Tanja Hester at Our Next Life wrote a fantastic, comprehensive piece on the limitations and downsides of health savings accounts (HSAs) and high-deductible health plans (HDHPs). Before you dig deeper into this post, you should head over there and read it, because it’s chock full of awesomely useful information.
OK, see you back here when you’re finished…
The Bottom Line
Now that you’ve read her post, you know that HSAs aren’t the magical “triple-tax-advantage” savior some might claim. Yes, there are definite benefits to HSAs if your circumstances are right (more on that in just a moment). But as we’ve said many times, HSAs are a contextually good idea attached to a pretty bad one — HDHPs — and you have to really lean in to avoid letting that bad idea drive your future more than the contextually good one.
Here’s the bottom line: Our “best in the world” health care system puts a great deal of pressure on us as individuals to make the right decisions about our health without giving us much to go on. It’s a system wrought with tradeoffs, and no one type of plan or solution it right for everyone. While HDHPs aren’t doing what they were meant to do, which is to make us better healthcare consumers, older plan designs like PPOs and HMOs aren’t doing that at all, and in fact could end up costing you more than an HDHP, with no added tax benefits and without drastically improving your health and longevity.
The TL;DR message is this: if you’re young and invincible or old and rich already, you can get an HDHP without much further consideration. For the other 99%, read on about some of the challenges we face as “consumers” of healthcare, with an HDHP and without one.
Citing data from the Kaiser Family Foundation’s annual Employer Benefits Survey on employer-based health insurance, Hester showed that deductibles are rising way faster than inflation. It’s not uncommon to have a deductible of $5,000 for individual coverage and $10,000 for family coverage on an HDHP. In fact, that’s what I had ($10,000) while employed and what I have now ($12,000) on ACA coverage. That’s often a lot more than your share of the annual premium cost for employer-based health coverage, which is typically 30-40% of total premium. It’s also a lot more than the average person can afford in out-of-pocket costs in any given year. The tragic result is that people consume less healthcare, even when they may desperately need it — including the doctor Hester notes who thought he may be having a heart attack but didn’t want to go to the emergency room. That’s bad, bad, bad. I’m no doctor and cannot provide expert advice, but don’t do that!
What makes matters worse — yet may also make HDHPs look less bad by comparison — is that deductibles are rising for PPOs, the next most common plan type offered by employers, at rapid rates as well. They’re substantially lower than HDHPs but that doesn’t matter a ton when you get sick because of the way that we think about health care costs — which is to say, we don’t want to spend much of anything.
Deductible amounts are rising much faster than inflation, as Hester pointed out, to the point that 1 in 4 people has a deductible of more than $2,000 annually (it’s 2 in 5 for those who work for small companies as opposed to large ones).
As you might expect, HDHP deductibles are more than double non-HDHP (mainly PPO and HMO) deductibles — $2,349 to $1,153, respectively.
But take a close look at that middle line. It shows that, with an employer’s average contribution to an employee’s HSA — often called “first-dollar contributions” because it helps you pay “first-dollar” on any medical expenses you may have over the course of the year — the difference in effective deductible between HDHP and non-HDHP coverage is just over $400. If you assume that the HDHP has a lower monthly premium and you figure for a “normal” year of medical need, you’re going to be better off with an HDHP if the difference between the PPO and HDHP premiums is $422 or greater in favor of the HDHP. In fact, the Kaiser study notes the impact of the contribution
While growing deductibles in PPOs and other plan types generally increase enrollee out-of-pocket liability, the shift in enrollment to HDHP/SOs does not necessarily do so because most HDHP/SO enrollees receive an account contribution from their employers.
These, of course, are averages based on a lot of employer kinds and sizes. At my old job working for a benefits administration and enrollment platform, I helped with research that went a little deeper on large employers in particular and showed that the difference in deductibles between HDHPs and PPOs was similar but that the PPO deductibles were nearly twice as much as the Kaiser survey.
For PPO Plans:
- Individual deductible: $1,088 (up 8.4 percent from 2016).
- Family deductible: $2,421 (up 9.0 percent)
- Individual deductible: $2,219 (up 1.9 percent)
- Family deductible: $4,437 (up 0.6 percent)
(source: SHRM Daily — full-disclosure: I’m quoted in this article)
An interesting part of that research was that we looked at employers offering both a PPO and an HDHP side-by-side and these employers were sometimes raising deductibles on PPOs to make them look less appealing to employees so they would switch to HDHPs. Why? Because, at least in the short run, HDHPs are cheaper for employers to provide you, both because they cost them less and because you get less medical care, as Hester pointed out. Yes, even employers you really respect will take this step because it’s super-expensive to give you health insurance — even if they do get a big tax break for giving it to you. In fact, if unemployment wasn’t as low as it is and employers weren’t fighting for workers, a lot more companies would probably flip you over to an HDHP.
What does this mean in relation to one of the core premises of Hester’s post, that HDHPs keep you from getting the care that you need?
It means that you have to look out for more than just HDHPs, and that doing the math on HDHP vs. PPO is about more than just flat comparisons of deductibles and premiums. We try to keep it positive at The Benefits of FI because, as we said at the start of this journey, your benefits are income and ultimately that’s a great thing because they’ll support your FI and FIRE goals…if you manage them to your best advantage. That means, as Hester so clearly lays out, being focused not only on the economics of the situation but, more importantly, your health. It would suck to 1) get sidetracked toward retirement by getting sick or injured and having the wrong type of coverage that end up costing you all of your emergency fund and more, or 2) being so stubborn about going to the doctor that you don’t make it to retirement.
(Sidenote: If you’re thinking about a short-term plan or health ministry, I have big thoughts you might not like about those, too!)
Six Tips for Making It Suck Less
The bottom line is that, just like your finances overall, you need to put a little bit of work into picking the benefits that work best for you based on what your offered, what you can afford, and what will keep you healthiest in the short and long runs. Here are
1. You’re not invincible. Nobody likes to think about getting sick or hurt. But if you take that thought and make insurance choices based on it, you’re betting on yourself and you need to remember that the house, not the gambler, usually wins.
2. Three Numbers for Comparison: Premium, Deductible, HSA Contribution. When comparing your choices, taking any of these three numbers in isolation paints an incomplete picture. Make sure that you know what you will pay monthly and annually before you have to use any coverage. Then…
3. Don’t forget the other numbers. There’s the triumvirate of premium, deductible and HSA contribution (if applicable) that will get you a long way toward understanding your costs. But don’t forget your untilization costs: copays, coinsurance, in-network costs vs. out-of-network costs. And don’t just assume your cost is “full-price” pre-deductible for PPOs and HDHPs. There are major differences for covered services — I wrote about differences in prices for “cash” vs. HDHP for a procedure (also here) and, spoiler alert, there was a big difference!
4. Assume you’ll spend money on your health. You have additional cost considerations in picking your plan, like copays (e.g. a flat, negotiated amount you pay to see a doctor or pay for a prescription) and coinsurance (e.g. what percentage you pay for a procedure, like a surgery, vs. what your insurance pays) that you’ll want to model out to see what you may end up spending. For example:
|Doctor visit||$125 (no |
|Out-of-network emergency |
|$7,900 (out-of-pocket |
True story: It wasn’t the HSA that first got me into an HDHP. It was that we were going to save money over the PPO when my wife gave birth to our daughter. The difference was around $1,000 because our deductible at the time was $5,000 for the whole family and one of the positives of HDHPs is that once you cover your deductible, you don’t pay anything for utilization. So our daughter was born on January 2 and we were able to pay directly from my HSA (pre-tax dollars) for the next 12 months and didn’t pay for another office visit or prescription for daughter or mom until the following year. Yes, we didn’t increase our HSA that year, but we did spend a lot less on health care.
The point is that you need to know your circumstances and/or be realistic about what may happen. The point of insurance is to keep you covered in case something goes wrong, so use it properly. However, the point of U.S. health insurance is a little more than that, so…
5. Use your preventive coverage. Most coverage you’ll get through your employer has some kind of “preventive coverage” available to you, like an annual physical. If it’s ACA-compliant coverage, it has to provide these “minimum essential coverages.” About 80% of employer-provided health plans are ACA-compliant these days but some are “grandfathered,” meaning they don’t have to cover the MEBs. Find out what you have available to you and use it, use it, use it!
6. Ask for help. Another point Tanja made is that a lot of research shows that we aren’t better consumers when we’re given an HDHP. It’s absolutely true and a major reason I hate when employers of low-income workers (like retail and hospitality) flip their workers to HDHPs when they can’t even afford low-deductible coverage — but as much as I’d like to debate that issue, that’s an argument for another day.
For this topic, I’d say we’re not really good health consumers under any circumstances because insurers have made it so godawfully confusing to understand, and they haven’t given us many tools our resources to help us understand it better. But one resource who might help you understand better (besides The Benefits of FI!) is your company’s HR or benefits administrator(s). Bug them. Ask them all sorts of questions. And be nice doing it because they’re typically overworked but they do want to help you. If they don’t have the answers, have them put you in touch with an insurance company representative or broker who can answer your questions. There are people out there whose professional responsibility is to help you get the most out of your benefits without charging you personally, and you should use them just like you’d talk to a financial planner if they offered to help you for free.
Figuring out the best thing to do with benefits ain’t easy — whether you’re FIRE or just living your life for 65. That’s the big reason we started this blog. We’ll keep talking about it and we’d love to hear your stories, scenarios, tips, tricks, whatever. And we also will take any and all funny GIFs you’d like to share!Like