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!
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