Choosing Between a High Deductible and Traditional Health Plan

In response to my article about HSA contribution limits for 2013, a reader named Stephanie asked the following:

Is there any good way to calculate which health plan is right for you? I’ve been having trouble the past few years deciding between the regular PPO and the HDPPO, but my health care costs are usually pretty high (I reach my deductible mid-year).

Choosing Between a High Deductible and Traditional Health Plan

I’ve actually talked about how to approach this decision in the past, but today is as good as any for a refresher…

When choosing between a high deductible health plan and a more traditional PPO or HMO plan, you need to consider factors such as the monthly premiums, the difference in deductible, possible differences in the co-pay levels once you meet your deductible, the annual out-of-pocket limits, possible differences in the types of care that are covered, etc.

If you go with an HDHP, you also need to consider your ability to meet a fairly major financial obligation (the deductible) in a short period of time. This means you should have sufficient emergency savings, or other liquid assets that can be deployed at a moment’s notice.

From the sound of things, Stephanie is in a pretty good position, as she referred to her plan as a high-deductible PPO. This is what we have, and the coverage is very similar to that offered by my employer’s standard PPO. The primary difference is that there is a higher deductible (duh!) with the high deductible version.

In our case, we switched from a $20 co-pay system with no deductible for office visits and a $900 deductible for lab tests, etc. to a plan with no co-pay and a $3k annual (family) deductible. Thus, we were facing the prospect of paying the first $3k out of pocket. In other words, we pay 100% if the “Usual & Customary Rate” (UCR, which is lower than “list” price) until we reach our deductible.

But once we reach our deductible, we actually come out ahead. The reason for this is that we then transition to a co-insurance rate of 10% of UCR which is almost always cheaper than the $20 copay. The story is similar for prescription coverage… 10% of the allowable rate is almost always cheaper then the $15/$30 copay (depending on which drug we need).

The annual out-of-pocket maximum for our HDHP is $6k vs. $3k for the old school PPO, but… That would require $33k in medical costs before we hit it — $3k for the deductible plus 10% of $30k for the other $3k. Barring an absolute disaster, this is fairly unlikely.

Aside from the above, the plans are largely equivalent. They both cover the same types of care, they cover wellness services (checkups, mammograms, etc.) at 100%, and so on.

After last years premium increase, we’re coming out about ahead by about $370/month (for our family plan), or a total of a little over $4k/year. So yes, we’re risking a bit on the upside in terms of an extra $3k out-of-pocket in case of a catastrophe, but we have a guaranteed savings of $4k/year (which outweighs the higher deductible) on the premiums.

On top of all else, we’re also able to sock away over $6k/year in a tax-advantaged HSA. To me, this is a no-brainer. I do, however, realize that not all HDHPs are as attractive as ours, so you’ll have to run the numbers for your own situation.

2 Responses to “Choosing Between a High Deductible and Traditional Health Plan”

  1. Anonymous

    When I was faced with the same decision, I created a spreadsheet to calculate out of pocket costs. Even have a graph showing the costs whether the medical incurred was $0 to $1Mil. The spreadsheet includes the premium amounts, deductibles, costs after deductibles, HSA tax savings, and employer contributions to the HSA (we get $500).

    For my family, the HDHP with maxed out HSA was the best deal regardless of medical expenses incurred. This, of course, is highly dependant on your offerings, number of family members, etc.

  2. Anonymous

    Unfortunately theres no easy rule of thumb or general easy answer to picking between health insurance offerings. Every plan is different so we don’t know what plan is better for Stephanie. She has to look at all the details of each plan and compare premiums, deductibles, co-insurance, annual out of pocket maximums and coverage. Thtas a lot of variables and each one can vary from plan to plan.

    Stephanies situation is easier than a lot of people if she is fairly certain her deductible will be hit every year. For her the simplest comparison would be adding up the monthly premiums for each plan plus the deductible and seeing which one is higher. So if the high deductible plan is $100/month with a $2000 deductible and the traditional plan is $350 a month with a $500 deductible then summing each gives her a $3200 total for high deductible choice versus $4700 for traditional. Of course it can also matter how much the co-insurance or copays are and what the out of pocket maxes are.

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