Editor’s Note: For those who aren’t familiar with Health Savings Accounts, I’ve written extensively on the topic before, take a look.
This question didn’t come to my inbox but instead it came through as a comment on my article about 2014 health care annual enrollment. Calculating which plan is best for you is no easy feat and I’m glad Amber posted her comment so I could review the numbers and help her make her decision.
I’m on the fence about HDHP. I PAY $40 a month for my PPO with a $1000 deductible. My HDHP will cost nothing with a $2000 deductible with company contributing $1000. I usually see the doctor 4-5 times a year so I PAY at most $150 for doctors. The catch is in my medication I have some very expensive medicines that I only have to pay $10 with my PPO with a total of $340 last year. If I had a HDHP it would cost $3,500 so I would have to pay my complete deductible plus 10%. So with medication alone that’s $2150- my employer contribution = $1,150. With PPO total I’m paying $480 + 340 = $820. SO with that math I’m saving $330 a year with regular insurance. What do you think? Am I missing something or should I stay with my PPO?
Most employers have realized the benefit of an HSA/HDHP combo by now and offer great incentives to sign up for one. They save money, you save a lot of money, it’s a win-win. And as long as your employer offers a decent HSA plan you almost always come out ahead vs. a traditional plan. The trouble arises when you spend only a couple thousand every year like Amber. Figuring out which plan is right for you can be difficult if you have some expenses but not enough to go way over the deductible. In this case the expenses are somewhat fixed so we can do a couple quick calculations and figure out which plan is best for her.
Most people have annual enrollment around November of every year but since Amber’s fiscal year ends in June she gets to sign up for health care right now.
Amber’s PPO plan costs $40 a month for a total of $480 a year and has a $1,000 deductible. Amber has a $10 co-pay on her medication and last year she spent $340 on medication co-pays. She also spent about $150 on doctor’s visits. So ignoring the premium for now, Amber spent $490 on healthcare last year using her PPO. Some employers offer an HRA which would let her pay for things like co-pays and co-insurance with after tax dollars but it doesn’t sound like that’s the case here.
At the end of the year, Amber has spent $490 in after tax dollars on her healthcare needs. And since that $490 was all co-pays, none of that money counts towards her $1,000 deductible(this is how most plans work but you should always double check these rules).
Amber’s HSA plan is free and her employer will also contribute $1,000 a month. Her deductible is $2,000 but since she doesn’t have any premiums she can take her premium savings($480) and add it to the employer contribution. That leaves her at risk for $520($2,000 – $1,480). If she pays for her medication without co-pays the cost is $3,500 per year. Once she fills up the $2,000 deductible though, co-insurance kicks in and she only has to contribute 10%. So her cost for the medication is only $2,150 with the HSA.
So as long as Amber contributes $1,150 to her HSA($480 would be free due to reduced premiums) she could pay for everything with pre-tax dollars. That means she’ll be on the hook for $670($2,150 – $1,480) but at a federal tax rate of 25% that $670 is only around $500 in out of pocket cost(we’ll ignore state, FICA & Medicare tax to keep things simple but that would make the cost even less).
And since Amber reached her deductible, her doctor’s visits would be completely free(or possibly 10% co-insurance depending on her plan). For simplicity, we’ll assume that she visits the doctor after the deductible is reached. Otherwise, the math would get way more complex but the end result would be the same.
So PPO Wins by $10 Right?
In Amber’s case it looks like the PPO is the winner by $10 right? Not so fast though. The PPO option still leaves Amber with $1,000 to go before she would hit her deductible. With the HSA option, she has already fully reached her deductible. So if she needed any additional medical treatment it would be at the co-insurance rate with the HSA but she would have to pay in full up until the deductible with the PPO.
I also recommended to Amber that by going with the HSA she could shop around for her medicine and see if she can get it cheaper online or from another source(you boys like Mexico?). A lot of time doctors like to prescribe name brand drugs when generics are readily available. Some doctors(like financial advisors) have huge conflicts of interest when it comes to prescriptions so that’s something you should always be aware of.
HSA by a Hair
I don’t think the HSA option is the clear winner in this case but if it were me, I’d probably go with the HSA over the PPO. Since I pay for all my expenses out of pocket instead of with my HSA dollars, that means I’d be able to invest and withdraw even more money tax free. If I was racking up $2,000 in HSA receipts every year, I’d be able to cash out $40,000 tax free in 20 years if I paid for all my current expenses with after tax dollars. Meanwhile, my money will be invested during that time and I can use the earnings to pay for future medical costs completely tax free. Man I love HSA’s.
If Amber decides to switch from her PPO plan to HSA there will definitely be some growing pains. She might not be able to use the same doctor(s) and in general the HSA is a more do it yourself type approach. But if you want to save money you’re always going to have to do a little extra work.
Readers, which plan would you choose if you were in Amber’s position? Do you now see how the premium savings can come into play and make HSA’s the better option for 9 out of 10 people?
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In my case, I went with the HDHP/HSA because it seemed like a better deal. HOWEVER, I’m kind of kicking myself now for that decision because I HATE not knowing how much things cost. With PPO, you just pay copays, but with the HSA plan you pay whatever negotiated rate the insurance can get with your doctors. And even though many insurers provide estimates of these prices, there’s no real way to know what it costs until after you’ve gone to the doctor. Which for me right now is a BIG disincentive to going to the doctor. One small issue may have cost $30 copay, now costs $200. Or it could cost WAY more.
Something else to keep in mind. It’s not just the money estimates, it’s also the mind games :/
Harry Campbell says
Hey Stephanie, thanks for stopping by and commenting. This is actually why HSA’s were invented in the first place. Most people go into the doctor and pay a $30 co-pay but don’t realize that the insurance is picking up the other $170. So even though you’re not paying for anything up front I guarantee you are paying for it indirectly with higher premiums over the long run. If you’re young and healthy you’re paying even more since you’re subsidizing older/sicker people.
HSA’s haven’t really caught on but the point was to make pricing more transparent. Psychologically, it’s a lot tougher to shell out $200 for a doctor’s appointment than to pay that money in smaller amounts over the course of a year through higher premiums. So HSA’s behoove you to shop around a little bit and make an informed decision.
You are right though, one of the major pitfalls of HSA’s is that pricing is not yet transparent. So if you need to see a doctor you could be looking at anywhere from $100-$1,000 depending on how much work you need. My solution is just don’t get sick 🙂
This is the reason I dislike the HSA option as well. I like you plan Harry to just not get sick. I think if this catches on as more mainstream it could help but I think in most people’s world they feel they just don’t have the option to get go to the doctor or get said services done.
My doctor was going to do some tests one time.. Don’t recall what now it was kind of an on going nuisance thing to me, but I asked how much it would cost and they couldn’t even give me a ball park number..
The billing specialist told me we have to do the testing then after we bill for it we can tell you what it will cost. Umm what? I ask so are we talking like $50, $100, $400? She couldn’t even give me a number to shoot for..
I just said really? It just tells me they have no clue what the services they are offering even cost. They generate some price somewhere after the fact based on some other probably unknown factors.
I know I refused to have any of the work done if they could not atleast give me an idea on a cost estimate. I left the office…
But really the people the NEED to have tests and other work done.. they are just at the mercy of the healthcare system…
Eat healthy, Stay Active, Be Fit, and take care of your own health the best you can.. That really is the best you can do.
Harry Campbell says
Way to take a stand Tim. It’s really a lose-lose because ultimately consumers (or the gov) are the ones who will drive down costs. HSA’s were designed so that consumers like you and I can make informed decisions. But psychologically, most of us would rather not see the doctor than pay $200 for an office visit. We’re used to paying that $30 co-pay and much higher premiums.
It’s sad but I don’t think HSA’s will ever really catch on for the same reason that people don’t save nearly enough for retirement. Most people can’t see the bigger picture and would rather get the instant gratification benefit. In this case, paying only a $30 co-pay instead of a $200 visit even though the reduced HSA premiums greatly outweigh the cost of a few office visits at full price.
Btw, you’ll like my article on Lab Test Coding, I could probably get hired now as a medical coding/billing specialist after all the research I did just to make sure my preventative care lab tests would be covered by my HSA/HDHP haha.
Jon @ Money Smart Guides says
I would choose the HSA as well. Like you, I pay for my medical expenses out of pocket, which allows me to invest all of my HSA money to get a better return. I plan in using the HSA account as an extra retirement account and use the money for medical bills when retired.
Harry Campbell says
Jon, sometimes I stay up at night and hope for medical expenses just so that I can pay for them out of pocket and be able to withdraw that money later on in life haha. But in all seriousness, I wouldn’t be surprised if that loophole goes away at some point in the future. Probably when I cash out $20,000 worth of scanned receipts and go buy a new car! HSA’s really are the best investment account available, which is why I am always trying to convince everyone to switch. TRIPLE TAX SAVINGS.
PS – Your site wasn’t working when I tried to visit.
Honestly, I think the HSA plan is almost always the best deal. My employer offers a plan that is basically the same as the HSA plan (same premiums and coinsurance), but has a lower deductible and out of pocket maximum and doesn’t give you access to an HSA. For a variety of reasons, I picked that one this year. But as the other commenters mentioned, there’s a certain level of psychology involved as well. Most bills I see are at least $150, some even up to $1,000. I definitely had to keep reminding myself last year that the plan I picked was the cheapest overall and that I was paying those bills with pre-tax money.
I really liked the HSA type plan when I had some expensive prescriptions instead of the PPO because the costs of the prescriptions actually counted towards the deductible – it saved me a ton of money.
I’ve actually found that I can’t shop around because the same service costs the same amount anywhere in my city. I don’t find that I go to the doctor any less than I would otherwise either. It does help reduce the tests I ask the doctor to run though.
Harry Campbell says
Yea HSA almost always comes out ahead due to the premium savings and employer contribution. But you are right about the psychology involved. I have a knee injury right now that I’m afraid to go to a doctor about because I’m worried it will cost too much. If it doesn’t get better though in a week or so, I’ll probably have to pony up.
The same service costs the same anywhere in your city? I don’t think that is normally the case as the TIME piece on healthcare costs found huge variations in pricing from hospitals/doctors in the same city. I think it’s just very difficult to figure out what that pricing is, but I really don’t think it’s the same city-wide.
Love our HSA…as long as you realize that you are going to be on the hook for a few hundred bucks each visit, and that you will/may have to pay out of pocket for that. I reimburse our costs as they are incurred, but am also putting in more money in our HSA than our max out of pocket. Which means that we will definitely be investing some…Like stated before, the only account (that I know of) that is Triple tax protected…huge advantage…especially for those with moderate to high income
Harry Campbell says
Yep you’re right, it is the ONLY account that offers triple tax savings. I take it one step further and pay for med expenses out of pocket so that I can invest that money in my HSA and keep earnings tax free for future med purchases. This probably only makes sense if you’re already maxing out 401k/roth/hsa though.
Are you maxing out your HSA? Even then, usually the HSA max is below OOP max but above the deductible. If your HSA contribution is above your OOP max then you have a freaking amazing plan!
Maxing out the HSA, we have a $2500 deductible and $4000 max OOP…and it costs us less than $10 a month, after the employer contribution to the HSA…It helps that the wife works for the insurance company!
@Harry We have a lot of big networks, not many mom and pop places. They’re probably all in on the pricing with the insurance companies.
I had a knee injury last year. It cost a lot between doctors, specialists, years, and physio. But using my health insurance was the only way to recovery. At least with a HSA plan, you can self refer!
Harry Campbell says
Ah ok that makes sense then. Usually you can find cheaper going to Urgent Care as opposed to hospitals or if you need a specialist there are lots to choose from (in my area at least).
That’s the other benefit of the HSA, you don’t need to go to a primary care doctor first like with PPO/HMO. I got shot in the kneecap with a paintball haha and I don’t think there’s anything a primary care doctor will be able to do for me. Might as well go straight to an orthopedist 🙂
Haha 🙂 I was so glad I could take a coworker’s recommendation for a physio place instead of the orthopedist’s since that meant I found one convenient to work! The primary care doctor can order some of the same tests or help you find an orthopedist if you don’t want to find one yourself. Like my primary care doctor could have ordered a MRI for me. My company’s PPO doesn’t require referrals – just the HMO plan.
So many people don’t do this evaluation though and just pick a plan. It’s only a few hundred dollars difference most likely if you’re single at my company, but it could be a few thousand dollars difference if you have a family and people don’t think about this! So many people don’t even know what plan they have!