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 pros and cons of such a move.
Moving to a High-Deductible Health 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.
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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.”
High Deductible Health Plan Pros and Cons
Okay. Let’s extract from my friend’s example some of the pros and cons 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 pocketallowed 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 stumbled upon a nice website that will quickly provide quotes for high deductible insurance plans that are also HSA-compatible.
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…
Photo by Mozo Man