In an effort to get more activity in this community, I’d like to start a discussion on how you evaluate which insurance plans to choose. Now, it is much simpler to do so when none of the plans you’re offered have HSA. With HSA plans and employer HSA contributions I found it’s actually quiet difficult to do all the math to figure out which plan will get you the most bang for your buck. The biggest thing you have to take into account is your expected annual healthcare expenses. Once you start taking into account things like pre-tax cost (premiums, HSA contributions) vs post-tax costs (your out of pocket post-tax expenses), your tax rate etc, you can get deep into a rabbit hole and find some surprising results.
I’m actually working on an Excel spreadsheet that allows me to compare up to 4 plans and tells me which plan is the most cost effective, depending on my annual expected OOP healthcare expenses. You input things like annual plan premiums, HSA employer contributions (if any), your HSA contributions (if any), plan’s out-of-pocket maximum (per person), plans out-of-pocket maximum (per family) and your tax bracket and the spreadsheet will spit out a chart telling you the relationship between your expected OOP annual expenses and the true cost you have to incur if you choose this plan. What surprised me the most is that the high deductible/high OOP-maximum HSA plan is actually the best/the most cost effective plan in basically any situation, especially if I max out my HSA contributions (this may not be true in your case, you have to run the numbers yourself). The reason for this is that while the regular PPO plans have lower OOP max, I would pay a lot more in premiums for them, which is a hidden cost a lot of people don’t consider. Also, the OOP expenses in PPO plans are all post-tax, while I get to pay my OOP expenses with pre-tax dollars if I choose an HSA plan, which matters a lot.
If anyone is interested, I’d be happy to share my spreadsheet to test it more and make sure I’m not missing anything important. Feel free to share your strategy as well if you recently had to make a choice between several plans, what plan you chose and what guided you to that decision.
Good discussion topic! I recently went through a similar exercise and my conclusion is that the HSA scenario financially wins in all cases as long as my OOP cost remain below 90% of the max on average. In my case both plans had low/no premiums.
There is one major caveat though: The advantage the HSA plan has comes from tax savings on the pre-tax contributions and from the tax free growth of the HSA. This only works if you do not spend any of your HSA funds and instead invest them, paying for healthcare with post tax money. Meaning you need to have 1-2x your max OOP set aside at all time to be safe.
The HSA is a very advantageous account for tax saving but I think it’s fundamentally flawed for actual healthcare costs because no one can predict what their costs will be next year.
I think a better approach is to assume your costs can be anywhere from 0 to the max OOP and see how the numbers work out for different scenarios. Then you can make a decision based on financial (not health) risk tolerance.
This only works if you do not spend any of your HSA funds and instead invest them, paying for healthcare with post tax money.
In the ideal world, if I knew exactly when I’m going to die and how much I’m going to need to spend for healthcare every year - yes, I would totally do this to maximize the effectiveness of HSA.
However I don’t live in that world. It’s no use to me to spend my hard-earned post tax money and die having 100k in my HSA account. Maybe if I was making 200k+ a year to have enough to max out all tax-advantaged accounts AND cover medical expenses with post-tax dollars, sure, I would do it.
That’s why I spend my HSA money for medical expenses now. I’ve done the math and doing this it’s still costing me less than a PPO plan.
I think a better approach is to assume your costs can be anywhere from 0 to the max OOP and see how the numbers work out for different scenarios. Then you can make a decision based on financial (not health) risk tolerance
That’s exactly what I’m doing with the help of my spreadsheet.
You probably are already aware of this but just in case:
- once you’re 65 you can withdraw from the HSA as if it was an IRA with no penalty.
- you can reimburse yourself for past medical expenses, presumably even 30 years in the past if you kept your receipts
Yeah, I’m aware. I just don’t trust myself to a) love that long and b) keep my receipts for that long.
I have a similar spreadsheet, and so far I have found that the HSA was usually better with every of my employers.
Basically If I end up barely needing medical services, the HSA tends to be better, because of the lower premiums, as well as the fact that the company contributes money to it, that becomes mine. If I end up having some catastrophic event however, the HSA tends to be worse than the PPO, because of its higher deductible.
But, the difference is not usually huge. For example, with my current plan, if I have an accident and have $80,000 of medical bills or more, I will end up paying around $4000 more with the HSA than if I had chosen the PPO. On the flip side, if I have low medical bills, I will end up saving about 3 or 4k with the HSA. So over the long term, as long as I don’t have huge medical bills every year, the normal years will compensate for the bad years.
Another side discussion regarding the HSA is that it shifts the burden of managing the money to you. You end up having an HSA account that you need to manage, meaning you have to keep track of receipts and reimburse yourself for medical expenses by drawing from the HSA. This is usually a small administrative burden, but it is something to consider. Looking at how much money you are saving, vs how much time you have to spend to save it, will give your an hourly rate. You may find that it is or is not worth it depending on how you value your time.
My theory as to why HSAs are usually designed to cost you less is that the companies want you to choose the HSA. Since with the HSA you end up with a higher deductible, this gives you an incentive to use medical services less, if you can avoid it. You are more likely to postpone a non important doctor’s visit, or avoid going to the ER if what you have is not that bad, costing the insurance less money in the process as well.i could of course be completely wrong, this is just a theory.
If I end up having some catastrophic event however, the HSA tends to be worse than the PPO, because of its higher deductible.
Interesting, in my case the HSA is still roughly equivalent or even better in this case. My lowest deductible PPO plan would cost me about $4k in premiums plus $4k out-of-pocket maximum. The HSA plan is $1k in premiums, $1k employer gift, and $8k OOP maximum. So I’d end up paying about $8k in either case. If I take into account that with the HSA plan my OOP expense would be pre-tax (from HSA balance), the HSA actually comes out a little ahead.
You’re right that the HSA plans put an onus on you to save up and manage it to take advantage of the savings. But I don’t mind doing that. Also, it gives you a lot of flexibility you don’t have with PPO plan. With a PPO plan if I don’t have any medical expenses in a year, I’d still be out $4k in premiums. With an HSA plan, I’d come out to $0 (employer contribution actually cover my premiums) and I’d save up those $4k for the upcoming years when I may actually have some expenses. I suspect the reason most average people shy away from HSA plans is they don’t have the discipline to contribute and save up for their medical expenses. They’d rather have the safety net of lower deductible/OOP maximum. But if you do the math, it actually costs them more this way.
Yes, they don’t have the discipline, or they are not able to determine which plan is better.
It varies by country, but according to this paper https://doi.org/10.1111/fima.12283, in the US only about half of the adults are financially literate in the first place (57%). The fraction of adults that have enough financial literacy to build a model comparing two financial products (in this case insurance) is likely a lot lower.