When to Consider a High Deductible Health Insurance Plan

by Kevin on June 28, 2012

When it comes to saving money on health insurance plans the first consideration is usually the deductible—how high to raise it to keep the plan affordable? Generally speaking, this is the most effective way to keep health insurance costs under control, but it’s not always the most advisable.

When ever you increase your deductible, you not only lower your premium but you also increase your liability in a medical event. If you increase your deductible from $2,000 to $4,000, you will be on the hook for all of your expenses up to $4,000 before your insurance provider will even begin paying benefits. This is even more important when you are looking at high deductible, or catastrophic, insurance because the deductibles can much be higher.

If you plan to raise your deductible to the levels of catastrophic coverage, you have to be certain that you can cover the difference in other ways.

In combination with a Health Savings Account (HSA)

HSA’s are one of the best ways to work with high deductible insurance plans, in part because they were designed specifically to be used in conjunction with such coverage. For example, the minimum insurance deductibles for 2012 are $1,200 for individuals and $2,400 for families.

HSA’s allow you to put up to $3,100 ($6,250 for families) into a tax sheltered account and withdraw it as it’s needed to pay for covered medical expenses. Any money that isn’t used in the current year can be rolled over into subsequent years and used as needed. In this way, the HSA funds are used to cover expenses that aren’t covered by the high deductible health insurance plan.

HSA’s won’t work for everyone. There are out-of-pocket maximums of $6,050 for individuals and $12,100 for families, and that includes not only deductibles but also co-payments or any other out-of-pocket medical costs, and that will limit how high your deductible can be. It won’t, for example, work with a basic health insurance plan with an individual deductible of $10,000.

When you have sufficient savings to cover the deductible

High deductible/catastrophic plans make more sense if you have sufficient cash reserves to cover the deductible. If, for example, your plan has a $5,000 deductible, you should have at least that amount sitting in a savings account or money market fund ready for immediate use. And actually, you should have more than that.

What is commonly referred to as a “deductible” actually includes two deductibles—one for individuals, and another for families (the “family deductible”). This is typically two or more times the individual deductible amount, so if your plan has a $5,000 deductible, you most likely have a $10,000 (or more) family deductible. Your cash reserves earmarked for health related situations then should be $10,000.

This reserve should be in addition to your regular emergency fund savings since medical disasters often cause other cash flow complications.

When you’re healthy and don’t use a lot of healthcare

If you’re generally healthy and you don’t have chronic health problems, high deductible plans make more sense. This is because in any given year you’re unlikely to use anywhere near the deductible amount.

If you have chronic health issues and will predictably use most or all of the deductible amount in a typical year, you’re better off going with the lowest deductible you can afford.

When you can’t afford health insurance any other way

This is the most compelling reason to have catastrophic health insurance coverage. If having a $10,000 deductible means the difference between having health insurance and doing without it, then you should take the high deductible coverage.

Most people judge the quality of a health insurance plan by how much it covers on the front end—by how low the co-payments and other first dollar expenses are. But this isn’t the true purpose of health insurance.

At its best, health insurance should cover health disasters—the big medical events that can be life threatening. Health insurance companies offer high deductible plans at substantial discounts precisely because it means they don’t have to pay for routine medical costs like doctor visits, tests and minor health procedures. Even though these aren’t covered, the plan will pay for major events where coverage is most needed.

Under optimum circumstances, you can use a high deductible plan if you’re in good health and have sufficient cash reserves to pay for your deductibles in any single year. That combination will save substantial money on health insurance premiums each and every year, even though it won’t pay for routine medical costs.

What to you think of high deductible/catastrophic health insurance plans? Have you ever had one, and if so, how did you work around the deductible?

Google+ Comments

Related Posts