High Deductible Health Plans

High Deductible Health Plan (HDHP) offers a new direction in health management. In th past healthcare coverage has been a benefit mostly provided by employers without much involvement from the employees. Here is how it worked in the past. You start a new job, employer offered you couple of different HMO and/or PPO plans, you select one and then pay your copay at the time of service and you're done. There was no incentive for taking good care of yourself and making less frequent visits to your primary care physician. All this is changing with HDHP plans. Remember, you save on auto insurance premium if you're a responsible and safe driver, so why not on your health insurance premium if you manage your health responsibly? This very question is what triggered these new products in health insurance marketplace. People are sick of paying for others who are don't manage their health responsibly and make everyone in the group coverage pay more to cover these patients. Most HDHP plans are offered with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA) that provides traditional medical coverage and a tax free way to help you build savings for future medical expenses. The HDHP/HSA or HRA gives you greater flexibility and discretion over how you use your health care benefits.

The HDHP features higher annual deductibles (a minimum of $1,100 for Self and $2,200 for Self and Family coverage) than other traditional health plans. The maximum amount out-of-pocket limits for HDHPs participating in the most employer programs in 2007 is $5,250 for Self and $10,500 for Self and Family enrollment. Depending on the HDHP you choose, you may have the choice of using in-network and out-of-network providers. Using in-network providers will save you money. With the exception of preventive care, you must meet the annual deductible before the plan pays benefits. Preventive care services are generally paid as first dollar coverage or after a small deductible, or copayment. A maximum dollar amount (up to $300, for instance) may apply.

When you enroll in an HDHP, the health plan determines if you are eligible for a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA). If you are Medicare enrolled, you are not eligible for an HSA. Each month, the plan automatically credits a portion of the health plan premium into your HSA or HRA, based on your eligibility as of the first day of the month. You can pay your deductible with funds from your HSA or HRA. If you have an HSA, you can also choose to pay your deductible out-of-pocket, allowing your savings account to grow.

Before we move on, let's discuss the difference between a HSA and HRA. HRA is not a new product. HRA money is mostly paid by employer and employee will lose it if he/she decides to quick and seek a new job. For example, most Health plan with HRA start out with $1,000 from the employer and employee can use this money for out of pocket expenses. Some HRA products are offered with Employee first dollar. What does that mean? An employee with first dollat HRA must meet the out of pocket deductible limit before he or she can se HRA money for health coverage. HSA accounts on the other hand are managed by employee but contribution is added by employer as well as employee. Also, any unused HSA money will be a rollover for next year. If you decide to quit and take up a new job, HSA account moves with you so you can still use it for your health expenses with new employer.

HSA contribution worksheet for 2007

Frequently Asked Questions - HDHP and HSA

Health Reimbursement Accounts(HRA)

Health Saving Account Worksheet

Comparison chart for HRA and HSA plans

To provide you a better understanding on how HDHP plans work, here is an example.

A medium to large size employer with 10-15,000 employee offering PPO health plans to its employees usually offer family coverage for about $110 per paycheck. These plans usually have $15-$30 copays and 20% coinsurance. Now let's take an example of a healthy family of four using this plan. If they make 10 visit to doctor office a year with an average bill of $150, their annual healthcare spending is $1,500. Now at $20 copay and 20% coinsurance here is their total out of pocket expense.

Total payment for 10 visits with $20 copay = $20 X 10 = $200

Total payment due to 20% coinsurance = $1,500 X 20/100 = $300

Total annual healthcare expenses excluding prescription drugs = $200 + $300 = $500

Now let's assume that this family switches to the simple HDHP plan with HSA. A typical HDHP plan with this type of coverage is offered at around $25 per paycheck for family coverage. Employer or plan doesn't pay anything until this family meet their out of pocket expenses, which stand at $4,000 for a typical plan. Now let's run these numbers are see what is the impact on this family if they switch to HDHP plan.

Employer deposit to HSA account = $700

Family is paying $25 per paycheck for premium so they are saving $110 - $25 = $85 per paycheck in premium. For simplicity, let's assume that they deposit all the difference in their HSA acccount.

Total money deposited by employee is HSA account = $85 X 26(total number of biweekly paycheck in a year) = $2210

Total Money deposited in HSA account = $2,210(Employee contribution) + $700(Employer Contribution) = $2,910

Total healthcare expenses for the year paid by employee = $1,500

Money left in the HSA account at the end of the year = $2,910 - $1,500 = $1,410

Now things will start to come together. Did you notice that this family is left with over $1,400 at the end of the year that is going to be a rollover for next year HSA so they will start out next year with $1,400? If they continue to manage their health well, this balance will continue to grow and 8-10 years down the road, it will be a decent size reward for them to manage their health well. If they would stayed with the traditional PPO plans from their employer, there was no incentive and they would have left with nothing at the end of the year. This is a very simple example of the power of a HDHP plan with HSA account.

Remember, employer are always looking to cut down their healthcare spending and it is just a matter of time before HDHP plans become a standard healthcare coverage with most employers. So if you take your health seriously and manage it well this is the great time to jump on board a HDHP plan and get rewarded for being responsible. Also, HDHP coverage is available to anyone even if you're self employed or buy your own health insurance.