Perhaps you’re confused at your health plan options. So many letters lumped together. Should you get an HSA or should you get a PPO?
Something People Get Confused By
Before we go further let’s clear something up.
It’s not a choice between an HSA plan and a PPO plan. An HSA (Health Savings Account) is a savings account you can use with a high-deductible health plan (HDHP). An HSA account helps you save for medical expenses. It’s not a form of health insurance.
A PPO (Preferred Provider Organization), refers to the network coverage your health plan gives you access to.
If you get your healthcare with providers who are in the network of your healthcare plan you pay less for healthcare, than with providers outside the network.
The biggest competitor to PPOs are HMOs (health maintenance organizations), which allow you to co-ordinate your healthcare with your primary care physician, but at the cost of having access to a smaller network of providers.
Here’s where it can get confusing.
Many HSA eligible health care plans (HDHPs) are part of a PPO network. But some aren’t.
Remember that an HSA eligible health care plan is called a HDHP. These plans are identified by their high deductibles but low monthly premiums.
The opposite of these relatively new plans, are traditional health care plans where you have high monthly premiums, in exchange for a low deductible.
Misleadingly, these traditional plans are usually referred to as PPO or HMO plans to differentiate them from HDHPs. Sometimes people will refer to these high premium low deductible plans as “typical PPO plans”.
This can be puzzling as HDHPs can be part of a PPO network. Therefore, they would be “PPO plans”.
To help simplify this perplexing piece of jargon, where technical terms clash with what people say everyday, we will use the term “typical plan” or “traditional plan” to refer to the older low deductible high premium plans, which is what the media may sometimes refer to as “typical PPO” or “typical HMO” plans.
Okay with that out of the way, let’s get to the heart of the matter.
The question isn’t whether an HSA is better than a PPO.
The question is do you want a high deductible plan, or do you want a low deductible plan?
- Some Health Plan Terms
- What is an HDHP?
- What do a HMO and PPO offer?
- Why Should You Get an HDHP?
- Why Should You Get a PPO or HMO?
- How to Work Out What Plan Is Best For You
Some Health Plan Terms
Before we move forward, let’s define a few terms you’ll come across when shopping for health plans. If you know these feel free to skip to the next section.
- Deductible: This is what you pay upfront for your medical care before your insurer’s coverage kicks in. Once you meet your deductible your insurer covers a large part of the bill. It resets every year.
- Premium: This is what you pay every month to the insurance company to have health insurance whether you use it or not.
- Copay: Predetermined rate you pay to access healthcare services. With your plan, you could have to pay $20 everytime you go to the doctor’s office or a $10 copay for your monthly medication.
- Coinsurance: Once you meet your deductible, your health insurer takes up the bulk of your medical bills. But not all of it. Your co-insurance is the percentage of a medical bill you pay for after you meet your deductible. For instance, with a 25% coinsurance, you would pay 25% of each medical bill, and your health insurance provider will cover the remaining 75%.
- Out-of-pocket limit: But you can’t just keep paying for your healthcare, otherwise in a bad health year even with the best plan you would become bankrupt. Your out of pocket limit is the absolute maximum you would need to pay for your healthcare in a year before your health provider covers 100% of the bill.
Here’s how they all fit together.
Every month you pay your premiums to get health insurance. When you visit the doctor, depending on your plan, you pay for the full cost of the service or the copay that is in your policy.
Once your bills add up to your deductible amount, your health insurance starts covering a large chunk of your bills. Between 60 and 90%. The coinsurance is the remainder that you pay.
There is a further cut off though. You’ll continue to pay your copays or coinsurance, until your bills add up to the out-of-pocket maximum.
Once you hit this limit, your insurance provider starts covering all of your medical costs. At least until the year ends.
Now that you know this, you’ll be able to better judge whether a high deductible or low deductible plan is best for you.
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What is an HDHP?
A high-deductible healthcare plan (HDHP) is one where you have high deductibles and out-of-pocket maximums but lower premiums than traditional plans.
In 2019, the IRS states that an HDHP must have a minimum deductible of $1350 a year and an out-of-pocket maximum of $6750 for individuals. For families, the figures rise to $2700 and $13500 respectively.
It stands in contrast to traditional PPO and HMO plans.
What do traditional PPO and HMO plans offer?
These traditional plans (the none HSA eligible ones) have higher premiums but a lower deductible and out-of-pocket maximum. In fact, some HMO plans have no deductible or out-of-pocket costs. They’re great if regular office visits are part of your health regimen.
The difference between a PPO and an HMO is on the network you can get healthcare with, and whether you need a referral to see a specialist. With an HMO you deal with your primary doctor most of the time. A PPO, on the other hand, gives you options to see other doctors and specialists.
Compared to an HDHP though, these traditional plans allow you to see the doctor more without paying for each visit.
Why should you get an HDHP?
Some HDHP plans may make you eligible for an HSA. HSAs grant you tax benefits if you save and invest into a rainy day fund for healthcare expenses.
Your HSA contributions are tax deductible from your income tax, thus granting you tax savings. You can also invest your HSA with mutual funds over the long-term, with your interest and dividends being tax-deferred.
If you don’t spend it, you can keep the gains and spend them, tax-free, when you retire. An HSA provides you with an emergency fund for when you do fall ill in case you need it.
HDHP plans are best if your risk tolerance is high. If you don’t expect medical care throughout the year, and would rather put your money into savings and investment.
Because of this they’re often recommended to young and healthy employees.
However, with an HDHP, if you do visit the doctor, you will need to pay significant amounts of money out of pocket before your health insurance kicks in.
That broken leg you get while skiing? It doesn’t just hurt, it could double the cost of your vacation.
Why should you get a traditional PPO or HMO?
On the other hand, a traditional plan is great if you expect to make regular doctor visits or to get continuous medication.
Their lower deductibles mean you’ll hit your limit sooner, and your insurance coverage will kick in earlier. For instance, they’re great if you’re pregnant as you’ll be making regular checkups with your doctor while you’re expecting.
Pros and Cons of HDHP Plans
|Pros of HDHP plans||Cons of HDHP plans|
|HDHP networks aren’t as narrow as HMO networks. This means you’re more likely to be in network when travelling, saving you money if you fall ill.||Chronic illness leads to high out of pocket expenses.|
|Your out of pocket expenses aren’t at the market rate, but will be at a special (hopefully) cheaper rate. A rate which your healthcare provider and insurance company negotiate.||If you have high monthly out of pocket expenses, then you won’t be able to max out your HSA. Being able to max out your HSA is a key advantage of HDHPs.|
|If you qualify for an HSA, you can move this from your old employer. Great if your switching jobs or thinking of self-employment or retiring.||Deductibles can be high – as high as $13,000 for families. This can be a colossal financial setback if you’re unprepared.|
|If you don’t have expensive medication, lower monthly bills as lower premiums. More money in your pocket every month.||If you’re older a simple Doctor’s visit can balloon into a battery of tests and screenings. This is so they don’t miss anything. But, these costs add up fast, and your expenses can be quite high before you hit your deductible.|
Frequently Asked Questions
Can I have an HSA and a PPO?
Yes! In fact many HSA eligible health care plans are part of PPO networks.
Though not all PPO plans are HSA eligible. Check if your plan allows you to have an HSA when shopping around.
Is it better to have an HSA or a PPO?
As we’ve said such a question is misleading. HSAs are a form of savings account that you can get with some healthcare plans. PPOs refer to the network your health insurance gives you access to.
But people tend to associate HSAs with high deductible plans. And they associate PPOs with low deductible plans.
Hence the correct question is: Is it better to have a high deductible or low deductible health plan?
The answer: it depends. It depends on your risk tolerance, how often you expect to visit the doctor, and how much you can afford to save up.
For instance, if you are:
- Healthy (thus expect no doctor visits)
- Have a high risk tolerance
- Are HSA eligible
- Can afford to max your HSA contribution limits
Then an HSA eligible high deductible plan may be worthwhile for you. This is because you can use the savings in your monthly premiums to invest in an HSA.
But if you are:
- Have pre-existing medical conditions that mean you need regular check ups
- Have a low risk tolerance
- Can’t afford a significant medical bill
Then a low deductible health plan, even with the higher premiums, would make more sense for you.
What’s the difference between HRA and HSA health insurance?
HRAs (Health Reimbursement Arrangements) have a similar premise to HSAs. It’s a savings account which you can use to reimburse medical expenses.
The big difference is that HRAs belong to your employer (and only employers can offer them to you). But HSAs belong to the employee (you).
Also, you, your employer or a family member can fund your HSA. But only employers can fund an HRA.
Your HSA is portable as well. If you leave your company you can take it with you to a new company, or use it for retirement, like an IRA.
But with an HRA, if you leave your employer, you lose access to that money. It belongs to the employer.
What’s better, an HSA or an HRA?
Like most things in life, it depends. It depends on you and your needs. HRAs and HSAs also have different benefits to employers and employees.
If you’re an employer:
Advantages of an HRA include:
- Has tax advantages.
- You can integrate them with FSAs (which we cover here).
- Can help keep employees.
Advantages of an HSA include:
- Tax advantages.
- You have flexibility with how much you contribute (you can contribute all, some, or none)
- Less record keeping.
- Your workforce becomes more engaged with their health care and medical expenses.
- Lower expenses to your company.
If you’re an employee:
Advantages of an HRA include:
- No need for an HDHP.
- Funded by your employer in full.
- You have access to the funds from the first day of coverage.
Advantages of an HSA include:
- You can use it for long term savings and gain interest.
- You can contribute to it tax free, and also gain interest, tax free.
- You get to spend it tax free on health care expenses, lowering your costs.
- You can move it with you to a new employer.
Are all high deductible plans HSA eligible?
No. In 2016 only 19% of HDHPs on the federal exchange were HSA eligible.
A HDHP doesn’t need to only have high deductibles to be HSA eligible. According to the IRS, to qualify for an HSA you must:
- Have cover under the IRS’s definition of a HDHP on the first day of the month
- You have no other health coverage, nor are you enrolled in Medicare.
- You aren’t claimed as a dependent on someone else’s tax return
The IRS’s definition of an HDHP is:
- A higher annual deductible than typical health plans
- A max limit on the annual deductible and out-of-pocket medical expenses that you must pay.
- Out of pocket expenses include copayments and other medical expenses, but not premiums.)
Also to be HSA eligible, a HDHP has to offer no benefits before you hit your deductible. Deep in the IRS guidelines you’ll find the following language:
“except for preventive care, [the] plan may not provide benefits for any year until the deductible for that year is met.”
This means even if your high deductible plan:
- meets the out-of-pocket limit
- the minimum deductible
- You’re HSA eligible
But your plan helps to pay for X-ray visits before you hit your deductible, then you can’t get an HSA.
Can I have an HSA if my employer offers an HRA?
Yes, but only under very limited circumstances. Most general HRAs will make you ineligible for an HSA.
But if your company offers a “limited purpose” HRA or a “post-deductible” HRA, then you may still be eligible for an HSA. Also, if your employer contributes to an HRA you can only use when you retire you may be eligible for an HSA.
A “limited purpose” HRA is one where you can only use it for dental, vision or preventative care.
A “post-deductible” HRA is one where you can use it to pay for medical expenses after the IRS deductible is met.
Can I contribute to an HSA without an HDHP?
But you can still spend the funds in your HSA or reimburse your medical expenses until the account is empty.
But if you want to top up your HSA? You’ll need to enroll in an HDHP.
Can I have an HSA if my spouse has an HSA?
First, you would need to qualify and be eligible for an HSA. Let’s assume that’s the case.
If your spouse has an individual health policy and no other form of health insurance, then you can get an HSA.
BUT if your spouse uses an FSA (Flexible Savings Account) [link to article], then you wouldn’t be eligible. This is because the IRS would see you as covered by “other insurance”.
The devil’s in the details though. If your spouse’s FSA is a limited purpose FSA (one that covers vision and dental only) then you can get an HSA.
Can an HSA plan have copays?
Yes. The IRS defines copays as an out-of-pocket expense in an HSA eligible HDHP. HDHPs have to have a max out-of-pocket limit.
Can HRA be used for premiums?
(See above for the definition of an HRA.) For most employers, the simple answer is no.
HRAs were often used by employers to reimburse workers insurance premiums. But, that changed with the Affordable Care Act (ACA).
Under the ACA an HRA can no longer pay for health premiums. There are some exceptions though.
ACA market reforms do not apply to “Retiree HRAs” and One-Person Stand-alone HRAs. The first being an HRA only offered to retirees. The second being an HRA with only one plan member.
Under these two specific HRAs you can use them to reimburse health care premiums.
Can HRA funds be rolled over to an HSA?
You can roll over an HRA into an HRA account in some circumstances.
But as of 2012, you can’t roll funds over from an HRA into an HSA.
Can you contribute to an HSA without health insurance?
No. To contribute to an HSA you must be on a qualified HDHP and not otherwise insured. A family member can contribute on behalf of other family members as long as they are eligible.
But to be able to contribute to an HSA, you need to have a HDHP.
How to Work Out What Plan Is Best For You
When deciding what plan to choose you’ll need to have to take a thorough look at the following factors:
- Do you expect to visit the doctor often or not? What is your risk tolerance? Will you be able to afford an expensive medical bill if an unexpected event happens?
- Do you travel often? You’ll need to check how large the network your provider would cover. Otherwise, an out-of-network hospital visit could mean you pay the whole medical bill.
- Take a clear look at the math of the plans you’re weighing up. If possible, put them through a calculator like the one found at this site
Sometimes even though the deductible for a traditional plan is lower it doesn’t make financial sense if the employer contribution to the HSA in the HDHP plan is high. Don’t forget contributions to an HSA are made before tax.
At the end of the day, no-one can tell you what plan is best for you. Only you know your unique situation, and your risk tolerance. Talk to a tax advisor and make the choice that’s best for you.
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.