In 2015, my husband’s employer first offered a high deductible health plan, also called a HDHP or HSA plan (since it qualifies us to enroll in an HSA). It sounded like a pretty good deal to us. We decided to switch from the traditional PPO (preferred provider organization) plan to the high deductible plan. I was surprised to hear that he was one of only a few employees who took advantage of the new plan. Since HSAs are so wonderful, why were we in the minority?
High Deductible Health Plans and FEAR
I think it’s mostly fear that deters people from signing up for a high deductible health plan. They’re afraid that they’ll be one of the families that ends up with huge out-of-pocket expenses. Well, we took the gamble in 2015. Unfortunately, we had unexpectedly large medical expenses. For 2016, we felt confident that we were all healthy, and we gambled again… and once again had big medical expenses! I wanted to share our story with the high deductible medical plan and the situations that people fear. After looking at all the numbers, our situation actually doesn’t look so grim.
Our Health Plan Choices
Every employer offers different plans, but our choices are pretty typical:
PPO (Preferred Provider Organization) Plan
- Copays of $20 for a general doctor visit, $40 for a specialist doctor
- Preventative services covered at 100% (no copay or deductible)
- Prescription medications are a copay of $10/30/55 (depending on tier)
- Deductible of $750 per person and $1,500 per family on services other than doctor visits
- Plan pay 80% after deductible is met
- Can use with a Medical FSA of up to $2,600
High Deductible Health Plan with HSA
- $2,600 deductible per person, $5,200 per family (100% of all expenses paid by us up to that amount)
- Plan pays 100% after deductible is met
- Preventative services always covered at 100% (no deductible)
- Prescriptions are paid completely by us until the deductible is met (then copays apply)
- Ability to have an HSA account with contributions up to $6,750/year
- Company will contribute $1,200/year of FREE MONEY into the HSA
- Premiums are $40/month ($480/year) cheaper than the PPO
Who benefits from a HDHP with HSA vs PPO?
In general, the kinds of families that would benefit most from a HDHP are either:
- Very healthy and rarely use their medical benefits. In that case, the family would benefit from the lower premiums and access to the HSA. With our plans, if we didn’t use our medical benefits at all, we’d pay $480 less in premiums AND have $1200 in free money sitting in our HSA. That’s a no brainer! We could also contribute money into the HSA for tax-free savings.
- Very sick and use their medical benefits a lot. Families like these would reach their deductible quickly and then get to enjoy the benefits of 100% coverage for the rest of the year. In contrast, the PPO plan only covers 80% after the deductible. In the case of surgeries or hospitalizations this could make a HUGE difference.
Who would NOT benefit from a HDHP with HSA vs PPO?
Generally, the families that fall in between those two categories above do not benefit from a high deductible health plan. If you have enough medical expenses to meet (or come close to) your deductible, but don’t have anything else that year, then you’re going to pay more. The PPO plan would have worked out better in that case.
How did it work out for us?
It’s been a couple rough years for us with medical expenses. We thought we were going to fall into that “very healthy” category, but we definitely did not.
In late 2014, we needed to choose our health plan for 2015. At the time, our son was recovering from his 2nd ear drum repair surgery. The doctor felt confident the surgery was successful and that he would soon be released from the care of the ENT. With no other major medical expenses expected, we happily signed up for the high deductible plan.
Right after open enrollment closed, we found out that the surgery had failed and our son would need ANOTHER surgery in 2015. We scheduled the surgery for the fall of 2015 and he met his personal deductible late in the year. He got very little benefit from the 100% coverage after the deductible. Our expenses were very high and we felt that we “lost the bet” on the high deductible plan.
By late 2015, I knew for sure that my son’s ear surgery had been successful and he was likely done with the ENT (finally!). Again, with no other major expenses expected, we signed up for the high deductible health plan. We were going to be healthy in 2016! ***Insert ominous music here!***
By January 2016, my daughter had been coughing for months and we couldn’t figure out why. Then she got REALLY sick. She had pneumonia, and it didn’t respond to antibiotics right away. Over the course of a few weeks, she had multiple trips to the doctor, numerous medications, multiple chest x-rays, and a trip to the emergency room. She met her personal deductible very early that year!
The saga continued as she didn’t stop coughing, even after the pneumonia was cleared. After going to specialists and doing plenty of testing, it was determined that she has a mild case of asthma. Of course, asthma means expensive medications too.
Comparing the numbers
I thought we had made a bad choice in both years since our medical expenses were so high, but I was surprised by what the numbers actually showed. Below is a comparison of what we actually paid on the high deductible health plan versus what would we would have paid on the PPO plan.
- Out of pocket costs on the high deductible plan: $5,721
- Hypothetical out of pocket costs on the PPO plan: $2,326
- Plus higher premiums on the PPO plan: $2,326+480=$2,806
- Add the loss of free money in HSA: $2,806+1,200=$4,006
- Plus missed tax savings by maxing out HSA: $4,006+1,750=$5,756
- Total true cost of PPO plan: $5,756
2015 cost savings by choosing the high deductible plan over the PPO: $35
- Out of pocket costs on the high deductible plan: $3,716
- Hypothetical out of pocket costs on the PPO plan: $3,034
- Plus higher premiums on the PPO plan: $3,034+480=$3,514
- Add the loss of free money in HSA: $3,514+1,200=$4,714
- Plus missed tax savings by maxing out HSA: $4,714+1,750=$6,464
- Total true cost of PPO plan: $6,464
2016 cost savings by choosing the high deductible plan over the PPO: $2,748
Both of these years were tough for us with medical bills, but I was surprised to learn that we actually made the right choice both years! The high deductible plan saved us money both times, even though our family seemed like the “worst case scenario”, especially in 2015.
There are certainly situations where the high deductible plan would not have worked out in our favor. If TWO of us had come close to meeting our deductibles late in the year, we definitely would have been better off with the PPO plan.
HDHP vs PPO: A note about taxes
You can see in my calculations above that I included “missed tax savings” of $1,750. How did I figure that? I assumed that if we’d gone with the PPO, we would have maxed out the FSA account at $2,600. With the high deductible plan, we maxed out our HSA at $6,750. If we went with the PPO, we would have had $4,150 less money protected from taxes. The total tax rate on that money would have been 42.15%. Therefore, we would have paid about $1,750 in extra taxes.
Calculating Total Tax Rate
Our total tax rate is the combination of:
- 28% Federal income tax
- 6.2% Social Security tax
- 1.45% Medicare tax
- 4% Ohio state income tax
- 2.5% Local city income tax
As I talked about in my post about HSAs, HSAs are they only way to completely avoid all of these taxes. Also, unlike FSAs, the money in an HSA is permanently mine. There is no “use it or lose it” rule.
Bottom Line: HDHP with HSA vs PPO with kids
We gambled twice with a high deductible medical plan and it felt like we lost both times. When you look at all the numbers, though, we actually benefitted both times.
What am I going to do for 2017? I’m going to sign up for the high deductible plan again! I feel like that last two years have been examples of the “worst case scenario” for our family. Yet, we STILL came out ahead with the high deductible plan. Hopefully, we’ll all stay healthy in 2017, but even if we don’t, I feel that I’m making the best choice for us.
Every family is different and every health plan is different, but I do feel like high deductible plans are a better choice for many families.
Have you considered a high deductible health plan for your family? I’d love to hear your story in the comments below!