High Deductible Health Plans and Major Medical Bills

High Deductible Health Plans and Major Medical Bills

I spent yesterday at the hospital. Don’t worry, it sounds a lot worse than it was… Our oldest son had to have his tonsils and adenoids removed, so my wife and I were camped out in the outpatient surgical center for the better part of the day.

In the end, everything went smoothly, and he’s on the road to recovery. But this isn’t a parenting or medical website. This is a financial website. Thus, I thought I’d talk a bit about the financial side of such things.

As you know, we’ve been participating in my employer’s high deductible health plan for the past couple of years. In other words, we’ll be facing a whopping bill once the dust settles. Actually, it will be multiple whopping bills… The hospital, the doctor, and the anesthesiologist all bill separately. And then there will likely be some lab tests, etc.

The good news is that we’re protected on the upside by our $3, 000 deductible. The bad news is that, since it’s January, we’ve paid almost nothing toward it thus far, so we’ll be paying that out-of-pocket. In our case, that really just accelerates the inevitable. With four kids in the house, we usually hit our deductible bill mid-year whether or not we have a major medical procedure.

But still, a $3k medical bill to start the year is something that could really set a lot of people back. Fortunately, we have short term cash in the bank, and we also having a well-funded health savings account (HSA) in case we need it.

Truth be told, we’re planning on continuing to use our HSA as a tax-advantaged investment account, so we’ll be paying for this from other sources. But if we weren’t, we could always fall back on that HSA.

As I’ve noted in the past, the lower premiums of our particular health plan more than make up for the higher deductible. But if we hadn’t been planning ahead, a relatively major medical procedure could’ve created a short-term cash crunch. If you’re considering a high deductible health plan, just be sure that you’re aware of, and prepared for the worst case scenario.

17 Responses to “High Deductible Health Plans and Major Medical Bills”

  1. Anonymous

    I don’t see this mentioned so I’m not sure if everyone is aware of it. But if you pay for your medical expenses with after tax dollars and save the receipts(scans are ok), then you may withdraw this money at ANY point in the future.

    Ex: I had $3,000 in medical expenses last year that I paid for with my credit card. I contributed $3,000 to my HSA last year. As the IRS rules stand now, at any point in the future, I can take out the $3,000 tax free. Meanwhile, I can invest that money and all the interest/dvidends I make will be tax free if used for medical expenses or I can withdraw after 65 like a regular IRA. Sounds like a great deal to me if you can afford it!

    Ref: Question 39, http://www.irs.gov/pub/irs-drop/n-04-50.pdf

  2. Jan: As far as I’m aware, that’s the way it’s always been. At age 65, you can essentially treat the account as a traditional IRA. This makes sense, because you have never paid taxes on this money (it was deductible going in and it grew tax deferred). Of course, as you point out, if it’s a qualified withdrawal, it’s still totally tax free – which is great.

    If you can provide an authoritative source for the previously tax-free nature of all withdrawals at age 65+, I’d love to see it. But like I said above, my understanding all along (based on IRS guidance, and going back at least to 2008, which predates passage of the healthcare reform) has been that non-qualified distribution at age 65+ are treated the same as distributions from a traditional IRA.

    This doesn’t change the fact that the early withdrawal penalty for non-qualified distributions under age 65 has doubled from 10% to 20%, which is unfortunate, but not a deal-breaker for me.

  3. Anonymous

    My point number one is correct as stated. One must pay income tax, even if over age 65, on a withdrawal from an HSA that is for non-qualified purposes (non-medical expenditures, OTC, etc). You do get to avoid the 20% PENALTY, however, as you state.

  4. Jan: While the penalty for unqualified distributions has gone up to 20% (from the original 10%), official IRS guidance still indicates that you are free to withdraw your money after age 65 without penalties. From page 9 of the current version of IRS Publication 969:

    Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.”

    link: http://www.irs.gov/pub/irs-pdf/p969.pdf

    The “additional tax” in this case is referring to the 20% penalty for unqualified distributions.

    In other words, your “first and foremost” point is wrong.

  5. Anonymous

    There are some things to keep in mind in the use of HSAs and some of the writers here may not be aware.

    First and foremost, under Obamacare the rules have changed. Distributions from an HSA over age 65 are no longer permitted tax-free for any reason; now, they must be for permitted medical expenses in order to avoid income tax on the distribution.

    Second, just like the rule changes for FSAs, over the counter meds are no longer a permitted medical expense with few exclusions (insulin, for example).

    Third, not every high deductible plan is HSA-eligible. There are maximum deductibles permitted:
    “2012 HSA maximum out of pocket (deductibles, co-payments and co-insurance) for HSA qualified high deductible health plans (HDHPs) are: $6,050 for individuals and $12,100 for families. Currently, 2011 HSA maximum out of pocket are: $5,950 for individuals and $11,900 for families.”

    Finally, even though you know you will be paying out of pocket because you have not met your deductible, be sure your insurance is billed by the care provider so that you can take advantage of their negotiated rates. For example, a recent lab test in my family was billed by the provider at $142.15;the “plan allowance” was only $10.69 and since it was a participating provider, that was all that was due. Makes you realize how life is so unfair to the uninsured.

  6. Anonymous

    We also use an HSA. Our deductible is near $6000. When it comes to shopping around I haven’t find it very beneficial for a few reasons.

    First, at least for me, my bills have been added to our deductible so savings would just delay hitting it. For us, we always hit. We have six kids. Doesn’t take much. :O)

    Second, there is the issue of records management. If I have this test there and other tests somewhere else I have to worry about the information being entered/transmitted correctly. I prefer to keep everything under one “roof”.

    Finally, there is the time it takes to shop around. Depending on the test, the savings may not be worth it.

    I hope your son recovers quickly.
    cd :O)

  7. Anonymous

    Glad to hear everything worked out! The HSA can be scary with it’s higher deductibles but with proper planning it is the best deal around no matter what your health is. Keep up the great articles!

  8. Anonymous

    I’ve hit the maximum out if pocket before (over $10k). Not fun, but still cheaper than the alternative plans. After factoring in the cost if the premiums, the schweet tax advantages of the HSA, and the lower out of pocket maximums of the HDHP – the HDHP w/ maxed out HSA was still the cheapest way to go for us.

    I’m sure every companies plans are radically different, so always run your own numbers for best-case, average, and worst-case outcomes. Plan for the worst!

  9. Anonymous

    We did the same thing with our daughter. With our HDHP, we owed $3,000. After we got the bill, I called and went on a payment plan, monthly payments for 30 months. Although there iPad plenty in our HSA to cover it, I thought it would be better to pay over time do our HSA earns more interest. After a few months, I called the hospital again and offered to it in full if we could novitiate a lower price. They knocked about $300 off of our bill. $3,000 may be high, but you can still save a bit if you offer a settlement or go on a payment plan.

  10. Anonymous

    My best to your son’s speedy recovery.

    Great article, and it really points out the take home message for me of planning is everything. I know too many people friends and clients alike who fail to plan ahead with emergency funds, or HSA’s and they end up in trouble when something big does come up.

    What are your thoughts for the self-employed in this area?

  11. Anonymous

    Wow – $3000 for a family deductible is low! My husband and I have individual policies with $5000 deductibles each. I was going to re-apply to get into new groups (after two years) since we have no pre-exisiting. An Anthem agent was telling me the $11,000 deductible “family plan” would be the way to go for us – for sure.
    Well, that (to me) is absurd. That would be putting us at risk of paying $11,000 in one year if just ONE of us would have a major claim. I don’t think that is worth a “savings” of $700 a year in premium. The “family” is just me and my husband. Health ins. is at the top of my STRESS list!!
    You are fortunate to be able to afford a plan with a $3000 family deductible. 😉

  12. Anonymous

    Hope your son recovers well from everything–and that he can enjoy some nice ice cream to soothe his throat. 🙂 I noted that your planning to use your HSA for investment purposes, but I thought it would be good to note that you can always change your mind down the road. If you pay for the costs out-of-pocket now and then down the road your car breaks down and you have a big repair bill you might tap out your resources. You can always go back, after the fact and pay yourself back for the medical expenses you had earlier–if you have a checkbook from your HSA you can right a check out to yourself for the earlier medical expenses, and I understand that you can do this at any time–even in future years. Just something that folks can keep in the back of their mind if they’re thinking about using an HSA as an investment account, and they need to actually tap into it for expenses they paid as out-of-pocket earlier.

  13. Anonymous

    @3: FCN doesn’t necessarily get “11 months worth of entirely free health care.” Most of the typical health care plans that I’ve seen includes some level of coinsurance. You’ll have to pay *something* during the year. Most plans do have an annual out-of-pocket limit, but this is almost always *not* the same as the deductible.

    My company’s high deductible plan with HSA makes sense for me, too. The premiums are a lot lower, and the company contributes to the HSA account.

    One thing to make sure to look at is: If you know that you’ll meet your deductible every year, it may be wise to move to a lower deductible plan in exchange for the more expensive monthly premium.

  14. Anonymous

    This may not apply to your situation, since you have a large family and only a $3,000 deductible(which is pretty low, nice work!). But, when HSA’s were first made available, one of the tenets was to encourage the consumer to shop around for healthcare. It sounds like you went to a large hospital, where costs will be way over the top, when in fact clinincs and smaller group care facilities will offer these services at a fraction of the cost since you are paying cash.

    I have an HSA and I have done some research ahead of time, in case I get sick, as to where I should go for reasonable rates. Kind of a pain to get some places to give you a quote on an MRI but can be well worth it!

  15. Anonymous

    Now that you’ve hit your deductible early you can look at it as if you’ve got 11 months worth of entirely free health care ahead of you. Kind of an odd ‘silver lining’ but thats the way I choose to look at it.

    Glad to hear your son is OK.

  16. Anonymous

    I hope that your son has a quick recovery! It’s incredible how expensive health insurance, and health care costs in general are, but it is definitely better than not having any health insurance. Having an emergency fund is essential to cover costs like these, and although we pay higher rates for being self-employed,having health insurance is always factored into our budget.

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