Moving From the Security of a PPO/HMO to an HSA-Qualified High Deductible Health Plan (HDHP)?
It’s hardly newsworthy health care is becoming more expensive. Whether measuring monthly health insurance premiums directly or the out of pocket costs upon receiving care, the trends are clear: costs are going up. Rising health care costs impact everyone. While employers still pay the majority of health care costs in the US, employees individual share of the total costs continues to increase. For this second group, employees and families, cost sharing consists of a few components and occurs across all insurance formats, including PPOs and HDHPs.
In this post we will discuss a few of the major factors in deciding how to select one over the other.
- HMO, PPO, and HDHP, all costs are rising. Unfortunately, no matter which form of health insurance you choose, your health care costs will rise. This is due to the fact the underlying costs of providing health care continues to grow, while these costs are being passed on to payers: employers and employees. No one choice of health care plan that can immunize you (get it?) against this growing cost. Occasionally a PPO will have deductibles so high it may “feel” like a high deductible, though not meet the IRS standards that qualifies a plan to be a “HSA-qualified HDHP.”
HSAs can “store” the difference in monthly premiums savings through account contributions, rolling over balances from year to year and employer to employer.
2. Many plans share the same network. While each health care plan is different, whether a PPO, HMO or HDHP, you should expect to have many of the same health care providers, hospitals and care clinics. The same goes for the prescription drug plan, which is structured outside of the care provider network but included as part of the overall health insurance plan. As a result the difference in plans often comes down to how the premiums, co-pays, deductibles and co-insurance work together in “risk sharing” the financial responsibility of providing health care costs to a group of people.
HSAs can help tip the financial scale in favor of HDHPs
3. Estimating health care cost is hard. Many employers, particularly large ones, offer health care cost projectors under various health insurance plans to help employees estimate anticipated costs to enable them to budget accordingly. These well intentioned efforts by employers give their employees peace of mind while supporting their benefit choice. However, these estimates are just that, estimates. Life — and health- can be unpredictable. Budget appropriately, and conservatively, when you can. Recognizing this, many financial advisors are starting to help clients budget not only for retirement health care costs, but also costs during their working years.
4. Health care insurance plan specifics may change year to year. Regardless of your choice of plan, with health care in a seemingly continuous state of transition you should review plans specifics each year during open enrollment. Even if you elect to remain in the same plan make sure you find out what may have changed. Also keep in mind that if you have certain preferred providers you should ask them directly about their participation. Your employer and their benefits consultants may not know about ongoing participation decisions by individual health providers, such as your long-standing pediatrician or OB/GYN.
5. HSAs can help tip the financial scale in favor of HDHPs. While often using the identical network as the PPO option, an HSA-qualified HDHP changes the economics by charging employees less in monthly insurance premiums in exchange for increasing the out of pocket costs due at time of service. Depending on how frequently the insurance plan is used, the savings in lower, fixed monthly premium often outweigh the out-of-pocket difference. HSAs can “store” the difference in monthly premiums savings through account contributions, rolling over balances year to year and employer to employer. Importantly, this difference can compound over the years through appropriate investing. Further, many employers offer deposit incentives to encourage employees to participate in these accounts. Most now offer brokerage features to invest HSA funds, similar to your 401k and IRA. Be sure to check with your employer about what financial benefits you may be entitled to.
While the financial planning details of health care plan selection are beyond the scope of this post, recognize that similar to insurance of all types; the health care consumer is often advantaged by agreeing to lower monthly premiums in exchange for accepting higher costs when submitting a claim. Given the many advantages of Health Savings Accounts, this is even more true when selecting an HSA-qualified HDHP and making full use the HSA’s investment savings and tax benefits.
About Aaron Benway, CFP, EA — Aaron is a Certified Financial Planner (CFP)and IRS Enrolled Agent (EA). He co-founded HSA Coach, a digital tool to educate consumers on HSAs, track health expenses and other documents, and provide individual financial calculators, to help consumers get the most from their HSA and other savings. To help individuals directly with their financial planning and wealth management requirements he founded AB Financial Planning.
Prior to HSA Coach Aaron was the CFO of HelloWallet, a financial wellness software startup purchased by investment research firm Morningstar. Earlier in his career Aaron was an investor at The Carlyle Group and a nuclear engineer in the US Navy. Aaron has an Electrical Engineering degree from the US Naval Academy and an MBA from Harvard Business School. Aaron lives in the Washington DC area with his wife and two children.
