April 28, 2006, Newsletter Issue #26: High Deductible Health Plans

Tip of the Week

Most families are paying anywhere from $6,000 to $12,000 in annual premiums for family health insurance, depending on whether you have employer-sponsored group insurance or a privately purchased individual health plan. If you are considering switching to a high deductible health plan (HDHP) to lower your premiums, make sure you understand the terms before deciding. HDHPs, when used in conjunction with a health savings account, (HSA) can be a good option for families in tune with their health care usage patterns.

For example, a family of five would have had an employer contribute $8,950 toward the family's PPO health insurance premiums. The family would have paid another $6,800 in premiums. This family would then paid $300 in co-pays for office visits throughout the calendar year, plus more than $3,600 in prescription co-pays. This would result in nearly $11,000 in out-of-pocket expenses for health care. Even though the insurance company collected nearly $16,000 in premiums from the employer and the employee, it only paid out a little more than $3,000 in benefits to providers. However, if the family had a HDHP instead of a PPO, the same family would have used an HDHP with a deductible of $5,000 and a HSA. If the employer and employee split the HDHP premiums of $7,000, the family would pay $3,500 in premiums. But there is still the $5,000 deductible to consider, so the family could use payroll deductions to deposit that money in equal chunks into the HSA. The family could then turn around and use the money from the HSA, which by the way gets deposited on a pre-tax basis saving the family in the 28% tax bracket, $1,400 a year. This $1,400 could be used for their own medical expenses. The family's gross out-of-pocket expenses would be a maximum of $8,500 for the year. Factor in the $1,400 tax savings, and the net medical expenses for the year are $7,100 or a savings of nearly $4,000 for the year.

If the family's expenses hit the $5,000 mark, the HDHP benefits would become active. However, if the expenses do not reach the $5,000 mark, any money left in the HSA rolls over to the following year earning interest tax-free. Even if the HDHP does not pay out benefits in the year, the security of knowing that should a major medical event strike the family, a family would be covered worthy of the premiums paid. The benefits of an HDHP when the employer does not contribute may or may not prove worthwhile for everyone, so consider the total costs before you decide.

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