HDHP + HSA vs. PPO

When you enroll into your workplace health plan, which one is right for you from financial perspective? In most cases, you will save money when you select a High Deductible Health Plan (HDHP) that is combined with a Health Saving Account (HSA) over a long term.

 

Pay too much for peace of mind?

Let’s look at the two costs involved in our health care coverage.

(1) Insurance premium - This is your contribution from your paychecks, automatically deducted by your employer. You pay a higher monthly premium for a larger network of doctors and hospitals (flexibility).

(2) Out-of-pocket expenses - This is what you pay medical services or medication, and includes copays, deductibles, coinsurances. You pay more out-of-pocket when your plan has higher deductibles.

Insurance premium is a fixed cost that is decided during enrollment while out-of-pocket expenses could vary depends on our and our family’s health situation. I noticed that we tend to select a PPO or other higher premium plan in expectation to control out-of-pocket expenses or ensure we can go to any doctors/hospitals when we want.

Some people I know made a choice of choosing a more expensive plan such as PPO because they thought they would have more doctor visits. Some people went to the most expensive one because they wanted to get a larger network of medical services so they don’t have to visit one in out of network (which would be very expensive).

However, this peace of mind comes with a high price tag. You pay a lot of money for the benefit - of larger network and flexibility of choosing medical services - that you are unlikely to maximize. I think we can lower medical cost and get peace of mind by choosing HDHP with HSA.

 

What is HDHP?

HDHP is simply a health plan that has a higher deductible that meets some IRS requirements.

  • Due to its high deductible, it has lower premium (because you agree to share more cost with the insurance company)

  • It can be similar to any health plan in terms of network and flexibility. Depends on your employer’s plan, it can be similar to PPO, EPO, or HMO, etc.

  • It is typically combined with a Health Savings Account (HSA) to help us pay medical costs with pre-tax money.

  • HSA is the great way to save and grow money without paying any taxes.

    • You can contribute tax-free. Your contribution is deducted from paychecks before tax. This lowers your taxable income for your annual tax return.

    • Your employer may contribute tax-free. This is a free money like a 401k employer matchup.

    • You can grow the money tax-free. You can invest money into the funds and pay no taxes for dividends and capital gains.

    • You can withdraw the money tax-free. You pay no taxes for the money you contributed or you earned from investment.

  • HSA provides flexibility to choose how to pay deductibles for medical services.

    • Pay from HSA. You may want to do this when you have no emergency fund and want to avoid credit card debts.

    • Pay out-of-pocket (not from HSA). You can keep the money in HSA compounding for larger medical expenses in future.

    • It is typical that we keep saving into HSA for medical cost after retirement.

 

Cost Comparison

I have compared the estimated medical cost by using the enrollment tool from my employer. This comparison is just to show how HDHP and PPO costs in some scenarios, and may not apply to your situation.

Assumptions:

  • HDPD - maximum out-of-pocket expenses $5,300 for family

  • PPO - maximum out-of-pocket expenses $4,000 for family

  • PPO in this comparison is “middle level” amongst the PPOs from my employer. HDPD has similar coverage with this PPO.

  • This cost comparison does not include benefits of HSA e.g. employer’s contribution

Use Cases:

(1) A family of 4 (2 adults, 2 young children) whose all members have frequent visits to hospitals, urgent cares, and have surgeries.

  • HDPD - premium $2,000 + out-of-pocket $5,300 = total $7,300

  • PPO - premium $4,000 + out-of-pocket $4,000 = total $8,000

HDHP costs little less. In both cases, out-of-pocket expenses reached the maximum, so the plan took over the rest of expenses 100%.

(2) A family of 4 (2 adults, 2 young children) whose half of family need some medical services

  • HDPD - premium $2,000 + out-of-pocket $1,700 = total $3,700

  • PPO - premium $4,000 + out-of-pocket $300 = total $4,300

HDHP costs little less.

(3) A family of 2 adults who have small need of medical services e.g. just yearly checkup and flu shots

  • HDPD - premium $1,200 + out-of-pocket $300 = total $1,500

  • PPO - premium $2,400 + out-of-pocket $50 = total $2,450

Healthy family saves a lot from HDPD.

Conclusion

So I think HDHP is a financial winner in most cases. When you include the benefits of HSA, even more. Exceptions would be when a family member has a medical condition that needs expensive and/or continuous medical service. You will need to do some math before finalize.

Hope this helps.