Pros and cons of catastrophic health insurance

By Posted : 03/01/2011

Catastrophic health insuranceAmid rising health insurance costs and a tough economy, a growing number of consumers and employers are turning to high-deductible health plans (HDHPs), often known as "catastrophic health insurance."

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These plans feature lower-than-average premiums in exchange for higher-than-average deductibles, and many on the market today are paired with tax-advantaged health savings accounts (HSAs).

Under a high-deductible health plan, you pay for all your medical expenses – except for qualified preventive care – up to the annual deductible. After that, some plans pay 100 percent of your covered medical expenses. Others initially pay a share of your medical bills – such as 80 percent – before paying 100 percent when you reach an out-of-pocket maximum.

Your premiums do not count toward your deductible or your out-of-pocket maximum.

These plans are sometimes referred to as catastrophic health insurance plans, but the name is a bit of a misnomer. Under health care reform, the plans must cover 100 percent of preventive care, even before you pay the deductible.

In addition, many of the plans cover a full range of health care services – not just hospital and emergency medical costs you might associate with catastrophic care.

The HSA health insurance option

HSA-qualified, high-deductible health plans are a popular option today. Made possible by a federal law that went into effect Jan. 1, 2004, these plans are coupled with a health savings account that lets you set aside pre-tax money to use for medical care today or in retirement.

"More and more consumers are looking for ways to save money on health care and on taxes, so they're taking another look at HSAs," says Ellen Laden, a spokeswoman for Golden Rule Insurance Co., which underwrites individual health insurance plans for UnitedHealthcare.

Golden Rule pioneered the first medical savings account in 1993, a forerunner to the HSA. Just under 30 percent of Golden Rule's individual customers choose HSA-eligible plans, and Laden says the company is seeing an uptick in interest.

Consumers shopping for affordable individual health insurance were the first to gravitate toward HSA-eligible plans, followed by small employers, says Dennis Triplett, CEO of UMB Healthcare Services in Kansas City, Mo., which services health spending accounts, including HSAs.

"Now we're seeing interest from larger businesses," says Triplett, who also chairs the HSA Council at America's Health Insurance Plans (AHIP).

The number of Americans covered by "health savings account/high-deductible health plans" totaled  10 million in January 2010, up from 8 million the previous year and 6.1 million in January 2008, according to a May 2010 report by AHIP. Large-group coverage was the fastest-growing market for the products from January 2009 to January 2010, rising by 33 percent, AHIP says.

Triplett says that in the last year, his company saw a 40 percent increase in the number of HSA accounts it services.

How these health insurance plans work

Not all high-deductible health plans can be paired with an HSA. To qualify for HDHP status in 2011, the plan must have a deductible of at least $1,200 for an individual and $2,400 for a family. Out-of-pocket maximums can be no more than $5,950 for an individual and $11,900 for a family.

You can contribute up to $3,050 per year in pre-tax dollars to an HSA as an individual or up to $6,150 as a family. You can save an additional $1,000 in the account if you're 55 or older.

The money in the account grows tax-free, and in some cases companies that service the accounts provide investment options such as mutual funds to promote further savings growth, Laden says.

When you withdraw the funds, you do not have to pay taxes so long as the withdrawals you take are for qualified medical expenses, such as the HDHP’s deductible or medical costs not covered under the plan, including dental and vision care. You can also use the accounts to save for long-term care not covered by Medicare.

Laden says she knew one man who poured as much as he could into his HSA to pay for orthodontic bills he knew he'd eventually face for his children.

"All three little girls were thumbsuckers, and he knew they'd need braces," she says.

HSA funds can also be used for non-medical expenses, but you'll pay a 20 percent tax penalty on top of income taxes on any money you withdraw for non-medical expenses before age 65, Laden says. You pay only ordinary income tax – no penalty – on withdrawals for non-medical expenses after age 65.

An HSA account is portable. Even if you switch to a different type of health plan or change employers, the money is still yours to spend on health care.

Is a high-deductible health plan right for you?

Triplett says many types of consumers can benefit from high-deductible health plans. 

"I think they're a no-brainer for the young and healthy, but I think they're well-suited for all demographics," he says.

Remember, though, that not all high-deductible plans are HSA-qualified. In addition, HDHPs vary in what they cover and how they’re priced.

Consider the following, Laden says:

  • How much can you afford to pay for health insurance?
  • What coverage do you need?
  • What does the plan cover, and what does the plan not cover?
  • How much is the deductible, and how much, if any, would you pay in coinsurance up to the out-of-pocket maximum?
  • How will you save for the HSA? Plans underwritten by Golden Rule Insurance, for example, require members to contribute at least $25 a month to the HSA.
  • Does the plan offer a strong network of providers, and is the network national?

If you sift through health insurance quotes and consider a "catastrophic health insurance plan," make sure you understand how the plan works, what it covers and how much you might end up paying out of pocket.


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