This is the second post in a 5-part series on health insurance. We’ve explored what to do when your employer cancels your health insurance plan, and over the next few weeks, we’ll also look at my experiences with health savings accounts, how we save thousands on our health insurance bill, and using AFLAC for pregnancy.
Our health insurance journey last year took us in the direction of individual insurance plans over a group policy, which our employer decided to cancel. Having individual insurance simply means that instead of being part of a “group,” typically your fellow co-workers, you purchase the policy directly from the insurance company.
This is nothing new, of course, if you drive a car, own a home, or insure expensive engagement rings—most of those policies are bought and managed the same way.
One of the major choices we needed to make was whether to get a “traditional” plan, comparable to our former company policy, or a high-deductible plan (HDHP for short).
A High-Deductible Plan Defined
High-deductible health plans are exactly what they sound like—insurance plans that offer higher deductibles than most other traditional plans.
The “official” definition considers any plan with a deductible greater than $1,200 (or $2,400 for family coverage) to be a HDHP. That may not sound “high” to many of you, who already have deductibles in this range.
The main difference with HDHPs is that most costs, up to your deductible, are covered by you out of pocket. There are no doctor “co-pays” like with a traditional plan. Once you reach your deductible, however, all valid costs are completely covered.
HDHPs are therefore a form of “catastrophic insurance,” where day-to-day costs are covered by you, and the insurance plan kicks in when something major occurs (“major” being anything over your deductible limit).
What are the Benefits?
You might be wondering why paying (potentially) thousands of dollars out of pocket is a good thing. Well, here are some of the great benefits HDHPs offer:
- Lower premiums: The biggest benefit of these plans are lower premium costs, making them much more affordable on a monthly basis than traditional insurance. If you’re wondering how much less, it varies—but our own insurance premium, for example, went down 60% when we switched.
- Wellness benefits: Many HDHPs offer wellness benefits that cover yearly check-ups, mammograms, and in our case—child well visits and immunizations. If you have kids, this alone could save you thousands.
- Contracted rate: While you’re paying “out of pocket” for doctor’s visits, you are still paying the rate that the insurance company has negotiated with your doctor. For some procedures, this could be 70-80% less than the rate they would bill someone without insurance!
- Permits an HSA: Most HDHPs will allow you to open a health savings account, where you can put away tax-advantaged money to use for your health care expenses. More on HSAs in an upcoming post!
- Flexibility: Because you’re paying out-of-pocket for expenses, you have a lot more freedom in the type of care you choose. While it still pays to stay “in-network,” you can choose alternatives that may not have been available before.
What are the Drawbacks?
Of course, there are some major drawbacks to be considered, such as:
- Out-of-pocket costs: Up to the stated deductible, you’ll need to cover most of the costs associated with health care. Additionally, if you have a co-pay policy, you’ll have to pay a percentage beyond your deductible until you hit the “out-of-pocket maximum.”
- Savings discipline: With full-service insurance, you have peace of mind that you’ll be covered no matter what. With an HDHP, you’ll need to have the discipline to save a large portion of your income in a savings or HSA account to use for your health expenses.
- You may not be eligible for an HSA: While most people are qualified to apply for HDHPs, not everyone is eligible to take advantage of health savings accounts. More on that later this week…
Are HDHPs cost-effective?
Absolutely…depending on your age and health, switching to an HDHP can be the best thing you do for your budget this year. We currently spend about 40% of what we were paying with a traditional group plan, and about 60-70% of what an individual traditional plan would have cost.
In a few weeks, I’ll share exactly how much we’ve saved this year simply by switching to this kind of plan, and show you how you can find out if the math works for your situation!
Final Thoughts
With rising health care costs and a spotlight on health insurance with the recent U.S. health care legislation, HDHPs have become more well known as an alternative to traditional insurance.
Combined with health savings accounts, HDHPs can be the answer to lower expenses and more choice when it comes to how you handle your health care needs.
Photo by markhillary
Fiscal Fizzle 
As much as I love HDHPs with HSAs (I really do), there are a couple of ENORMOUS things that potential users need to understand when not going the group route:
1) You are not guaranteed coverage with individual health insurance like you are in a group plan. You need to pass through underwriting, which means that if you have pre-existing conditions or other circumstances making you ineligible for insurance, you will likely not get coverage. (This may change thanks to Obamacare).
2) Many individual plans do NOT cover everything, specifically maternity. If you get a plan that has maternity coverage, it’ll cost you extra every month on your premiums. So be completely sure of what your plan covers and what it doesn’t before signing up.
Great points Jason! You are definitely NOT guaranteed coverage, as my wife found out after giving birth to our baby (did you know that was a “pre-existing condition?” LOL). We ended up getting a conversion policy for her that DOES cover maternity, but you’re absolutely right–for most individual plans, this will be extra, and from what we saw, NOT worth the cost (better to save the money every month and pay the maternity costs yourself).
My company switched to a HDHP recently, and it has been quite a shock! It sounded great on paper, but with three asthmatics in our house, the prescription costs have killed us. Even after reaching our deductible (we did it in less than 3 months), we still have to pay OOP for prescriptions. We get a reduced rate, and I use our company’s mail-order plan for most items, but even after the deductible, it’s still $200-250/month that I have to cover just for medicines. Also, dental and vision are separate plans, so they do NOT apply to the deductible at all. I’m having to put $700/month or more into my HSA just to break even.
I want to set aside enough $$ to be ready for when the new plan year starts, but it’s going to be a challenge. Between the prescriptions, dental & vision costs and paying for one kid’s braces, we’ll be lucky to start the new year much above zero.
Maybe at some point, we will get where things even out, but for now, it’s costing us a lot more money than our old plan.
Thanks for sharing your story! These plans are DEFINITELY not good for everyone, so if you’re out there looking for new insurance and you have a choice (unlike this case, where I’m assuming the employer made the switch)–do your homework.
We have no ongoing prescription costs to speak of, so that wasn’t a factor when we considered switching, but it sounds like in your case, it’s a more expensive setup!!
Yeah, at first we thought it would be great, because we knew we’d hit our deductible early. But we didn’t read the fine print well, because we (many of us, actually) didn’t realize that prescriptions didn’t apply.
We’ll see how it goes. If I find some whiz-bang way to make it work better, I’ll be sure to let you know. 🙂
That surprised us too, but since it wasn’t a big concern, we didn’t think much of it at the time. I think the final plan we ended up getting has a separate prescription deductible, but it does have one.
We have an HSA. The primary benefit was since it is through the employer the premiums are pre-tax and the contributions are Federal pre-tax. A draw back is CA doesn’t recognize the contributions as being pre-tax. But for our family the allowed contributions to not actually cover the medical costs for the year. So I would be nice if the contribution limit were raised.
Thankfully, our prescriptions do count towards the deductible.