Help me compare Health Insurance Plans!

[FUEGO]

It is annual enrollment time for DW's plan, which offers great affordable coverage for our whole family of 2 adults and 3 kids.

I have narrowed the choices down to 2 plans:
1. UnitedHealthcare High Deductible Health Plan ("HDHP" hereafter) and
2. UHC's "Basic" plan ("Gold Plated" hereafter)

The HDHP has a $3000 deductible and pays 80% after that.

The Gold Plated plan has $0 deductible with $25 copays for primary care and urgent care visits, and $40 for specialists. Major stuff is 80% paid for right off the bat, unless it is hospital admission or emergency room, then there is a $100 copay before the 80% kicks in.

The Family out of pocket max on both plans is $7000. For the Gold Plated plan, there is an additional out of pocket max for each Individual of $3500. This individual limit doesn't appear to be present on the HDHP.

I am comparing these two plans on an after tax basis to see which is the better deal. I think I know the answer but wanted to bounce this off the incredibly smart, talented, and good looking crew here.

HDHP costs $266 per year after tax. Gold Plated plan costs $741 after tax. Per year. With HDHP I can put $6450 into an HSA and save $2880 on taxes (44.65% marginal effective tax rate). For the sake of argument, I could put $450 into a FSA with the Gold Plated plan and save $201 on taxes (and assume there is zero risk I would not use it all in 2013).

To summarize, the HDHP results in a cost of $266 + (-$2880) = -$2614 after taxes (in other words, we save a net of $2614 by doing HDHP+HSA). The Gold Plated Plan results in an after tax cost of $741 + (-$201) = $540.

This makes the HDHP $3,154 cheaper than the Gold Plated plan, after taxes.

I am thinking that the HDHP plan is the way to go. A savings of $3,154 would pay the $3000 deductible in full on the HDHP if we were to experience a significant medical issue during the year. Then we would be paying 20% of the next $20,000 (or $4000 more) to hit the $7000 out of pocket max. In contrast, we could pay $3,154 extra to get the Gold Plated plan and forgo any deductible and start paying 20% of the next $17,500 (or $3,500 more) as soon as we had a medical issue (or up to $3,500 x2 if more than one person has a medical issue).

So for a worst case medical catastrophe that cost $23,000 exactly, the HDHP would cost $346 more after taxes. HDHP = $3000 deductible + $4000 coinsurance - $3154 net savings due to HDHP = $3846 expense after taxes. Gold Plated = $0 deductible + $3500 coinsurance - $0 = $3500 expense after taxes.

On top of that, Gold Plated plan copays don't count toward the out of pocket max, and they can add up.

I think the worst case of $346 additional costs, at least partially offset by copays required is a worthwhile gamble to save a potential $3,154 minus whatever we expend on non-preventative healthcare during the year.

As for assumptions, we are all basically healthy and don't foresee needing any medical attention in 2013, but you never know. Almost zero Rx costs unless we have something come up. Our HSA is through Fidelity and already established, so no extra cost for admin fees, and extremely low expense ratio funds available. In this analysis, I also neglected the ongoing tax savings of sheltering another $6450 worth of investments from the tax man, meaning that ~$200 or so of income won't be taxed at all each year in perpetuity. I figure we will be spending money on healthcare at some point in the future so I can withdraw from HSA tax free later for qualified medical expenses (which is why I realize the tax savings now in my analysis).

Thoughts? Critique of math or methods?

The only shortcoming to the HDHP is that we are slightly more likely to defer visiting the doc since we have to weigh the full cost of services against the potential benefit of services provided instead of paying nearly nothing or only 20% of the cost under Gold Plated plan.

 

[pb4uski]

I think if you are healthy that HDHP is the way to go.

If you have maxed out 401k/403b. Roths and other tax-deferred/tax-free retirement savings vehicles then the HSA is a great way to save for retirement health care costs - sort of like a supplemental Roth.

What I did the last few years before RE was maxed out the HSA but paid my medical expenses (deductibles, etc) out of pocket.

 

[FUEGO]

pb4uski,

Yes, that mirrors my thinking too. Between DW and I, we always max out 2 401ks, 1 457, 2 Trad IRAs, pension contribution, 529 up to state's tax deduction of $5000. We end up putting $20k or so each year into the taxable accounts, so the HSA is a great way to shelter just a little more income today from the tax man, and perpetually to let it grow in a Roth-like account.

Our current HSA balance is around $32000 IIRC, which I could see us burning through easily during a long ER (starting in our 30's) even with heavily subsidized government health care or insurance (obamacare, medicaid/free child HI, Medicare, etc). And I imagine we'll be cash customers for dental expenses during ER (at least the adults) so that will be a few hundred a year in good years, and we don't have many good years unfortunately.

 

[pb4uski]

Also, I'm looking at our HSA as a possible tax-efficient source of funds for LTC if either of us needed nursing home care (we are currently self-insured).

 

[JoeWras]

My choices are very similar to yours with a bit more cost to both plans.

I've gone with the HSA, and have for the last few years. I really like having another way to commit more cash tax free. I don't think it will be a problem to burn through the HSA. And in the best case, if I'm old and healthy and didn't burn through it, I can withdraw as if it were an IRA (after 65 yr. old).

It is true that there is a temptation to not visit the doctor to avoid paying full. However, I remind myself that my health is most important. If I maintain my car, I maintain myself. But I do plan. Right now, I have a slight knee issue. I'll defer any MRI to next year since this year has been so low cost.

I think everyone with any high deductible plan goes through this timing process.

 

[FUEGO]

My choices are very similar to yours with a bit more cost to both plans.

I've gone with the HSA, and have for the last few years. I really like having another way to commit more cash tax free. I don't think it will be a problem to burn through the HSA. And in the best case, if I'm old and healthy and didn't burn through it, I can withdraw as if it were an IRA (after 65 yr. old).

It is true that there is a temptation to not visit the doctor to avoid paying full. However, I remind myself that my health is most important. If I maintain my car, I maintain myself. But I do plan. Right now, I have a slight knee issue. I'll defer any MRI to next year since this year has been so low cost.

I think everyone with any high deductible plan goes through this timing process.

That's what I figure - if I don't use up the HSA I can still access it later at a slightly higher cost. And that outcome means we have been incredibly lucky with our health over a few decades. I can live with that! On the flip side, having an outsized HSA is probably a good thing to have in terms of covering our risks. Unexpectedly large health care expenses that we can't necessarily control are a real danger to ER since we are stuck with the bodies we have. It isn't like spending choices in other areas of consumption.

 

[pb4uski]

I'm keeping a running file of my health care costs paid from taxable funds since I started my HSA. My understanding is that I can withdraw that cumulative amount tax-free at any time I wish.

 

[FUEGO]

I'm keeping a running file of my health care costs paid from taxable funds since I started my HSA. My understanding is that I can withdraw that cumulative amount tax-free at any time I wish.

I do the same. And I stuff medical receipts into a box throughout the year, then update a spreadsheet in December when I stick the receipts into a file. I agree - the tax regs make it sound like you can reimburse yourself for medical expenses incurred any time, even years later, as long as they weren't reimbursed from elsewhere (FSA or insurance for example) or deducted on Schedule A.

 

[Mulligan]

That's what I figure - if I don't use up the HSA I can still access it later at a slightly higher cost. And that outcome means we have been incredibly lucky with our health over a few decades. I can live with that! On the flip side, having an outsized HSA is probably a good thing to have in terms of covering our risks. Unexpectedly large health care expenses that we can't necessarily control are a real danger to ER since we are stuck with the bodies we have. It isn't like spending choices in other areas of consumption.

Remember you have another way to drain that big HSA account after you turn 65 tax free. You can pay your Medicare premiums out of your HSA. I imagine if you live to be a 100% healthy 95 year old, you would still have put a good dent into that HSA, just by paying premium costs over the years. Sounds like the best possible outcome, doesn't it?

 

[FUEGO]

Remember you have another way to drain that big HSA account after you turn 65 tax free. You can pay your Medicare premiums out of your HSA. I imagine if you live to be a 100% healthy 95 year old, you would still have put a good dent into that HSA, just by paying premium costs over the years. Sounds like the best possible outcome, doesn't it?

Good to know. Definitely a way to exhaust the HSA tax free if you don't do it prior to 65. I lump HSA funds in with the "Roth" type of money when I look at taxable vs. deferred tax funds (Trad IRA or 401k/457) vs. Roth.

 

[MichaelB]

The after tax math and HSA spend rules all look good. We too use the HSA as a small Roth type tax free investment account. The HSA accounts generate additional overhead I could do without, and because the custodian is a separate and less regulated financial institution there is the minor concern regarding solvency and such, but I think HSA is too good a deal to pass up.

 

[FUEGO]

The after tax math and HSA spend rules all look good. We too use the HSA as a small Roth type tax free investment account. The HSA accounts generate additional overhead I could do without, and because the custodian is a separate and less regulated financial institution there is the minor concern regarding solvency and such, but I think HSA is too good a deal to pass up.

We are very lucky that the HSA is offered through DW's company and the custodian is Fidelity. I believe the employer pays all account fees on the HSA while she remains employed there. So relatively small risk of financial solvency compared to the smaller custodians. And as a huge added bonus, the HSA shows up on our Fidelity online portal just like an IRA, and allows access to everything that we can buy in the IRAs (like ETFs, including zero commission ishares, and low ER Fidelity Spartan mutual funds).

I am also thinking that the HSA will provide almost $100/yr in tax savings every year going forward on this $6450 contribution (3% of $6450 paid in dividends each year x 45% marginal tax rate). Another great benefit if we leave the money in there for 30 years.