HSA or No? How a High-Deductible Plan with a Health Savings Account Might Help

Health Insurance

December 20, 2017

As you browse options for healthcare plans, the relatively low premiums of high-deductible plans may catch your eye. Their low cost is appealing, but there must be a catch, right? Yes, these plans do have some drawbacks. Still, once you understand how they work, you may decide that a high-deductible plan is right for you – especially if you combine it with a health savings account (HSA).

What is a High-Deductible Health Plan?

A high-deductible health plan is an insurance plan that has a higher annual deductible and out-of-pocket maximum than your average major medical plan. The premiums are typically lower than those for traditional plans, but until reaching the deductible, covered individuals must pay out of pocket for most healthcare services.

In 2018, an HDHP must have an individual deductible of at least $1,350 and a family deductible of at least $2,700. The individual deductible and out-of-pocket maximum cannot exceed $6,550, and the family deductible and out-of-pocket maximum cannot exceed $13,300.

Keep in mind that these figures apply only to in-network services. For out-of-network services, your ofut-of-pocket costs could exceed the $13,100 annual limit, and your plan might not cover out-of-network services at all.

What is a Health Savings Account?

People who enroll in HDHPs are eligible to open health savings accounts. These are special pre-tax accounts that participants can use to save money for covering qualified medical expenses, such as copayments and deductibles. Because you don’t have to pay taxes on the money saved in an HSA, using one of these accounts can help you save on your healthcare costs. You can contribute tax-free funds to your HSA up to a certain amount each year. For 2018, that amount is $3,450 for an individual or $6,900 for a family.

If you don’t spend all of the funds that you put in your HSA one year, you can keep the money in the account to use on medical expenses in future years, unlike the flexible savings accounts employers offer to their workers. You can open an HSA through a local bank or an online bank. Some financial institutions offer HSA accounts that earn interest.

Benefits of a High-deductible Plan

If you have your eye on an HDHP, it may be because some of the following benefits have caught your attention:

  • Lower premiums: Both individuals and employers are fond of the lower upfront price tag that an HDHP offers.
  • Opportunity to open an HSA: Only HDHPs are eligible to take advantage of these tax-free savings accounts for medical expenses.
  • Control over your care: Self-directed healthcare is often touted as one of the greatest benefits of HDHPs. The idea is that, instead of putting the majority of your healthcare dollars toward premiums, you decide where to spend on healthcare and where to save.

Drawbacks of a High-deductible Plan

Despite the appeal of a high-deductible plan, this approach to insurance does have some drawbacks:

  • No copays: Unlike many traditional plans, HDHPs often do not have copays, which can reduce the cost of your care throughout the year. Without copays, you will pay the full amount for most doctor visits, tests, prescriptions and other services until you meet your annual deductible.
  • Potential for large out-of-pocket expenses: With an HDHP, if something major comes up, you’ll potentially have to pay thousands of dollars before your insurance kicks in.
  • Possibility of putting off treatment: According to one study, approximately one-third of people whose plans had high deductibles put off or skipped out on important care because they didn’t have the funds to cover their deductibles.

Who Should Get an HDHP?

People with few or minimal healthcare needs

There’s no guarantee of what the next year will bring for you health-wise, but you likely have a feel for whether you’re typically a healthy person. If you don’t often go to the doctor, take expensive prescription drugs, or spend much time in the hospital, you can potentially save a bundle by enrolling in an HDHP. Your premiums will be lower than with a traditional plan, and if you continue to stay healthy, you won’t spend much on out-of-pocket medical expenses either.

Although it’s not a hard and fast rule, younger people are often healthier than older people; therefore, they often have fewer medical expenses. That’s why HDHPs are more popular among millennials than older generations. Approximately 44 percent of millennials who work for large companies willingly choose to enroll in high-deductible plans. Only 36 percent of the boomer generation does so.

People with the discipline to save money for healthcare

You know that if you don’t pay your health insurance premium, you’ll no longer have coverage. This can serve as powerful motivation to pay your premium every month. Contributing money to your HSA doesn’t work the same way. If you don’t sock money away in your account, you won’t lose your account or your healthcare coverage. You just won’t have any savings. Since medical crises can hit at any time, that’s a risky gamble.

It’s wise to keep enough money in your HSA to cover your deductible. Successfully navigating an HDHP requires that you regularly contribute to your account. If you’re a person who is disciplined at saving money, then you may find that an HDHP is a good fit for you.

People who can (and are willing to) spend money when needed

As noted, one drawback to HDHPs is that the price tags associated with healthcare may dissuade people from getting needed medical care. However, putting off getting important tests, seeing a doctor, or refilling prescriptions is not a wise health move and could end up creating bigger, more long-term expenses down the road.

In order for this type of health plan to really work for you, you must resolve from the outset to spend the money in your HSA when necessary. If you consider yourself a person who manages your money well but also isn’t afraid to spend funds when necessary, you may be successful at managing your health under an HDHP.

Who Should Avoid These Plans?

People with chronic medical conditions

Regular trips to the doctor and multiple monthly prescriptions can add up quickly. Add a few hospitalizations to the mix, and your costs could skyrocket. For people with chronic health conditions, this is often the reality of their medical situation, and it can make an HDHP an expensive proposition. In families with multiple health concerns, the costs associated with an HDHP will rise even higher.

That’s not to say that an HDHP is never right for people with chronic conditions. Before selecting a plan, do a cost analysis of your projected medical expenses to weigh whether an HDHP or a traditional plan would likely be more beneficial for you. In most cases, people with regular (and costly) medical needs will benefit from a traditional major medical policy.

People who don’t have enough savings to cover unexpected bills

One smart way to approach an HSA is to take the amount that you save on your premiums and invest that cash in your HSA. Over the course of the year, you may be able to build a significant nest egg. But what happens if you face major medical expenses before you’ve had the chance to build up your HSA in that way? You could be faced with bills you can’t pay. If you don’t already have some savings to help cover potential expenses, it could be better to stick with a traditional plan.

People who don’t want to do the extra legwork that an HDHP requires

Advocates of HDHPs emphasize that these plans can help consumers take control of their healthcare. That’s true, but it means that you’re probably going to have to invest some time in researching your best options.

First of all, if you’re in an HDHP, you’ll definitely want to find out what sort of healthcare you can receive at absolutely no cost to you. Under the Affordable Care Act, all insurance plans that meet the standards for minimum coverage must offer free preventive care, such as well checks, immunizations and mammograms. Therefore, to use an HDHP well, you’ll need to be willing to learn what is covered so you won’t be tempted to put these services off for fear of getting hit with a bill.

Furthermore, for care that is subject to the deductible, prices have a tendency to vary among providers. A savvy consumer will call around to find where the best price for a treatment, a test or a prescription can be found. If this sort of research doesn’t appeal to you, you may end up paying more than is necessary on an HDHP.

Is an HDHP right for you? There’s no one answer that’s right for every family. You’ll have to weigh the pros and cons in light of your spending habits, medical needs and personal preferences. If you choose to enroll in an HDHP, be sure to open an HSA along with it, and save diligently so you’ll be prepared whenever a medical need arises.