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The battle for my healthcare dollars is on.
I just received a postcard from my husband's employer telling me that we could get access to a consumer directed health plan (CDHP) aka high deductible health plan (HDHP) that may save us money.
But I'm willing to run the numbers just to make a fair and objective comparison between the HDHP and the traditionally priced plan (the Non-HDHP) that's on offer.
What follows is a comparison process I've designed to determine whether I should choose the HDHP or Non-HDHP. At this point in my financial life, I can afford high out-of-pocket (OOP) maximums and contributions to a Health Savings Account (HSA).
Gather Key Numbers
I designed my process to consider cash flows for healthcare expenses both now and in the future. I capture the effect of payments (cash outflows), such as monthly insurance premiums, and benefits (cash inflows), such as tax breaks for HSA contributions.
Specifically, the numbers to which I'll pay attention include:
- monthly health insurance premiums for the HDHP and traditional plan (non-HDHP)
- out-of-pocket (OOP) maximums for both types of plans
- Health Savings Account (HSA) and/or Flexible Spending Account (FSA) contributions by the employer (if any)
- personal contributions to HSAs and/or FSAs
- income tax brackets
- expected growth rate of investments
- healthcare spending in retirement
In my situation, both the HDHP and non-HDHP choices use the same provider network. So, I won't weigh the differences among various health insurance models with varying networks. My decision focuses on cash flow.
Consider Worst-Case Scenarios
I'll assume worst-case scenarios in terms of out-of-pocket expenditures. Specifically, I'll compare cash flows associated with reaching OOP maximums with both the HDHP and non-HDHP.
What I won't do is estimate next year's costs based on my guesses about my future health status. In the past, I've predicted various scenarios and considered details relating to deductibles, co-pays, co-insurance, etc. for different types of health plans. This approach served me well when I had fewer funds to allocate to healthcare costs. (If you're interested in comparing plans, see my course: Guide to Choosing Health Insurance article with spreadsheet.)
But, right now, I want to quantify and evaluate my total exposure in terms of healthcare expenses. For simplicity's sake, I'll focus on OOP maximums.
If I spend less than the maximum, then I can celebrate my good health and good sense to choose an HDHP with a low monthly premium. If my expenses are high, then I can be glad that I planned for the highest possible maximum.
Set Up Apples-to-Apples Comparison
I'll create an apples-to-apples comparison by allocating an equal amount to healthcare, whether I sign up for an HDHP or a traditional plan (non-HDHP). Here's a summary of my comparison process:
- Determine the cash outlay associated with the HDHP
- Match this cash outlay with the non-HDHP
- Compare the two approaches in terms of wealth accumulation within designated health accounts and the effect of healthcare spending from these accounts in retirement (that is, measure how these accounts support cash flow demands for expenses)
Method of Allocating Dollars Today
Generally, healthcare expenses are higher with an HDHP, particularly if an HSA is funded. So, I'll determine the maximum cash flow required to manage this type of plan and then spend and/or invest the same amount with the non-HDHP. In practical terms, this approach means I'll invest any savings generated from the non-HDHP into a regular investment account.
Funds are allocated to these categories:
- health insurance premiums
- cost of healthcare services up to the OOP maximum
- funding of a designated healthcare account (either an HSA or regular investment account designated for healthcare)
- tax benefits associated with payment of premiums and account contributions
Annual healthcare spending (plus investing) will be the same, whether HDHP or non-HDHP. But the allocations will differ.
Use of Money on Healthcare Spending in Retirement
For simplicity's sake, I won't tap the HSA or the investment account to pay for medical expenses … until retirement. At age 65 (when HSA funds can be withdrawn tax-free for qualified medical expenses), I'll compare the account values in the HSA with its regular investment counterpart. For now, I'll use my spreadsheet to project the potential of the HSA and my regular account.
Generally, if the value of the HSA exceeds the funds inside the regular investment account, the HDHP with HSA is the best choice. That's because HSA funds are available tax-free (as long as I don't need this money for regular, non-medical expenses) whereas money withdrawn from the investment account may incur capital gains taxes. If the HSA is valued at less than the investment account, I'll consider whether tax-free withdrawals in retirement outweigh the benefit of a higher balance in the regular account. Again, the purpose of this exercise is to consider the impact of my healthcare decisions on cash flow.
Be Ready for a Surprise
At this point last year, I was starting to get more information on my healthcare plan options. Initially, the employer shared its OOP maximum for the HDHP, both for in network and out of network providers. It also mentioned that we'll receive an employer contribution to the HSA in the amount of $1,000.
I didn't want to wait until I got all the details about each plan before I designed my decision-making process and my spreadsheet. So I developed my comparison methodology and populated my spreadsheet with the information I had to date. That helped me not to judge by impressions (like thinking that the traditional plan or non-HDHP is always less expensive) but to develop the framework and then see what the numbers told me.
Eventually, the details of the plans arrived. Using my process, I discovered that — if we chose the HDHP, incurred expenses up to the OOP maximum, and maxed out HSA contributions — we'd spend about $14,000 for healthcare in the coming year. The tax benefits associated with the pretax payment of health insurance premiums and the HSA contribution would be worth about $1,500. So the cash outflow associated with healthcare would be $12,500. To support an apples-to-apples comparison with the traditional plan (non-HDHP), I'll set aside the same amount, which would then involve putting about $5,000 annually in a regular investment account.
Over time, I'll accumulate more in the HSA than the investment account. Plus I'll be able to withdraw money from the HSA tax-free in retirement to pay for healthcare expenses.
The HDHP is the better option for us for a few reasons. The OOP Maximum is just $2,000 more with the HDHP, compared to the non-HDHP. Further, the employer will seed the HSA with $1,000 at no cost to us. Lastly, the tax benefits of the HSA contributions and withdrawals pushes the HDHP ahead of the non-HDHP.
Your results may be very different depending on the design of the healthcare insurance plan available to you.
This process is accompanied by a spreadsheet and explained to simplify the decision-making process for those who are interested in more detail in my HDHP vs. Non-HDHP Comparison Spreadsheet course.
If you reasonably believe you'll spend less than the OOP maximum and don't have extra money to contribute to an HSA, check out my Guide to Choosing Health Insurance article with spreadsheet.
How do you choose your health insurance plan?