General Motors recently announced that they are moving towards higher deductible insurance plans. Such things wouldn’t normally be news worthy. But here we are in the middle of a government controlled health care battle. Every piece of health care news seems to have an impact.
So, should you consider moving to a high-deductible plan, if given the option? Odds are if GM (who traditionally has “Cadillac” insurance plans…pun intended) is moving towards higher deductibles, your company will be too. Therefore, you should likely be ready to make this decision for yourself when the time comes.
Below I’ll present an example of someone who’s making the move. I’ll also provide some things to consider when deciding whether it’s right to make a similar change.
Moving to a High-Deductible Plan: An Example
I have a friend who’s current health insurance plan (covering him and two kids) is costing him $614.63/month with a deductible of $500 and a $20 copay. He’s considering a new policy: $278.08/month with a deductible of $5,600. His tax bracket is 25%.
He calculates that the savings on his monthly premiums will be $336.55/month, which is $4,038.60 in a year. That’s incredible savings on the premiums alone! He’s considering using a Health Savings Account (HSA) to stash the difference in plan costs.
| Policy | Deductible | Monthly Premium | Yearly Cost |
|---|---|---|---|
| Old | $500 | $615 | $7,380 |
| New | $5,600 | $278 | $3,336 |
| SAVINGS | $4,044 |
But he knows he can’t stop the analysis there. He factors in estimated usage: best case, he says his medical cost for all three people including dental and prescriptions would be $2,000. He’s a young guy, so I’m sure that’s fair.
Under the new plan, he’d have to pay all of this $2,000 out-of-pocket, or out of his newly opened HSA. So the $4,038.60 in premium savings minus $2,000 actual medical cost plus $500 in tax savings using the HSA equals estimated savings of $2,538.60 per year. Pretty good, right?
He says the worst case scenario would be that he has $5,600+ in medical expenses. He gets 25% tax savings, so of the $5,600 deductible, he would only spend $4,200. His other deductible was $500, so to compare he can subtract $500 from the $4,200 to get $3,700. Which compared to $4,038 (saved above) would give him an actual difference in yearly cost of $338.60 to his advantage. Basically, even if he pays his entire deductible, he comes out ahead.
My friend goes on to say,
“Even in the 15% bracket, my worst case would be that I paid $221.40 more a year than I would have with the other plan, which I believe is worth the risk when the savings are so big. Plus I can roll over from year to year and could get an interest-bearing Health Savings Account.
As long as I keep it funded correctly (paying the difference in premium to the HSA until I have it where needed, it should be a great financial situation for me. Once I get it fully funded, I can take the money that I was spending to fund the HSA and put into savings, a Roth IRA, etc.”
Factors to Consider When Thinking of Moving to a High-Deductible Plan
Okay. Let’s extract from my friend’s example some of the key points he used to help make his decision:
- Will you save on premiums? In the example above, the answer was “yes”, and in a big way.
- What’s your estimated usage? I like the way my friend used an average and then compared it to the maximum estimated spend. It might be prudent to break out last year’s actual costs to provide some more perspective.
- Should you be trusted to setup the HSA and contribute? My friend seems to think that would be a easy thing for him. And I agree. The fact that he’s even taking the time to make this calculation shows he’s got the initiative to make the savings happen. And he’s obviously had the money each month if he’s been making that kind of payment. There are some eligibility rules for HSA you should know about. I may discuss that in a later post.
But what are some other things to consider?
- Are You Getting Similar Coverage with the New Plan? My friend didn’t mention a couple of things when discussing his old plan vs the new one. The maximum annual out of pocket allowed and the difference in the actual coverage of the plan. If he didn’t already, he should go back and factor those things in.
- Are you healthy enough? If you’re already maxing out your current plan and you have some serious health issues that require prescription drugs, odds are a high-deductible plan isn’t for you.
- Are you about to try to get pregnant?
- Do you have pre-existing conditions?On an employer plan, pre-existing conditions aren’t a problem. Moving to a high-deductible plan will create a re-start in your coverage and the insurer is likely to charge you more for those pre-existing conditions.
Where to Find a High-Deductible, HSA-Compatible Plan?
I was doing some research of my own the other night after I learned of my buddy’s situation above, and I stumbed upon a nice website that will quickly provide quotes for high deductible insurance plans. I was surprised at the nice rates, the quality insurance companies listed, and the speed with which my quote was turned around (instant). It’s called eHealthInsurance.com. Click here for quick access to a quote on HSA-Compatible Plans.
What’s your take? How do you feel about the analysis done above in my friend’s example? Have you or are you considering a move to a high-deductible plan? Share your experience below…
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HSA plans are definitely the way to go. One aspect not discussed here is the ability to use an HSA as a “super Roth” investment vehicle, with no taxes paid on money going in or out of the account, including investment earning. I am not spending any of my HSA money until I retire. I wrote a post about how to do this some months ago.
Good analysis. I did my own, as our open enrollment period ends today.
We have an extremely generous HMO. The family rate is $225/month. Our copays are $20 for our regular practitioner and $30 for a specialist.
Lab work, tests, surgeries and more are covered 100%. When I had my son, our entire bill was $280. That was for prenatal visits, ultrasounds, labor, time in the hospital — everything.
Under the deductible insurance option my husband’s employer offers, we’d have to spend $5,000 OOP before their benefits kicked in, and they’d only cover 80% of whatever costs.
That’s a LOT more than we spent last year.
We are sticking with our HMO as long as it is offered, even if we could potentially save $1000 per year or so by going another route.
Awesome write up.
Unfortunately, my employer does not offer HSA’s but FSA’s instead. The FSA is a burden to try to “work out” perfectly – it’s definitely created to profit the company and not to help the individual. We do use it, but we have to be diligent to predict the correct amounts.
I’m going to my plan director here at work right now to see if we can start offering HSA’s! They just make so much more sense.
Cheers
Very timely write up given open enrollment season is now. HSA and FSA, both are good. Generally, one just have to ask themselves how healthy they think they are, and deduct accordingly.
There’s always something you can buy to use up your FSA. Contacts, sunglasses, stock up for medicine. Just don’t beef it up like crazy!
Hope to see you at Financial Samurai one day!
One challenge with this is companies that switch to a high deductible plan usually don’t pass the savings on to you, the worker! When my church switched to an HSA model, they pocketed the difference, so obviously the high deductible was VERY BAD for me, financially.