Open enrollment is fast approaching for many businesses. And while it’s a hectic time for employers, the process of choosing a health plan can also be stressful for employees. There’s no one-size-fits-all health plan — for some people, the best fit is a low-deductible health plan, while for others, it’s a higher deductible plan.
Conventional wisdom says that low-deductible health plans are better for families with small children and for people with significant medical conditions, while plans with higher deductibles are better for single, healthy individuals. But life is more complicated than that, and these general guidelines aren’t necessarily enough to help people select the best health plan for their needs.
To determine if a low-deductible health plan is best for them, your employees should also consider total costs, savings and cash flow, their willingness to obtain care and HSA eligibility. We’ll discuss what counts as a low-deductible plan, along with everything else your employees should keep in mind as they navigate deductibles.
High-Deductible vs. Low-Deductible Plans
When someone has insurance and needs care, they pay a fixed amount — the deductible — for medical services before their health plan begins chipping in.
For the most part, the distinction between “high” and “low” deductibles is subjective. For health savings account (HSA) eligibility, the IRS does define high-deductible health plans (HDHPs) as those with a deductible of at least $1,350 for a single individual in 2019; but while one employee might think a $5,000 deductible is high, another might easily say the same thing of a $1,500 deductible. The average deductible across all covered workers was nearly $1,600 for single individuals in 2018.
Some employees, generally those with few medical needs, tend to focus on premiums. Others focus more on deductibles. That’s because higher deductibles typically translate to lower premiums. If you’re healthy, then you might prefer a lower premium, since you have to pay it regardless of your health care needs — even if it comes at the expense of a higher deductible, which you may only dip into for the occasional doctor visit. A person with a chronic medical condition, on the other hand, might prefer the lower deductible and higher premium, since even higher premiums may represent a smaller proportion of their total annual medical costs.
Total out-of-pocket costs include the deductible, copays and coinsurance, and that can add up to quite a bit more than the deductible. It’s important to help employees consider the total amount they would pay annually for each plan, combining premiums with out-of-pocket medical costs. Employees should understand before they enroll which services will be covered with a copay, which ones will count toward the deductible and how likely they are to hit the plan’s out-of-pocket maximum — including the coinsurance they’ll pay after meeting the deductible. To define terms:
- An out-of-pocket maximum is the highest amount that someone with insurance will have to pay in out-of-pocket costs over the course of the year, as long as employees follow any prior authorization rules and only receive services that are medically necessary and in-network.
- Coinsurance is a percentage of the costs that an insured person has to pay after they’ve paid the deductible but, notably, before they’ve reached their plan’s out-of-pocket maximum.
To calculate worst-case scenario costs, encourage employees to add each plan’s out-of-pocket maximum to the yearly cost of premiums. Remind them, however, that most people don’t have enough medical expenses to meet their out-of-pocket maximum every year, and that they should also calculate their expected costs under each plan.
Savings and Cash Flow
In some cases, the out-of-pocket maximum doesn’t differ much between a low-deductible health plan and a higher deductible policy. But the total dollar amount is only part of it — employees also have to consider how those expenses are spread out across the year.
In the case of a sudden medical emergency, an employee might meet their out-of-pocket maximum in a short period of time regardless of what plan they have. But for people with chronic medical conditions, a low-deductible plan may allow them to spread out their medical costs over a longer time frame.
Consider two plans, both with an individual out-of-pocket maximum of $4,000:
- Plan A has a $500 deductible, $25 office visit copays, prescription copays that vary by drug tier and 80/20 coinsurance after the deductible.
- Plan B has a $3,000 deductible and 80/20 coinsurance after the deductible. Office visits and prescriptions count toward the deductible rather than having a copay.
Some employees have the savings and cash flow to make either option work, and they might save money on premiums by choosing the higher deductible plan. If an employee with a chronic condition picks plan A, they’ll be responsible for the first $500 in charges that aren’t for office visits or prescriptions. However, they’ll share the rest of their costs with their insurance company until they eventually reach $4,000 in out-of-pocket costs.
If that same employee picks plan B, they’ll pay all of their expenses until they hit $3,000, only getting to share costs with their insurer after that point. So, while both options may have the employee shell out $4,000 for their medical care that year, plan A may allow them to spread that cost over several months, whereas plan B could force them to pay $3,000 right at the start of the year.
Willingness to Obtain Care
A higher deductible can give some people second thoughts about getting medical care. Copays for services like office visits, urgent care visits and prescriptions can make care more affordable than counting all services toward the deductible, but it’s something employees should consider before choosing a health plan.
Some people won’t let their coverage stop them from seeking care, but a low-deductible health plan could be a better fit for employees who recognize that a high deductible might cause them to avoid necessary medical treatment.
A health savings account can be a valuable financial tool, but only people with an HSA-qualified high-deductible health plan can contribute to an HSA.
If you offer an HDHP, ask employees to factor it into their decision. In addition to premiums and out-of-pocket costs, employees should also consider any potential employer contributions (if you offer it) as well as the lower tax bill they’ll have if they contribute to an HSA.
Be prepared for some employees to carry the common misconception that HSAs are only useful for healthy employees. The out-of-pocket maximum for HDHPs is often comparable to — or even lower than — that of lower deductible plans. When combined with lower premiums and a reduction in taxes, an HDHP can sometimes be the best choice for an employee with high-cost health conditions.
Health insurance needs vary from one person to another, depending on their health, risk tolerance and overall financial situation. As with most things related to insurance, finding the right deductible is a personal choice. Helping your employees understand the ins and outs of different health plans will give them the tools to select the plan that best fits their needs.
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