Understanding the Pros and Cons of High Deductible Health Plan

High Deductible Health Plans have been in the news lately for the low premium they offer. However, there are certain things one must consider before signing up for these plans.

In the last five years, the number of people who have signed up for a High Deductible Health Plan (HDHP) has increased drastically. An HDHP is like any other health plan in the market, but its one distinguishing feature is the high deductible, low premium policy. The prospect of paying low premiums every month, coupled with a Health Savings Account (HSA) has made HDHP a lucrative deal for many people.

The idea behind HDHP is that the client will undertake all the expenses until a stipulated deductible is met. Usually, the deductible is set at a higher amount than the traditional health insurance plans. After the deductible is met, the insurer pays for the medical expenses of the client. The insurer either covers the whole amount of medical expenditure or the client needs to chip in a part as co-insurance till the stipulated ‘maximum out-of-pocket’ amount is reached. After this, the insurer has to bear the entire cost of treatment. Irrespective of whether the client has reached the deductible amount or the out-of-pocket amount, annual medical checkups – classified as ‘preventive care’ – are allowed by the insurer.

Apart from having a high deductible, an HDHP makes an insured person eligible for an HSA. HSA is a savings account where a person can put in his pre-tax money to cover his medical expenses. The money in an HSA can also be used for investment purposes. However, if the money is used for non-medical purposes, it will be liable for taxation.

Pros

One of the prime reasons people find HDHP appealing is because it offers individuals an option of making lower monthly payments. With lesser premiums, people can save more money to meet other necessary expenditures. In fact, the reason HDHP has been adopted by so many people since its inception in 2004, is because of the perception that it cuts down the monthly cost of medical expenditure.

Another advantage that people see in an HDHP is that it comes with an HSA. People want to save as much as they want, and look for ways to prevent Uncle Sam from taking a cut from their ‘hard-earned’ money. As one can list HSA as a tax-deductible contribution, the amount liable for taxation by the IRS decreases. Also, the amount that one deposits in an HSA can be used to earn tax-free interest. An HSA allows people to ‘carry-forward’ their savings onto the next calendar year as well.

Young people and people who don’t have a history of any major illness can benefit from an HDHP. As they rarely seek treatment and prescription drugs, they spend less on their out-of-pocket expenses. With relatively lower premiums and a tax-free HSA, they can save more each month.

Corporations and other places which employ a large number of people have taken a strong liking to HDHP. Many experts believe that the prime reason for this is that employees observe discretion while spending on medical expenses as they are not covered by the company or the insurance policy till the deductible is met. This, coupled with lower premiums leads to lesser expenditure on managing the health cost that a company has to bear.

Cons

People who need frequent medical attention or are undergoing treatment for major illness need to spend their own money on treatment. In these cases, where the medical cost is higher, the entire savings of an individual will have to be used to provide treatment. Even after meeting the deductible, the person will have to pay a part of expenditure as co-insurance till the out-of-pocket limit is reached.

Many experts believe that HDHP has made people callous as far as taking care of their health is concerned. In the traditional plan, the person is covered to see a doctor and buy prescription drugs. However in an HDHP, the person has to spend his own money. So, instead of seeking the advice of a medical practitioner, people may just wait for the illness to heal on its own. This attitude can cause health problems and many potential diseases remain undetected.

While many people count on the low premiums while signing up for a high deductible plan, the reality can be starkly different. Even after meeting the deductible, the cost of copay and co-insurance can mean that you are spending more on what you would have, in case of a traditional plan. Also, many HDHPs restrict the choice of doctors and hospitals, meaning that you don’t have many options to choose from. This results in people paying higher cost for their medication.

HDHP has its merits and demerits. The general advice that most experts give to people is that if you are young and live a healthy life, HDHP can be the plan for you. However, if you have a chronic illness or engage in smoking/drinking etc., a traditional plan may suit you better. It is important that you read all the terms and conditions of the insurance policy before you settle for one.