit to the doctor out of your own pocket. The average visit to a primary care physician costs about $60, not including any labs or diagnostics that might need to be done. Think about it though, how many times in the past year have you gone to the doctor? Say you went three times, and each visit cost you that $60 – that’s $180 in doctor’s office charges for the year. So for the year, you’ve spent the same as $15 every month ($15 a month X 12 months = $180). But if you’ve saved $30 a month by switching to a high deductible health plan, then you’re still ahead of the game! Not only that, but you’ve still got quality insurance to protect your assets in the event something happened.

Now, keep in mind, we’re not talking about limited benefit plans. A high deductible health plan isn’t a plan that has a ton of limitations, riders, exclusions, and confusing clauses. The premiums for a HDHP aren’t lower because the plan doesn’t cover cancer, or won’t pay on claims related to high blood pressure – if it’s a covered expense under one of the $1000 a month policies, then it’s a covered expense under a HDHP. The only difference is that you have to meet a higher deductible before your benefits kick in and, usually, that you won’t have a copay for your smaller health care concerns.

There’s one more thing about high deductible health plans that makes them an excellent solution for your health insurance needs: HDHP’s are the only type of plan qualified for health savings accounts.

A health savings account is a tax-advantaged medical savings account. Any money you place into your health savings account is not subject to federal income tax and can be used for qualified medical expenses at any time without federal tax liability. In other words, if you put money into a health savings account and then pay for a qualified medical expense with funds from that health savings account, then that money is never subjected to federal income tax. You can put up to $3000 a year (for an individual policy, or $5950 a year for a family policy) into your health savings account, and those funds roll over year after year after year. So long as you have a HDHP, you can keep depositing money into your health savings account up to the annual contribution limit. If you cancel your HDHP and move to a plan that doesn’t qualify for a health savings account, you don’t lose your money – you can keep taking it out until the account is depleted, but you can’t put any more in. Furthermore, you can take the money in your health savings account at any time even for non-medical expenses, but the funds you withdraw become subject to income taxation and you incur a 10% penalty.

So basically, with a high deductible health plan, you get the same coverage, a lower premium, qualify for a tax-advantaged health savings account, and have more control over your health care dollars. Sound like a good deal?

If you have any questions about high deductible health plans or health savings accounts, please don’t hesitate to contact me! As always, my email inbox is open and my phone is ready for your call. I’m more than happy to help you with any questions or concerns you may have!

 

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