High Deductible Health Insurance Policies

Much is changing and will be changing in the future as comprehensive health care reform is implemented, for better or worse, so one needs to be cautious in describing anything about the health insurance system.  But let’s take a look at catastrophic, high deductible, health insurance policies as they exist today.

What is the purpose of health insurance?  A doctor friend of mine insists that we’ve gotten onto the wrong track by expecting health insurance to pay for all of our health expenses.  Health insurance, he maintains, is for emergencies, for the really major expenses that would otherwise destroy you financially.  Just as you buy insurance on your home in case it’s destroyed by fire or flood, but you don’t put in an insurance claim every time you have to change a light bulb, or mow the lawn, or replace a couple of kitchen tiles, health insurance shouldn’t be designed to cover every sniffle, every $50 bottle of pills, every doctor visit.  It should be for unforeseen, devastating things like major surgery, cancer, being diagnosed with some rare disease that requires hugely expensive drugs to treat, lengthy hospital stays, etc.

In this sense, then, my friend would be a philosophical supporter of catastrophic health insurance policies.

Because catastrophic policies, with their higher deductibles of $1,000 to even $10,000 per year, are premised on the notion that most medical expenses you run into most years you’re going to be able to handle out of your pocket, but when you get hit by the really big stuff, that’s when you need an entity with deeper pockets such as an insurance company to step in.

With a catastrophic policy, other than at most some minimal amount for a check-up or a couple of doctor visits, you’re on your own up to the amount of your deductible.  If you have a $4,000 deductible, then only once you’ve spent that much does the insurance company start to pay.

Because you potentially have to pay so much more in medical costs, the premiums for catastrophic policies tend to be markedly lower, which of course is their main selling point.  But for that same reason, they’re probably not a very good deal for people who due to age or health history are prime candidates to run up a lot in medical costs in a given year.  If you’re consistently paying most or all of your deductible each year, you’re almost certainly coming out behind with catastrophic coverage than with more comprehensive coverage.

Whereas if you’re a young and healthy person, medical costs tend to be all or nothing.  Chances are you will have almost no medical costs in a given year, unless you’re in a major accident or something unlikely, in which case it’ll be important to have coverage for truly major expenses.  But nine years out of ten, or nineteen years out of twenty, your deductible won’t be an issue, so you might as well take the policy with lower premiums.

If you’re looking into catastrophic health policies, one factor to keep in mind is that you need to look closely at all their provisions, because sometimes the cheaper policies don’t just have higher deductibles, but might also have other weaknesses.  For example, a cheaper policy might have a yearly or lifetime maximum on what the insurance company will pay.  Or it might not include coverage of prescription drugs, or might include coverage of only non-generic prescription drugs.

Also, look for a catastrophic policy that allows for a Health Savings Account (HSA).  An HSA is an Individual Retirement Account (IRA)-type account where you set aside some of your income to avoid having to pay taxes on it, as long as it’s never withdrawn except to pay medical costs.  So in a year where you have to pay your entire deductible of, say, $4,000 in medical costs, if you run that through your HSA account, that’s $4,000 less income you have to pay taxes on.

The choice of whether to go with a catastrophic policy, and if so, which one, will depend on your individual circumstances and preferences – financial, health, risk-aversion, etc.  Be sure to research your options, and consult with people knowledgeable about these matters, before making your choice.