More consumers and employers are turning to high-deductible health plans (HDHPs), often known as "catastrophic health insurance," as rising health insurance costs makein it harder to make ends meet for both businesses and individuals.
These plans feature low premiums in exchange for high deductibles and out-of-pocket costs. Employers pair many of these catastrophic plans with tax-advantaged health savings accounts (HSAs).
Under a high-deductible health plan, you pay for all or most of 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.
Deductibles for catastrophic plans can be eye-watering. The average deductible in one of those plans for single coverage is $2,349. Compare that with the average HMO deductible ($870) and PPO deductible ($1,204).
Remember, this is only the average. You could easily find a high-deductible plan much higher than that.
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Positives, negatives about catastrophic, high-deductible plans
Where a catastrophic plan works for you depends on you and your family's health situation. Here are some pros and cons to help you figure out whether a high-deductible plan works for you.
- Low premiums
- You don't pay as much for healthcare if you don't use services
- Health Savings Accounts help you save for your health care tax-free
- High out-of-pocket costs
- High deductibles
- Plans can cost you a lot more if you need many
Usually, high-deductible plans work best for young, healthy people who don't need much health care. A family with multiple children and a parent with a health issue, such as asthma or diabetes, will likely do better with another type of plan, such as a PPO or HMO.
The more health care services you need, the less likely that a catastrophic plan would make sense for you financially.
The HSA health insurance option
HSA-qualified, high-deductible health plans are a popular option. They let you set aside pre-tax money to use for medical care today or in retirement.
Consumers shopping for affordable individual health insurance were the first to gravitate toward HSA-eligible plans, followed by small employers. Mid-size employers have also embraced HSA plans.
"Many small and mid-size employers use HSA-type plans as a cost-saving measure, and many employees, especially those that are seeking more "catastrophic" type coverage and don't have any major health concerns, see them as a way to save money on premiums and still cap their exposure in the event something happens," explains Cory Friedman, vice president at GCG Financial.
While some large employers use HDHPs, many of the biggest employers self-insure. "All size employers use HDHP plans in some regard, but many larger employers are able to control costs by moving to self-insured plans without necessarily needing to increase deductible exposure to employees," says Friedman
Data shows that the popularity of HDHP and HSAs continues to grow. Nearly one-third of people with employer-sponsored health insurance have a high-deductible plan, according to Kaiser Family Foundation's 2018 Employer Benefits Survey.
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How these health insurance plans work
Not all high-deductible health plans can be paired with an HSA. Tino qualify for HDHP status, the plan must have a deductible of at least $1,350 for an individual and $2,700 for a family. Out-of-pocket maximums can be no more than $6,750 for an individual and $13,500 for a family.
You can contribute up to $3,500 per year in pre-tax dollars to an HSA as an individual or up to $7,00 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. Also, many employers also seed money into the accounts.
KFF said the average annual employer contribution to an HSA-qualified plan is $603 for single coverage and $1,073 for family coverage. However, about four-in-10 employers with catastrophic health plans don't contribute any money to those accounts.
|Costs associated with catastrophic plans|
|Minimum annual deductible for individual coverage||$1,350|
|Minimum annual deductibles for family coverage||$2,700|
|Maximum out-of-pocket costs for individual coverage||$6,750|
|Maximum out-of-pocket costs for family coverage||$13,500|
|Maximum annual HSA contribution for individual coverage||$3,500|
|Maximum annual HSA contribution for family coverage||$7,000|
When you withdraw the funds, you don't 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.
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. 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 catastrophic, high-deductible health plan right for you?
Most types of consumers can benefit from high-deductible health plans, but two types of consumers will often help the most from an HDHP.
The young and healthy are prime customers. "HDHP plans typically cost less, so why pay more in premiums for a richer benefit plan that you don't expect to use," advises Friedman. "They would be better off taking some of the premium savings and funding an HSA so that they have some money set aside in the event they incur unforeseen medical costs."
On the other hand, if you know you will hit your maximum out of pocket, an HDHP is a great option. "All things being equal, if your out-of-pocket is the same on an HDHP as it is on a traditional PPO, you get to pay a portion with tax-free dollars assuming your HDHP plan is HSA-eligible, which means your healthcare dollars go further," points out Friedman.
Remember, though, that not all high-deductible plans are HSA-qualified. Also, HDHPs vary in what they cover and how they're priced.
Consider the following:
- 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? Many plans require members to contribute a certain amount each month to the HSA, $25 a month is a standard amount.
- 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.