Pros and Cons of High Deductible Health Insurance

There is much debate over what effects the recently passed, and highly controversial, health care reform bill will have, short term and long term, but for now certainly health care insurance is a big, big burden for many people.  Understandably, they are looking for ways to spend less.

One option is high deductible health insurance plans.  Of course these vary a great deal in detail, but the basic principle is that the insurance company doesn’t pay until your total covered medical expenses surpass a certain high amount, anywhere from $1,000 to even $10,000.

So if your plan’s deductible were $5,000, you’d pay the first $5,000 of your medical expenses each year, and the insurance company would pay anything over $5,000.

Now, in fact it rarely works exactly like that, as plans have all kinds of other provisions.  That’s just the general idea.  But for instance your plan might provide you some very small amount of benefits to cover doctor visits independent of that $5,000.  Or above the $5,000, the insurance company might pay 50% for some things, 80% for some things, and 100% for some things.  Or there might be a lifetime cap, such that the insurance company will only pay up to $1,000,000 over the course of the time you have the policy.  Or prescription drugs might not be paid for by the insurance company even after you reach the $5,000 mark unless they’re generic.  And so on.

What are the main advantages of a high deductible health insurance plan?  Obviously the big one is the cost of the premiums.  You have a much better chance of finding a plan with manageable premiums if you’re open to a high deductible.

Another advantage is if you link your plan to a Health Savings Account (HSA).  An HSA is sort of like certain IRAs, in that you set aside some of your income in a special account and avoid having to pay taxes on it, as long as it’s never withdrawn except to pay medical costs.  With a low deductible plan, most of your medical-related expenditures go to premiums and only a little directly for medical expenses themselves.  With a high deductible plan, you spend considerably less on premiums and considerably more directly for medical expenses themselves.  So in the latter case a lot more can be run through an HSA, with the resulting tax benefit.

Another point to keep in mind, is even if the insurance company only starts to pay once you get above a certain high amount of medical expenses in a given year, it’s not like there’s no advantage to having insurance when you’re paying out of pocket.  With insurance, you’re only being billed the “negotiated” group rate that providers charge insurance companies.

So let’s say you’ve got a plan with a $5,000 deductible.  You go to the emergency room.  The bill might be $1,700 for just an individual having to pay for himself, but $600 for someone who’s part of a group – such as your insurance company – that negotiated lower prices for its members with the hospital.  So even though the insurance company is paying zero of your bill because it’s under the deductible, you still save $1,100 due to having this insurance.

What are the downsides to a high deductible health insurance plan?

One is that in order to cut premium costs, often the terms of the insurance are inferior in areas other than the deductible.  The lifetime cap, for instance, is more likely to be a part of high deductible plans than other plans.  Less favorable prescription drug reimbursements are typical of high deductible plans compared to other plans.  So you really have to understand all the provisions of your plan.  Don’t just base your decision on whether you can handle the high deductible; there may be other elements to worry about.

Another problem is people routinely underestimate how much they’ll spend on medical care.  If you make few or no claims in a year, you’ll be glad you had the cheaper insurance.  But the years where you have to spend most or all of that big deductible you’ll come out behind.  And those years are all too frequent.

Another factor is if you don’t take advantage of the HSA angle, then the high deductible plan may not be doing you much good.  If your plan doesn’t allow HSAs, or you just never linked yours to one, or you’re in a low tax bracket where it doesn’t help you very much to avoid taxes on the amount of money you spend on medical costs, then you’re missing out on one of the advantages of even having a high deductible plan.

In a way, high deductible plans can even lead people to make choices that are poor for their health.  Because people with high deductible plans typically have to pay for any medical treatment they’re considering – except the big enough items to get past the deductible, for which the health insurance will pay that excess – they often make the same decisions uninsured people do.  That is, they’re less likely to pay for preventative care, to catch problems early, etc.  They avoid seeking medical care until they have no choice, unless they’re already past the deductible for the year.

On the whole, high deductible health insurance plans are most often recommended for young, healthy people.  If you’re older, or you have conditions that are likely to need treatment, where in any given year there’s a very good chance you’ll have thousands of dollars in medical costs, these policies aren’t so good.  Whereas if you’re healthy and 25, where there’s a very small chance you’ll have crushing medical bills due to a major accident or something of that sort, but otherwise will likely never see the inside of a hospital all year, then the cheaper insurance that’s really only there for the catastrophic event might be the better choice.

The other factor is the high deductible plans are more advisable for people in a position to benefit from the HSA link than for other insurance consumers.