What are high-deductible plans?

A deductible is the amount that you must pay before your insurance covers care. Its purpose (and the purpose of any cost-sharing, such as coinsurance and copayments), is to encourage consumers to use care more judiciously, weighing the costs and benefits.

High-deductible plans (HDHPs), sometimes also called consumer-directed health plans, generally have a deductible that is at least $1,300 for an individual and $2,600 for a family, though it is not unusual for the deductible to be thousands of dollars higher. In return for not covering medical care up front, insurers offer a lower monthly premium.

Although HDHPs have been around for decades, a provision in a 2003 law (the Medicare Modernization Act) substantially increased enrollment by authorizing the creation of health savings accounts in order to help pay for health care expenses associated with high HDHPs. Prior to the existence of health savings accounts, there were other types of accounts that existed to help pay for the initial high-cost sharing associated with HDHPs, but they were owned by the employer, not the individual. Here, I explain the three main types of accounts that people use to pay for medical care expenses. Note that none of these accounts may be used to pay for insurance premiums:

Health savings account (HSA): An account owned by an individual, funded with pre-tax dollars by the individual (and her employer, if her employer has such an arrangement), to pay for out-of-pocket expenses associated with a HDHP. Because the account is individually-owned, funds roll over from year to year, and an individual may take the account with her from job to job and into and out of jobs.

Health reimbursement arrangement/account (HRA): An account owned by an employer, funded with pre-tax dollars by the employer to pay for some pre-specified medical expenses not covered by insurance. Funds may roll over from year to year, depending on employer rules.

Flexible spending arrangement/account (FSA): An account owned by the employer, jointly funded with pre-tax dollars by the employer and employee to pay for most qualified medical and dental expenses not covered by insurance. Generally, funds do not roll over from year to year – (some FSAs allow $500 to roll over, and others have a few month “grace period” in which they allow the funds to roll over into the next year).

Pros and cons of different accounts

Although all three types of accounts can be funded with pre-tax dollars, only the HSA is owned by the individual, which gives it several key features: 1) it can be carried from job to job or from job to unemployment or retirement; 2) its funds roll over from year to year; 3) because funds roll over from year to year, HSAs may earn interest, which accrue to you; and 4) you need not be employed to set up an HSA. Rather, you can set one up with a trustee, such as an insurer or bank.

You may enroll in multiple types of accounts, such as an HSA and a [post-deductible] FSA,* or an HSA and a [post-deductible] HRA,* but you will have to decide how you want to split your contributions into these accounts. Further, while you must enroll in an HDHP to enroll in an HSA, anyone offered an HRA or FSA can enroll.

*You may not simultaneously enroll in an HDHP and a general purpose FSA/HRA, which reimburses all types of medical expenses. Rather, to enroll in both types of accounts, the FSA/HRA must be a limited purpose FSA/limited purpose HRA, and the employer must specify that the [limited] purpose is to reimburse expenses after the deductible is met. This particular type of limited purpose account is called a post deductible FSA/post-deductible HRA. The benefit of a post-deductible account is that it reimburses qualified medical expenses after you have met the minimum federal deductible ($1,300 for an individual/$2,600 for a family in 2017) – even if this deductible is lower than your plan’s deductible.

How much can my employer and I contribute to each type of account?

Contribution limits for all accounts change each year.

In 2017, the contribution limit for an HSA is $3,400 for an individual HDHP and $6,750 for a family HDHP. Note that the minimum deductible for an individual HDHP is $1,300 (with a maximum out-of-pocket limit or stop-loss of $6,550) and that the minimum deductible for a family plan is $2,600 (with a stop-loss of $13,100). Those with HSAs who are older than 55 may contribute an additional $1,000 to their HSA, for either type of plan (called a catch-up contribution).

Employees may contribute up to $2,600 to an FSA. The employer may contribute up to $500 or instead, arrange to make payments that do not exceed the employee’s contributions.

There is no employer contribution limit for HRAs, and employees may not contribute.

Summary

HSAs were introduced as a way to increase uptake of high-deductible health plans. They offer several advantages over FSAs and HRAs, which are employer-owned, do not accrue interest, and may not roll over funds from year to year. Enrolling in both an employer-owned plan and an HSA may offer benefits to those in HDHPs, especially for those in very high HDHPs who do not think that they will meet their deductible, because employer-owned plans reimburse qualified medical expenses after the federal minimum deductible has been met.

 

 

 

How do I choose a private health insurance plan?

Even the smartest people I know get confused during health insurance open enrollment. Most people whose jobs offer insurance have only one or two options. Some, especially part-time and low-wage workers, are not offered insurance at all. The state health care exchanges provide individuals with an array of options – more in some states than others.

How do I choose a health insurance plan? I do not have easy answers for you, but I have some helpful information. In short, what health plan you want depends on your health care needs and how uncomfortable you are with risk. The more needs you have, and the more risk-averse you are, the more generous a plan you should purchase.

Here, I will explain different types of plans, from least to most generous. In general, the more generous a plan, the higher the premium. The lines between plans are not perfectly distinguishable; an HMO, for example, can have many features of a PPO, and vice versa:

HMO (health maintenance organization): Has a restrictive provider network and limited, if any, out-of-network benefits. Beneficiaries usually required to see a primary care “gatekeeper” before obtaining specialty care.

EPO (exclusive provider organization): has a restrictive provider network and limited, if any, out-of-network benefits, but does not usually require a primary care gatekeeper. Can self-refer to a specialist.

POS (point-of-service): combines HMO and PPO features. Beneficiaries assigned to a primary care gatekeeper, but may use out-of-network providers at a higher rate of cost-sharing (coinsurance/copayment).

PPO (preferred provider organization): has a wide network of “preferred” providers and allows beneficiaries to see out-of-network providers (non-preferred providers) at a higher rate of cost-sharing. No referrals required for specialty care.

Collectively, HMOs, EPOs, POSs, and PPOs, are called managed care plans because they attempt to limit costs and improve quality.

Indemnity: does not have a network of providers, but rather allows the beneficiary to visit whatever provider she wishes. Unlike the previous plans, however, an indemnity plan requires beneficiaries to pay the provider up front, and then obtain reimbursement from the insurer.

It is not clear where to put high-deductible health insurance plans on this list. These plans trade off high deductibles (the amount that you must pay before insurance covers medical services) for lower premiums. After you have paid the deductible, however, these plans usually operate like any other managed care plan. Whether a high-deductible plan is “worth it” depends on the extent of the premium reduction compared to the size of the deductible. Most high-deductible plans do not subject preventive care to the deductible, but rather cover this care without any additional cost-sharing.

How do I shop for care?

All plans, in both the exchanges and the employer-based market, must provide a Summary of Benefits and Coverage, which will allow you to compare major features of the plan.

If you need a certain medication, or if it is important to you to have a certain provider in your network, then you will need to look a little deeper. A drug formulary, available before you purchase a plan, will allow you to see what drugs are covered, for how much, and under what conditions. A provider network directory, also available before you purchase a plan, will allow you to see whether a provider is in-network. Note that a provider may be in-network for one type of plan, but not for another, even with the same insurer.

If other aspects of quality matter to you, then you can go to HEDIS for information on health care plan performance, including technical quality and care experience.

In the exchanges, healthcare.gov will allow you to compare the price and benefit structures of different health insurance plans. Plans in the exchanges must conform to one of four “precious metal” categories: bronze, silver, gold, and platinum, each increasingly generous. The precious metals correspond to actuarial values, the estimated proportion of covered costs on average among total enrollees. For example, the bronze plans are estimated to cover 60% of enrollee costs in a given year. But that could mean that one enrollee’s costs are covered at a rate of 90% (for example, because they use more in-network care), and another enrollee’s costs are covered at a rate of 30%. Silver plans have an actuarial value of 70%, gold 80%, and platinum 90%. Adults under 30 may purchase a very high deductible “catastrophic” plan instead of one of these plans.