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HDHP Insurance: When Does a High-Deductible Health Plan Make Sense?

With many employers, you’re given two choices for health insurance:

  1. A High-Deductible Health Plan (HDHP), or
  2. A traditional, copay-based plan with a higher monthly premium.

Which plan is likely to be better for you depends on your healthcare costs. The lower you expect your healthcare costs to be, the more attractive an HDHP becomes relative to a copay plan.

The goal is to answer this question: How high do my healthcare costs have to be before a copay plan makes sense? To figure that out, we calculate the break-even point: the point at which your costs will be the same regardless of which plan you use.

Let’s say your choosing between two plans:

  1. An HDHP with a monthly premium of $112 and an annual deductible of $1,750, after which the insurer picks up 80% of costs. (This is actually my own plan, purchased through eHealthInsurance.)
  2. A copay plan with a monthly premium of $287, a $15 copay per visit, and no deductible.

In other words:

  • Your annual out-of-pocket cost for the HDHP would be $1,344 ($112 x 12), plus any healthcare costs up to $1,750, plus 20% of healthcare costs beyond $1,750, and
  • If we ignore the small copays, your out-0f-pocket cost for the copay plan would be $3,444 per year ($287 x 12).

Here’s how it looks visually:

So what level would your healthcare costs have to exceed in a given year for you to be better off with a copay plan?

$3,500, determined as follows:

  • Annual cost for copay plan = annual premium for HDHP + amount of healthcare costs you’d be responsible for with an HDHP.

Or plugging in the actual numbers:

  • $3,444 = $1,344 + X (up to $1,750) + 0.2(X — 1,750)

Solve that equation for X, and we get $3,500.

Or you can substitute your own premiums, deductibles, and coinsurance percentage to determine the break-even point for your own healthcare options.

Remember, though, that an HDHP plan carries more risk than a copay plan. With a copay plan, you have a pretty good idea of what your out-of-pocket costs will be for the year. With an HDHP, your costs can (and probably will) vary significantly from year to year, which can make budgeting somewhat more difficult.

HDHP Insurance and HSAs

One last point to consider when choosing between an HDHP and a copay plan is that, if your HDHP meets certain requirements, it will allow you to contribute to an HSA, thereby allowing you to use pre-tax money for healthcare costs.

In order to be eligible to make HSA contributions, your HDHP must have an annual deductible of at least $1,200 ($2,400 if it’s family coverage) and maximum out-of-pocket expenses of less than $5,950 ($11,900 if it’s family coverage).

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Comments

  1. I’m looking at the HDHP and thinking it’s a good fit for my family. The premiums we pay, plus the co-pays, are getting ridiculous, especially since we don’t usually do much beyond preventative visits and a couple extra visits for sickness each year. Plus, since a HSA works like an IRA, any money we don’t use can be withdrawn during retirement. I could pay the difference between my new premium and my old premium into the HSA, earn a return, and benefit from that money.

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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