Question: I am shopping the federal Marketplace for a new insurance plan. Though I understand the basics of health insurance, deductibles have me confused. I am the sole breadwinner, living in Houston with a wife and two young children. All of us are relatively healthy, though we’ve been talking about having another child. Given these circumstances, should I choose a high-deductible plan to save money on monthly premiums or a low-deductible plan with higher premiums?
Answer: Deductibles are a common source of confusion, and with the vast array of options in the Marketplace, your difficulty choosing the right plan is understandable. Understanding how high- and low-deductible plans work, how monthly premiums play into your decision and how these plans can affect your coverage will help ensure your family has the most appropriate health care plan in the coming year.
How deductibles work
Health insurance deductibles are the amount of money you have to pay toward your health care before your insurance starts covering costs. Deductibles can range from a few hundred to thousands of dollars, depending on the policy. Some plans (typically HMOs) don’t have a deductible at all.
Insurance plans are a balancing act between deductibles and premiums. The more you are willing to pay each month on your premium, usually the lower your deductible.
High-deductible health plans, also referred to as “consumer-directed” plans, are plans whose deductibles surpass a limit set by the IRS. For 2015, those deductibles are no less than $1,300 for individual coverage or $2,600 for family coverage.
For the insurer, a higher deductible means you are responsible for a greater amount of your initial health care costs, saving them money. For you, the benefit comes in lower monthly premiums.
If you have a high-deductible plan, you are eligible for a Health Savings Account (HSA). These accounts allow you to set aside a limited amount of pre-tax dollars for medical expenses. In the case of employer-sponsored health insurance, companies may contribute to their employees’ HSAs, sometimes even matching employee contributions, leading to considerable pre-tax savings. Generally, your HSA is linked to a debit card that you can use on out-of-pocket costs, including that high deductible. Because the money in your HSA isn’t taxed like the rest of your income, it serves a dual purpose: helping you set aside money to cover health care costs and reducing your tax burden.
However, high deductible plans do have downsides. Meeting a high deductible can seem insurmountable in the face of costly medical bills.
High-deductible plans make sense for people who are generally healthy, and for those without young children. Because preventive care is free under the Affordable Care Act, and many policies allow you to see your primary care doctor with a copay rather than paying toward the deductible, a few visits to the doctor per year won’t be a financial setback for an otherwise healthy person.