Health insurance can be confusing. With so many acronyms are used to described healthcare products how can you keep them all straight?
This article will clear up key differences for HDHP’s and PPO’s. We will also give you some things to think about so you can decide which is best for you.
High Deductible Health Plan (HDHP)
- High is the first word and it refers to the deductible. These plans have a higher deducible than other health plans.
- Deductible is the limit you have to pay before your healthcare insurance actually starts to pay. This is provided to you up front when you sign up so you know what that deductible amount is.
- Health Plan just means that these are still like other health plans only they don’t pay out until the deductible is met.
Preferred Provider Organization (PPO)
- Preferred means the insurance has worked out deals with certain doctors and hospitals to provide health care at a lower rate than those healthcare professionals would normally take.
- Provider refers to the doctors or other healthcare professionals that provider service to patients.
- Organization means that the health plan organized this group of select providers who have all agreed to the pricing they health plan wants to pay.
What is typically the same
Since the passage of the Affordable Care Act, most insurances now cover 100% of preventative services. Examples include:
- Alcohol and tobacco misuse and screening
- Blood pressure and cholesterol screening
- Screening for various viruses such as HIV, Hep B, Hep C
A full list of preventative services can be found here. It is important to note that different things are covered for adults, women and children.
|Premium||Amount paid per month for health insurance.|
|Copayments||Predefined amount patient must pay for health services or medications in addition to what the insurance pays.|
|Coinsurance ||A portion of the amount owed that the patient pays, usually a percentage of the total amount.|
|Health Savings Acount (HSA)||Tax advantaged savings account for medical expenses. Only people with HDHP can open an HSA. PPO’s can not utilize HSA’s.|
|Deductible||Amount of money the patient must pay before the insurance will start to pay.|
|Out of pocket maximum||Maximum amount a patient will have to pay for medical expenses in one year. Does not include premiums.|
|Employer HSA contribution||The amount of money your employer puts into the HSA on your behalf once per year.|
The premium is what people often forget is costing them an arm and a leg. This is because it is deducted from your paycheck. Like with taxes people do not realize how much they actually pay for these things.
HDHP’s will have lower premiums than PPO’s. The amount you pay in premiums is gone to the insurance company forever. You do not get to keep that money or roll any over to another year.
With a PPO you will have set copayments. They will be laid out for doctors office visits, emergency room visits, prescriptions, etc.
PPO’s work with a network of providers to give you flexibility to see doctors you want to see. However, the copayments when you go to out of network providers can grow quite large. In some cases for out of network PPO’s will have coinsurance instead of copayments. With large bills that can get costly very fast.
HDHP’s don’t typically have any copayment because they are build on the concept of a deductible. Normally after the deductible is met they then switch to some form of coinsurance.
PPO’s do not normally use coinsurance unless it is for out of network providers. That comes up a lot when people travel for work or vacation and have to use healthcare services. Sticker shock occurs when they get a bill and instead of a $50 copay they have a 40% coinsurance. If the bill was for $1000 that means $400 coinsurance for the patient, yikes!
HDHP’s use coinsurance after the deductible amount has been met. Therefore, if the deductible was $2500 with 20% coinsurance that means 20% kicks in once the patient has paid $2500 out of pocket. This coinsurance is charged until the patient gets to the out of pocket maximum for the plan year. Once that amount is reached the insurance will pay 100% of costs till the end of the year.
Both PPO’s and HDHP’s can have a deductible. Typically, PPO deductibles will be much smaller or apply only to on certain aspects. These may include out of network services or prescription drugs.
HDHP’s are of course going to have a deductible that will be very high. The idea is to offset the risk from the insurance company to the patient by having the patient become a consumer of healthcare services. The theory is that shopping for the best deal should drive down prices.
5. Health Savings Account (HSA)
HSA’s were created for HDHP’s specifically. These savings accounts are triple tax advantaged.
- No tax on the money you put in
- Zero tax on the interest the money earns
- There is no tax on the money when it is withdrawn
In addition, the money going into your HSA comes out of your paycheck before taxes meaning you do not pay social security or Medicare taxes on this money.
HSA’s were designed to give people a way to pay for qualified medical expenses. Your healthcare insurance premiums do not count as a qualified medical expense. Below is a short a list of qualified medical expenses.
- Birth control
- Chiropractic services
- Dental services
- Doctor office visits
- Durable medical equipment
- Hospital bills
- Prescription drugs
- Surgery (Does not include cosmetic surgery)
- Vision care
How HSA’s work
Your employer will work with a financial institution that will provide an HSA service. Within the HSA you will have the ability to invest the money that you and your employer contribute to the HSA. Investment options could vary from stocks, bonds, mutual funds, index funds or target funds. You get to choose what investment options you want for your HSA.
A common practice is for plan sponsors to require a minimum amount of the HSA money in cash, that can easily be used to pay for your medical expenses. They do this so investments don’t have to be sold every time you use your HSA to pay for something. Once you have enough money in the account over that minimum amount you can invest those excess funds into various investment types.
The plan sponsor will send you a debit card that can be used to charge qualified medical expenses. If you pay for medical expenses with non HSA accounts then you can submit receipts for reimbursement from the HSA.
If the investment options in your plans HSA are not what you want or you feel the fees are too high, you can open a second separate HSA. Employer contributions to the HSA will go into the account they set up and then you can transfer that money to another HSA if you choose to. Two important things to remember if you do this:
- Make sure you ask if there are any fees to do this type of transfer!
- The transfer or rollover should not cash out the funds and send them to you, otherwise you could incur taxes and or penalties.
The money is yours
The biggest benefit to an HSA is that the money that you and your employer contribute is yours to take with you. That is one reason that HDHP’s have become popular. PPO’s do not allow you to keep any money in savings. If you were to have a Flexible Spending Account (FSA) that money must be spent by the end of the year or lose it.
Even if you go back to a PPO plan after you have an HDHP with an HSA you still own that money in your HSA. The only difference is you would not be able to contribute additional money unless you went back to a HDHP.
6. What qualifies as a HDHP?
One might wonder how high does a deductible have to be to qualify as a HDHP? The amount is adjusted for inflation over time and is set by the Internal Revenue Service.
|Minimum deductible single||$1350|
|Minimum deductible family||$2700|
If the deductible amount of the plan you are considering is not that high, then you may not qualify for the advantages of an HDHP. Conversely the insurer has the right to set deductible amounts much higher than these minimum values. The trade off being a lower premium for an even higher deductible.
Should you spend HSA funds or let them compound?
HSA’s are meant to help you save a nest egg for medical expenses. The theory is that people will have less medical spend when young and it will increase as they age. Therefore, the HSA grows while you have lower cost and helps you pay for the when you need them later in life.
However, if you are constantly pulling money out of your HSA every year to cover all qualified medical expenses that can put a drag on the compounding growth. If you can afford to pay for you medical expenses out of pocket without tapping the HSA you can maximize its effectiveness.
Shop around for the best prices on medical costs. Find resources to help lower prescription costs, such as my book Prescription for Maximum Savings. Take advantage of sales on vision and dental services when possible. All of these things could keep your HSA balance growing and compounding for you.
7. Out of pocket maximum
The out of pocket maximums are a way to help people know what the worst case scenario could be in any one year. This allows you to plan and make the decision between PPO vs HDHP. Remember the money you spend on premiums is not counted in the out of pocket maximum.
|Out of pocket cost||2019 amount|
Do you have an emergency fund that could cover the out of pocket maximum if needed? If so, the savings on premiums could help build your HSA balance that could be a great boost to your savings. If not, then it might make more sense to opt for the PPO with lower out of pocket maximums.
8. Employer HSA contribution
An important thing to remember when selecting HDHP vs PPO is the employer contribution to the HSA. It ranges from hundreds to thousands of dollars per year.
You are allowed to set aside $3500 for singles and $7000 per year into an HSA for 2019. That dollar amount is what you and your employer together can contribute. If that money is allowed to grow year over year it could become a significant amount.
It can be used to offset part of the large deductible with an HDHP. Again, if you pay for things out of your pocket it could also be a nice vehicle for growth.
9. Is HDHP better than PPO?
If you utilize the preventative services that are offered for free under both types of plans you will end up spending less overall. Annual physicals help catch problems early and lab work associated with them is normally covered. Flu shots and other vaccinations will help keep you out of the doctors office or worse urgent care and heaven forbid emergency room.
There is no one size fits all answer.
To know which plan is for you answer these questions:
#1 Add up how much you spent on healthcare in the previous year.
#2 Based on your health and how often you get sick determine if your expenses will be similar, go up or go down.
- Are you about to have a baby?
- Do you have a lot of prescriptions?
- Do you have kids who play sports where they could be injured?
- Are you in need of a major surgery in the near future?
#3 Do you have an emergency fund that can cover the out of pocket maximum?
#4 Do you have an HSA balance from a previous year(s) that could cover the out of pocket maximum already?
#5 Would you be able to cover the cost of your medical expenses from the previous year paying out of pocket?
#6 Do you often use healthcare resources away from home?
#7 Do high premiums take too much out of your take home pay in your check?
Apply your answers
Once you know how much you spend and forecast what spending should look like in the next year, you have the knowledge you need to make an informed decision. Accidents happen and if you pick the HDHP you should plan like they will by knowing you can cover the out of pocket maximum with emergency or HSA funds.
Heaven forbid a catastrophic illness happened but the HDHP would kick in after the out of pocket maximum if so.
If you have a saving mindset and plan to invest the funds to grow the HSA, then you can use premium savings to build that nest egg and an HDHP is the best choice for you.
If you have more health issues and maybe can’t cover the worst case scenario then PPO could be the way to go.
Roll your sleeves up
Get out a pen and paper or excel spreadsheet. Note the numbers discussed in this article for your specific health plans. Compare them side by side and crunch the numbers in and use different scenarios.
Remember, if you pick the HDHP with an HSA that is a longer term game plan. However, it doesn’t mean you have to stick with HDHP from now on.
10. What better HSA or PPO?
This question comes up all the time. Remember an HSA is not a health plan. Rather it is part of a HDHP.
11. Don’t sacrifice your health
While the intention of HDHP’s was to provide medical nest eggs, and drive prices down through consumerism it hasn’t worked out exactly that way.
Studies have shown that many people will forgo healthcare if the deductibles are too high. That may be due to not understanding how they plans are supposed to work for them. If you do decide to use a HDHP, remember it is your money. If you need to take money out of it to improve your health, then you should do that!
For more actionable advice on how to save the most on medications, check back to my blog for the latest updates.