It’s that time of year when employers tell us about how medical coverage has changed (been reduced) for next year, what the premiums are (been increased), and ask you which one you want to be stuck with for the year. I don’t know about you, but it’s a tough decision for me. You can’t change your mind mid-year, should some new sickness ail you, or heaven forbid, you get into an accident. My daughter and I are pretty healthy, but I’m getting to the point where I should probably see a doctor more often. I don’t even always go get my 100% covered (free) annual physical.
It seems like, at the companies that I’ve worked for, that the 3 healthcare choices you get are fairly similar coverage (80% covered, after meeting the deductible), but with different deductibles and therefore different monthly premiums. So if coverage is nearly the same, how does one determine which plan to go with? Of course, it depends upon the relative health of you and your family members, how often you normally see a doctor, and if you expect that to change within the next year. Something to also consider is what your maximum out of pocket expense might be if something catastrophic was to happen, such as an automobile accident, heart attack, or serious injury from skydiving, rock climbing or your favorite adrenaline activity. While you can’t plan for that to occur or not occur, you don’t want to be left with an outrageous medical bill if that was to happen.
Graphing your options
For years, I’ve created my own spreadsheet from scratch to compare the plans and graph the results. I plot how much it will cost me from my pocket for various medical expenses incurred through the year. The costs includes the per-paycheck premium, the 100% cost up to the deductible, the 20% co-pay up to the out of pocket maximum, and the out of pocket maximum itself. The graph illustrates how much it costs me if I’m perfectly healthy, visit a doctor for some minor things, regularly see a doctor, or have a major medical issue such as a lengthy hospital stay. Because there are usually different deductibles for an individual versus the entire family, there are graphs for each case.
An example is below. By looking at this graph, it’s easy to see that Plan C is the lowest cost, regardless of how many times you see the doctor. This is true if the coverage is the same, meaning you can see the same doctors, the hospital bills would be identical, and only the premiums, deductibles and max out of pocket amounts are different. Whether you never saw a doctor for the year, had $5000 of medical services, or had $35,000 of medical services, Plan C’s total cost (Premiums, Deductibles, and Co-Pays) are lower in all cases.
This is an easy decision for Plan C
It isn’t always that easy. Here’s my actual situation, and if only one family member receives medical care through the year. In many medical plans, the individual deductible is half of the family deductible, but in this case, Plan C has a large deductible that’s the same for a single family member or the entire family. The large deductible must be met before the plan starts paying out anything. In this case, Plan C deductible is $4000. If I incur somewhere between $2500 and $19000 of medical bills, Plan C is no longer the least expensive choice. In fact, it’s about $1000 more expensive than Plan B. Unless the bill is over $20,000, then Plan C is the cheapest, in this case due to the lower max out of pocket limit.
Enter the HSA Savings
But…what’s not included above is the fact that Plan C is actually a High-Deductible Health Plan (HDHP). From Wikipedia: “A high-deductible health plan (HDHP) is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. Being covered by an HDHP is also a requirement for having a health savings account.” That health savings account (HSA) is a beautiful thing where you can save PRE-TAX dollars, and later use that money to pay for qualified medical expenses, including your deductible and co-pays, as well as other things like dental, vision and prescriptions. For many people, this means 15, 25% or 28% savings on Federal taxes, as well as State taxes, which is 6% here where I live. That’s a 31% savings in my case. Now, factoring the HSA savings into the equation, the graph looks like this:
Now once again, the choice is easy. No matter what my medical expenses are, the Plan C (HDHP) with HSA tax advantage is the lowest cost choice.
After I went through this exercise, a friend found this website that does all the graphing for you. Just add in the pertinent information for your plans. If you don’t plan on going out of network, you don’t need to fill in those figures. It doesn’t figure out your tax advantage for an HSA, but the rest it does very well.
Hopefully you can use this information to help you with your next healthcare plan election, minimizing your cash outflow regardless of how much medical services you expect, or don’t expect, to be billed next year.