Choosing health plans is not an easy task. Most people feel overwhelmed and ill-prepared to make such a decision.
As a previous employer, I remember trying to navigate through the various health plan options to offer to our employees. I had to choose plans with imperfect information in a limited time frame. On the flip side, as an employee, I also remember being in a similar situation – how do I select the right health insurance plan for myself and my family with the same imperfect information?
I know I’m not the only one who has been in this situation. Since this is an issue for many employers and individuals, we (Lively) decided to walk people through a series of scenarios. These scenarios are just that – scenarios and examples for how certain situations may play out. It may not be the scenario that you are experiencing, but the logic can be applied to almost any situation.
Choosing Health Plans
Before we jump in – remember, there are two parts to your HSA: your medical plan and your actual HSA.
- Medical plans must meet special requirements to be part of an HSA. They may be different than what you are used to. The Internal Revenue Service (IRS) sets HSA rules and limits and updates the limits annually.
- Your medical plan must be a high-deductible health plan (you may see it referred to as an HDHP)
- You must satisfy your deductible before your medical plan pays benefits – similar to how your car insurance works
Setting the Stage: Background
Brandon is a single guy working in ABC Company’s IT department. Brandon still has a lot of student loan debt so the idea of an HSA savings plan sounds great. But, he’s worried about the high deductible.
ABC Company is offering its employees two choices this year for their medical plans.
- The new HSA plan with the high-deductible (HDHP) medical plan –
- The existing Preferred Provider Organization (PPO) medical plan (the more traditional plan offering)
Here’s the cost breakdown for the two plans:
NOW, let’s see what happens when Brandon has some healthcare expenses during the year.
Let’s compare the annual costs for the HSA/HDHP and the PPO Plan. The illustration assumes Brandon used participating network doctors and pharmacy for both the HSA/HDHP and the PPO Plan.
TIP:You save more money through the plan’s network discounts. Be sure to check if the doctor or pharmacy is part of your plan’s network.
Scenario #1: HSA & HDHP
*The above scenario assumes Brandon used HSA savings to pay for his $114 healthcare expenses. He could decide he’d rather save that money and pay the $114 out of his pocket. His new rollover amount for his HSA savings would be $2,100. Brandon’s choice.
…now let’s review those same services from Scenario #1 under the PPO Plan
Scenario #2: PPO Plan
Now, let’s see what happens if Brandon has a few unexpected visits during the next year. He had the same preventive care as he did in the first year and a refill on his previous prescription. But he wasn’t very good about taking his prescription! He was diagnosed with pneumonia, which meant more healthcare and more costs.
The good news is Brandon has his rollover plus higher contributions in his HSA savings. We’ll use the following in this scenario.
- ABC Company increases its annual HSA contribution to $660
- Brandon increases his annual HSA contribution to $1,800
- Brandon’s portion of the premium increased to $945 (due to an increase in total premium) for HDHP and $1,260 for the PPO Plan
Scenario #2 – HDHP + HSA
* The above scenario assumes Brandon used HSA savings to pay for his $842 healthcare expenses. He could decide he’d rather save more money and pay part or all of the $842 out of his pocket. Brandon’s choice.
…now let’s review those same services from Scenario #2 under the PPO Plan.
Scenario #2 - PPO Plan
Did you see what happened? Even though Brandon paid the full discounted fees with the HDHP + HSA (because he had not met his $1,500 deductible), he still saved money over the PPO plan. Why? Because of plan design differences and the higher PPO plan premium.
But what happens if Brandon has a lot of healthcare costs during a year? For Scenario #3, let’s assume Brandon had all the above costs (from Scenario #1 and Scenario #2) during the third year, plus surgery to repair a broken leg he got while skiing.
- ABC Company’s annual contribution remained the same for the third year ($660)
- Brandon decided to contribute $2,400 annually to his HSA savings ($200/month)
- Brandon’s portion of the premiums increased to $990 for the HSA and $1,300 for the PPO Plan
Scenario #3 - HDHP & HSA
*Brandon could decide to use most of his savings to pay for his healthcare costs or save more to roll over and pay for some of the costs out of his pocket. Brandon’s choice.
Now, for the PPO Plan.
Scenario #3 - PPO Plan
In this scenario, even though Brandon met his out-of-pocket maximum with both the HDHP + HSA and the PPO Plans, his costs were much higher for the PPO Plan. Brandon had no savings plan to help cover his costs under the PPO Plan.
Update: In the scenarios above, “cost using HSA savings” doesn’t account for the contributions (cash outflows) made by Brandon. The reason for this is the value for those contributions will vary based on Brandon’s tax rate. The higher the tax rate, the more value he will get. Special thank you to Cary for pointing this out!
Why does this even matter?
Few of us want to spend our hard-earned dollars on healthcare. However, even the best money-savers find themselves short when the unexpected happens.
With an HSA, your tax-free contributions are deducted automatically and deposited into your savings account. As your money grows tax-free, you can protect your other assets and savings when you need to pay for healthcare services.
How you use your HSA is your choice. Imagine what you could do with the money you save.
Invest in your health®. You will be glad you did.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.