Saving Money with High Deductible Health Plans
Insurance, in whatever context, is simply the transference of the risk of a significant financial setback from an individual, or business – which cannot afford the risk – to the capital markets, which can.
Insurance, therefore, works best when it insures people against high-cost, low-frequency events. The lower the frequency of the event, the more efficient the insurance protection. When the event is a high-cost, catastrophic event that is very rare, then individuals can protect themselves financially against a truly devastating risk by paying a premium they barely notice.
You can insure against the unexpected. You cannot meaningfully insure against a certainty. The more common the event you try to insure against, the less efficient the insurance.
This is the logic behind high-deductible health plans: By setting deductibles relatively high, the insurance company does not have to pay benefits for minor, routine expenses, or most recurring, predictable care. This means that if you are in good health, and you have a high deductible health plan, you don’t wind up subsidizing the costs of people who need regular, ongoing treatment, or routinely seek treatments for minor events.
How Much Can I Save with HSA/HDHPs
This means that high deductible health plans can potentially save you a significant amount of money. Actual results can vary widely with your state, zip code, age and medical history. But according to a recent survey from the Henry J. Kaiser Family Foundation – a think tank that specializes in health insurance and human resources issues, the total annual cost of HDHP/HSA plans is nearly $400 per year less for competing plans for individual policies, and nearly $1,500 less for family plans.
HDHP plans typically come with a health savings account. This is a special savings vehicle, restricted to HDHP plan members, that allows consumers to set money aside, on a pre-tax basis, to pay for medical expenses. The HSA is designed to ensure that people can pay the higher-out-of pocket costs of HDHPs when they do have a medical event.
HSAs Allow You to Use Tax-Free Dollars For Health Care Costs
Contributions are tax-deferred, earnings grow tax free, and withdrawals to pay for qualified medical expenses are also tax-free. Unlike flexible spending arrangements, however, participants can keep their balances from year to year – allowing them to grow, tax deferred. They need not forfeit any unused balances in the HSA to an employer.
Expenditures for non-qualified medical expenses are generally subject to income tax, plus a 20 percent penalty. A recent change to the law removed over-the-counter medications from the list of approved medical expenses, so use caution when using HSA funds to buy medicine.
HSAs and high deductible health plans work best for those in higher tax brackets, since the tax benefits of an HSA are more valuable if you pay a higher percentage of your income in taxes. They are also best for those in reasonably good health, who do not have significant needs for ongoing or routine treatments. However, some high deductible health plans will provide at least some coverage for basic preventative and/or diagnostic procedures.
They also work best for those who can afford to actually contribute to their health savings account. This account is a valuable benefit, as sooner or later you will probably have a medical condition or event that will require you to pay your deductible – especially if you have a family.