On Health Insurance Options

I've had one reader say he'd be interested in hearing about the different Health Insurance options we've considered and why we chose what we chose. Because one person's interested, the topic will be fascinating to everyone, right? Well, just pretend.

First, let's define some concepts. Just as in your textbook, key words will be in BOLD

A typical employer-sponsored health insurance program goes like this:

You (the employee) pay some of the premium (the fee that allows you to be a part of the program), your employer pays some (usually, a lot more than you do). When you have medical costs- you go to the doctor or pick up prescription medication, you have a co-pay. Sometimes this is a flat amount- $25 for the doctor's visit, or $10 for the generic medication at the pharmacy. Other times it's a percentage of the costs- 20% of the cost an emergency room visit, for example. The insurance pays the rest of the costs. With these plans, there's also a deductible and an out-of-pocket maximum. The deductible is the amount you'll have pay for many medical charges before insurance starts covering any of it- beyond it, the insurance will pay all or a percentage of the charge. The out of pocket maximum is the most you'll ever pay in a year for medical charges (sometimes excluding co-pays for medicines).


A few constructs have been set up by the government to help pay for the out-of-pocket expenses that come along with health care:

A Flexible Spending Account can be set up and used for qualified medical expenses- Everything from co-pays for medical services to over-the-counter medicine from the drug store to band-aids and sunscreen. The amount put into this account is determined when you sign up for the account, and deducted throughout the year from your paycheck, pre-tax. Because the money is going into the account before taxes, it's like saving 25% or so on your medical expenditures. Good deal. The catch on this account: The money is good only for the year you put it in. If you have any left at the end of the year, you lose it. Estimating health costs accurately is the key with an FSA, or you end up stocking up on a lot of Q-tips, sunscreen, and allergy medicine at the end of the year to spend the rest of the account. FSA's are often paired with typical insurance plans like I described above.

A Health Savings Account is similar to an FSA in many respects. The money in the account is also pre-tax, and can be used for all the same purposes as an FSA. The difference is, the money stays in the account and rolls over year to year, and the account is always paired with a High-Deductible Health Plan. The account sits at a local bank, and we can make extra contributions (not directly out of our paycheck) at any time, and deduct (is that the right word?) that amount on our taxes.

A High-Deductible Health Plan is an insurance plan with lower premiums and higher deductibles than a traditional plan. With the lower premium, the insurance pays less of the medical costs incurred. Participants can use their HSA funds to pay for most of their health costs up to the deductible or out of pocket maximum. After the out of pocket maximum, insurance covers all costs. The company offering its employees a HDHP and HSA often will cover part of the lower premium as well as contribute to the employee's HSA.

So why choose one plan over the other?

I can only speak for our decision making process.

My company has an excellent traditional insurance plan that I've been very happy with. When Josh got a new job, his company offered a HDHP with an HSA. We ran some numbers.

The costs to us broke down into these categories:

Premiums: With the HDHP, we'd save over $1500 a year on premiums taken out of our paycheck. The HDHP premiums are THAT much lower.

Co-Pays: The traditional plan has a $10-$25 co-pay for medicines and doctor visits. The HDHP would give us a discount, but we'd be paying for the health costs out of pocket (well, out of our HSA). An exception: on our HDHP plan, we have no co-pay for all preventative care (doctor/dentist well-visits).

Payments into FSA/HSA: After having to scramble the first year to spend all of our FSA, we decided to put very little into our FSA- just enough to cover co-pays on medicines we buy regularly. If there were unplanned medical costs, we'd pay for the part of the costs not covered by the traditional plan after taxes and lose the pre-tax "discount". With the HSA, we wouldn't lose the money at the end of the year, so can sock it away for 'just in case' emergencies. If the emergencies never come, the account will fill to our out-of-pocket maximum and we can stop funding it until needed.

Deductible: The HIGH DEDUCTIBLE health plan obviously has a high deductible- the deductible is the same as the out-of-pocket maximum - $5000. The deductible on the traditional plan is much lower- $500.

Out Of Pocket Maximum: The out of pocket maximum for the HDHP is actually $1000 lower than the OOP maximum on the traditional plan.

Conclusion:
In a typical year, with no medical emergencies, the HDHP is better for us. We're young, we don't take many medicines, and a couple doctor visits a year is all we have to worry about. The savings in the lower premium more than makes up for other higher costs.

In a worst case scenario, where we'd hit the out-of-pocket maximum with both plans because of serious injury or illness requiring hospitalization, the HDHP is better for us. The OOP maximum is lower, and we spent less on premiums, so we'd end up spending less overall.

In an in-between scenario, where we have significantly more medical expenses than usual, but not enough to hit the OOP maximum on the traditional plan, the traditional plan may be better. There's a break-even point, but I haven't figured it out yet.

We decided to go with the high deductible health plan. We want to be protected from a worst-case scenario, which we are, and probability says we'll have a typical year and save money. Because we're good at saving money for later, having an HSA makes a lot of sense for us- a second emergency fund, of sorts. I do realize, this is what makes sense for us, for now. When our needs change, when our family grows (or we anticipate it growing) we may make a different decision. And hopefully not annoy our HR people too much by changing all the time. We'll see how this goes, this year. So far, so good!

medical symbol from FunDraw.com