Choosing Between a Low- or High-Deductible Health Plan

Finding Health Insurance, Health
Should I Choose a Low- or High-Deductible Health Plan?

If you’re deciding between a low- and a high-deductible health plan (HDHP), there are more costs to consider than deductibles and monthly premiums.

High-deductible health plans were conceived to encourage consumers to shop around for health care. The logic is that if you’re responsible for medical costs upfront, you’ll do a little more work to find lower-cost providers — cutting expenses for you and your insurer.

That hasn’t panned out for most people. While consumers with HDHPs do tend to reduce costs, they do so by skipping out on care, including free preventive care, according to a recent study by the National Bureau of Economic Research.

Health insurance plans with lower deductibles offer patients more predictable costs and often more generous coverage, but their higher premiums can be hard to fit into a monthly budget.

Whether you choose a plan with a low or high deductible, don’t do so at the expense of your health. Here’s what you should consider when choosing between a low- and high-deductible health plan.

Key terms to understand

Before we discuss how to choose between plans, let’s brush up on some basic health insurance terms. Knowing what these mean will help you understand the difference between plan types and make a better decision.

  • Premium: the price you pay per month to have health insurance, whether or not you use it.
  • Deductible: the amount you have to pay upfront for all of your medical care, with the exception of free preventive care, before insurance kicks in. After you meet your deductible, your insurer starts paying a larger portion of charges, called coinsurance.
  • Out-of-pocket limit: a cap on how much you’ll have to spend for medical care in a year, not including premiums, so long as you stay within your insurance network. After you meet this limit, your insurance must pay for 100% of in-network services that are covered by your policy.

What’s the difference?

Deductible amounts are the obvious difference between low- and high-deductible health plans. Many high-deductible health plans, especially those with the lowest premiums, have deductibles close to their out-of-pocket limits, often $5,000 or more.

Premium costs vary, but plans with higher deductibles tend to have lower monthly premiums than those with lower deductibles.

Your plan type also affects your eligibility to use a health savings account (HSA).

Only people with qualifying HDHPs are eligible to open and contribute to HSAs. HSAs are tax-advantaged, meaning that you can direct funds from your paycheck into an HSA pretax, or you can add the money post-tax and deduct taxes later. HSA funds can be invested and earn interest, or spent on any qualifying medical expense, as defined by the IRS. You can contribute to one as long as you have a qualifying high-deductible plan.

Qualifying HDHPs follow certain rules set forth by the Internal Revenue Service. They must have:

  • A minimum deductible of $1,300 for an individual or $2,600 for a family in 2016.
  • A minimum deductible of $2,600 per person in family plans with individual deductibles for each member.
  • An out-of-pocket spending limit of no more than $6,550 for an individual and no more than $13,100 for a family in 2016. These figures are also the maximum allowable deductibles for individuals and families in 2016.

Not all HDHPs qualify you for an HSA, so make sure any one you choose meets all three requirements above.

Who should consider a high-deductible health plan

Though high-deductible health plans involve greater out-of-pocket costs, they still save some consumers money.

A high-deductible health plan might be right for you if:

  • You’re healthy and rarely get sick or injured.
  • You can afford to pay your deductible upfront or within 30 days of receiving a bill for that amount if an unexpected medical expense comes up.
  • You have the means to make significant contributions to an HSA each month.
  • You are healthy and are interested in using an HSA as a way to save or invest money.

Who should consider a low- or no-deductible health plan

In general, low-deductible plans make health expenses easier to predict — and despite the fact that they tend to have higher premiums, they still save some consumers money in the long run.

A low- or no-deductible plan might be right for you if:

  • You are pregnant, planning to become pregnant, or have small children.
  • You have a chronic condition or need to see a doctor frequently.
  • You are 65 or older.
  • You’re considering a reparative surgery, such as a knee or hip replacement.
  • You take several prescription medications, or even just one expensive drug.
  • You or your children play sports, especially those with high risk of injury.

Remember: If you can’t pay your premiums, you risk losing your health coverage and owing a penalty for not having health insurance. It’s better to sign up for a high-deductible health plan than to lose coverage altogether and risk receiving a full-price medical bill.

Your decision will be highly individual, a financial choice based on you and your family’s health care needs. But keep in mind that getting the medical care you need when you need it, including free preventive care, is what’s best for your health and your bank account.

Lacie Glover is a staff writer at NerdWallet, a personal finance website. Email: lacie@nerdwallet.com. Twitter: @LacieWrites.

 


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