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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 PPO (Preferred Provider Organization) plans offered by the company. In fact, I created a process and a spreadsheet to help make this decision. The process is designed for people who can afford to pay high out-of-pocket (OOP) maximums and contribute to health savings accounts (HSAs), which are available to consumers with eligible HDHPs.
(If you're looking to figure out the best deal for a single year, especially if you think you'll spend less than the the typical OOP maximum and don't have the money to contribute to an HSA, check out my Guide to Choosing Health Insurance article with spreadsheet).
Gather Key Numbers
I designed my process with spreadsheet 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 health savings accounts.
Specifically, the numbers to which I'll pay attention are:
- Monthly premiums for healthcare insurance coverage for the HDHP and PPO
- OOP maximums* for HDHPs and PPOs
- Health Savings Account (HSA) contributions by the employer (if any)
- HSA contributions by the employee (regular and catch-up)
- FSA contributions if available to employees
- Tax brackets while working
- Tax brackets expected in retirement
- Expected growth rate of investments within HSAs and regular brokerage accounts (to allow an apples-to-apples comparison between the HDHP and PPO)
I should note that in my situation, the HDHP and PPO use a provider network. Most of the providers in my area are in network so I won't need to choose between pricing and providers: my main choice is all about pricing.
You'll learn more on why I'm assuming worst-case scenarios and OOP maximums next.
Consider Worst-Case Scenarios
A premise behind the HDHP is that consumers can control healthcare costs. Hopefully, one day this dream will come true. In the meantime, I'll use OOP maximums in my calculations.
I suppose that over a lifetime of consuming healthcare, one could make decisions that could influence healthcare expenses. For example, a healthy lifestyle could reduce or possibly eliminate expenses associated with lifestyle diseases, such as certain types of diabetes and heart disease. Also, theoretically, shopping around for healthcare services could lead to lower expenses.
Controlling healthcare dollars sounds great in theory but is problematic in reality. Sure, I'm relatively healthy and fit; my triglycerides are 58, for example. But I'm getting older and both the possibilities of cancer and heart disease loom. Even if I stay free of disease, the cost of screenings and preventive treatment is high. Combined with other miscellaneous costs, an urgent care visit here or a medication for poison ivy there, healthcare expenses could easily reach OOP maximums.
Further, in my personal experience, controlling expenses is done mostly by refusing services not shopping around for healthcare services. Where I live, many providers refuse to give price estimates, no matter how politely, urgently, or repeatedly I ask. Some progressive, thoughtful, cost-aware providers offer quotes, then ask me to sign a document acknowledging that these numbers are estimates only and my bill may be higher.
So, for this exercise, I'm assuming 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 PPO.
Another assumption I'll make is that my choice of HDHP vs. PPO won't affect my ability to itemize medical expenses significantly. The variables in this calculation include the actual medical expenses as well as adjusted gross income (AGI) and other potentially itemized deductions, like state taxes, charitable giving, and mortgage interest. These calculations are difficult to pin down and apply to a relatively small percentage of people, especially with the increase in the standard deduction. So, for my HDHP vs. PPO decision, I'll ignore medical expense itemization.
Save for Healthcare Expenses
The truth is that I'd like to sock away money in a Health Savings Account (HSA). I'm looking to diversify my investment portfolio and shelter funds from income taxes; the HSA helps me do both. With this type of account, not only can I reduce my tax bill now, I can save on taxes in the future.
When evaluating the advantages (and disadvantages) of the HDHP compared to the PPO, I'll consider the tax benefits associated with the HSA. I'll also look at how taxes are affected by insurance premiums, use of Flexible Spending Accounts associated with PPOs, and withdrawals from health accounts in retirement.
To make an apples-to-apples comparison, though, I'll assume that I'll fund either an HSA or I'll put money aside in a regular investment account with the money saved (presumably) by choosing the PPO. Money in this investment account could be accessed for healthcare expenses in retirement; unlike HSA funds, though, withdrawals from a regular account could trigger capital gains taxes.
As a caution, the tax advantage of having a regular investment account comes only if you use the money in the designated health account or HSA for non-medical expenses. In this scenario, you'd probably pay lower capital gains taxes with a regular account compared to ordinary income taxes on HSA withdrawals.
Lastly, I'll assume that you're funding retirement accounts, like your 401(k) and IRAs, to the maximum. In this way, the money going into the HSA is a bonus for you and isn't happening at the expense of contributing to other tax-advantaged accounts.
Set Up Apples-to-Apples Comparison (Here's How)
In my process, I'll calculate the full amount needed to deal with healthcare expenses using an HDHP/HSA. In general, the personal risk and liability associated with healthcare is higher with the HDHP. So, I'll estimate the maximum cash flow associated with this type of account and then “spend” this amount with the PPO. The total amount will be the same for both types of plans but the allocations will differ. In practical terms, this process means I'll invest savings from the PPO option into a regular investment account.
This money will be allocated to the following:
- healthcare insurance premiums
- cost of healthcare services (which varies based on the network status of providers, negotiated rates for services, co-pays, co-insurance, deductibles) 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 premiums, HSA contributions, FSAs, etc.
For simplicity's sake, I won't use the HSA or the investment account to pay for medical expenses … until retirement. Again, this approach helps me to create an apples-to-apples comparison. At retirement at age 65, I'll compare the account values in the HSA with its investment counterpart.
If the HSA exceeds the investment account, then the HDHP/HSA route is the clear winner. That's because this money is available tax-free whereas money withdrawn from the investment account will likely incur capital gains taxes (depending on your tax bracket). If the HSA is valued at less than the investment account, then I'll consider how well each account will handle withdrawals in retirement.
Be Ready for a Surprise
I'm starting to get more information on my healthcare plan options. To date, the employer has shared its OOP maximum for the HDHP, both for in network and out of network providers. It's 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 get all the details about each plan before I designed my decision-making process and my spreadsheet. So I created both and populated my spreadsheet with the information I have to date, drawing on the past plans and information that's been shared about the plans from the employer.
Here's what I've gathered:
I've had to make a few assumptions about investment returns, tax brackets, and annual withdrawals in retirement. All of these element are important. A significant factor in this decision that's often overlooked is the tax impact of insurance premiums and health account contributions. In my scenario, I'm considering the value of the HSA contributions; if you've used or plan to use an FSA, the tax break associated with this tool can be significant and should be considered.
You may notice that the monthly premiums seem low. They are! But they reflect what we've experienced with my husband's current employer and we're grateful for the bargain price.
Using these numbers, I determine the most I'll spend on healthcare if I reach all my OOP maximums (in network only) and contribute the most possible to an HSA. In my scenario, I'll spend about $14,000 per year on healthcare — but that includes a $7,000 contribution to my HSA. I'll receive tax benefits for this spending and investment of about $1,500 so my true cash flow will be about $12,600. To support an apples-to-apples comparison with the PPO, I'll set aside and invest about $5,300 annually in a regular brokerage account. In this way, my cash outlay for both the HDHP/HSA and PPO choices will be equal.
Here's what this looks like:
HDHP with HSA:
PPO with FSA (possible) and 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.
It looks like the HDHP will be a better option for us for a few reasons. The OOP Maximum is just $2,000 more with the HDHP, compared to the PPO. Further, the employer will seed the HSA with $1,000 at no cost to us. Our annual cost for healthcare expenses will be approximately $13,000, which includes $7,000 for the funding an HSA. Your results may be very different depending on the design of the healthcare plans.
If you think you'll likely use out of network providers, then pay attention to those OOP maximums as the difference between in network and out of network can be large. In addition, you likely wouldn't want to accumulate millions in an HSA for retirement (though that's possible if you fully funded an HSA from age 26 to retirement at age 65). Still, you could fund it during some of your working years as a way to deal with healthcare in retirement.
My HDHP vs. PPO Comparison spreadsheet (Excel) allows you to compare an HDHP with a PPO using the approach I've described. It covers 40 years while working (26 years to 65 years) and 36 years in retirement (65 to 100). It requires just 13 inputs and all calculations are performed automatically. You can make adjustments as needed for more customized applications. It's available as a download on Teachable.