HDHP HSA vs PPO: Is HSA or PPO Better?6 min read • November 10, 2018
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?
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, on the other hand, is a form of health insurance. PPO stands for Preferred Provider Organization, and refers to the type of network you can access for healthcare.
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.
PPO plans are traditional plans that tend to have lower deductibles and higher premiums. Other healthcare plans like a health maintenance organization (HMO) have lower premiums and low or almost no deductibles, but you have a smaller choice of providers.
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 PPO or HMO 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 a PPO and HMO offer?
These traditional plans 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 PPO or HMO?
On the other hand, a traditional plan like a PPO or HMO 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, a PPO or HMO is great if you’re pregnant as you’ll be making regular checkups with your doctor while you’re expecting.
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.