Which HDHP Plan to choose? Is it a simple math problem?

[ZiziPB]

Hello fellow Mustachians, my employer is expanding our HDHP options from one to 3 for next year, with different levels of premiums, deductibles and coverages.  I am having a hard time deciding what option to pick and would appreciate some feedback from the mathematically inclined Mustachians.  Thank you in advance.

I carry coverage for myself + child.  My out of pocket expenses under the current HDHP plan were $2,250 in 2013, $1550 so far in 2014.  I have no additional planned medical expenses for this year (barring an unexpected illness).  So I'd say on average we spend $1800-2000 per year.  My HSA balance will be around $13,000 by the end of 2014.  I contribute the max to the HSA (including $800 contributed by my employer).  33% marginal tax rate plus 6.75% state tax.

I have the following options for 2015:

Option 1
$3,500 individual/$7,000 family deductible, $6450/$12,900 out-of-pocket max.  80/20 coinsurance after deductible.  $885 annual premiums.  Employer does not contribute to HSA.


Option 2
$2,500 individual/$5,000 family deductible, $5,000/$10,000 out-of-pocket max.  80/20 coinsurance after deductible.  $1922 annual premiums.  Employer contributes $800 to HSA.

Option 3
$1,500/$3,000 family deductible, $4,000/$8,000 out-of-pocket max.  90/10 coinsurance after deductible.  $2960 annual premiums.  Employer contributes $800 to HSA.

The entire family deductible must be met before co-insurance applies.  After a family member reaches the individual out-of-pocket max (includes the deductible), insurance covers 100% for that person, and remaining family members continue to pay 20% co-insurance until the family out-of-pocket max is met.

Which option would you choose in my situation and why?

[DNelson]

I would take option 2. With the employer contributions it's almost close to the cost of option 1 but has a lower deductible and out-of-pocket max.

[dandarc]

Option 1 to option 2 analysis: 

You pay $237 before tax for this due to the lack of HSA contribution from employer.  Marginal tax rate for health insurance premiums is 33 + 6.75 + at least 2.9% (if you're in 33% bracket for federal, you might only be saving the medicaid/care part of FICA).  You're paying no more than $140 per year after tax extra for the better insurance between options 1 and 2.  This saves you up to 4,900 in potential costs, if you have a very bad year.

Option 2 to option 3:
You pay 1038 extra before tax.  No more than $600 after tax.  In a worst-case year, you save $4,000 out of pocket, but if you go over the deductible, you also save compared to option 2 10% on the amount between the deductible and the out of pocket max.  I think you'd need graphs and such to find the break-even point.

I'd say going from option 1 to 2 is the easiest to justify - it isn't that expensive, and lowers your risk.  If this was a very low-cost year for you, you might consider Option 3, but you say this is more typical, possibly even a high-cost year.  There isn't a huge difference between the plans in a truly worst-case year where you max everything out regardless of plan chosen from what I can tell - unless you're living on the edge.  Even a very bad year should cost within about 10K of each-other - it would suck if you chose option 1, then had a massive healthcare expense year, but it seems unlikely the medical expenses alone would bankrupt you even then (again, unless you're living on the edge).

Not an exhaustive analysis, but I agree with DNelson - Option 2 looks like a pretty good deal, and option 1 doesn't look too bad either, given your typical medical expenses.

[ZiziPB]

Super helpful, thank you both DNelson and dandarc.  As I mentioned, I have a healthy balance in my HSA now that will cover the out-of-pocket for any of the 3 plans (between my balance and employer's contribution that goes in at the beginning of the year, I should have close to $14K to start 2015 with), so that alone provides the funds needed to self-insure to the higher deductible/out-of-pocket max.  And I have plenty of other savings as well, so no issue there.  So I think it boils down to choosing between option 1 and 2 and the question is whether it's worth it to spend $140 for $4,900 of additional coverage.

ETA: or is is $2,900 of additional coverage?

[dandarc]

Super helpful, thank you both DNelson and dandarc.  As I mentioned, I have a healthy balance in my HSA now that will cover the out-of-pocket for any of the 3 plans (between my balance and employer's contribution that goes in at the beginning of the year, I should have close to $14K to start 2015 with), so that alone provides the funds needed to self-insure to the higher deductible/out-of-pocket max.  And I have plenty of other savings as well, so no issue there.  So I think it boils down to choosing between option 1 and 2 and the question is whether it's worth it to spend $140 for $4,900 of additional coverage.

ETA: or is is $2,900 of additional coverage?

Depends on how your insurer handles that - ours has always been where the deductible and out of pocket max stack - i.e. you hit the deductible, then your 20% co-pays start applying to the out of pocket max.  Deductible = out of pocket to you and I obviously, but not necessarily in the context of your insurance policy.

[ZiziPB]

I believe that the out of pocket max includes the deductible.  So I pay 100% up to the deductible amount, then 20% of costs until I reach a total equal to the out-of-pocket max (including the deductible).  So assuming a really bad year with catastrophic health expenses, I would spend $12,900 plus $885 under option 1, or $10,000 plus $1922 minus $800 under option 2, right?  Or do I have it completely wrong?

Every time I start crunching these numbers, my head starts spinning...

[ZiziPB]

I believe that the out of pocket max includes the deductible.  So I pay 100% up to the deductible amount, then 20% of costs until I reach a total equal to the out-of-pocket max (including the deductible).  So assuming a really bad year with catastrophic health expenses, I would spend $12,900 plus $885 under option 1, or $10,000 plus $1922 minus $800 under option 2, right?  Or do I have it completely wrong?

Every time I start crunching these numbers, my head starts spinning...

Actually, after further reading of the plan descriptions, the deductible applies on a combined basis, but the out-of-pocket max applies on an individual basis.  The out-of-pocket max includes the deductible.  I will edit my original post.

[dandarc]

Yeah - I think the law may require the OOP max to include the deductible now.  The graphic on our website seems to indicate that the max OOP does include deductible now too.  Then the whole deductible thing confuses me as well - I always thought the family deductible is supposed to be combined together - but they clearly have divided the deductible in half and we each have our own (have not had a single dollar for myself apply to deductible / OOP maximum yet this year, in spite of going to the doc a few times - so far just the $15 / visit fees).  Almost like we've got 2 individual policies, rather than 1 family policy.  This stuff is all clear as mud - I loved my pre-Obama care HDHP - I pay up to $5K, then they pay 100% of everything, and the premium was cheap.  So much simpler.

So that narrows the differences in coverage between the options quite a bit.  With the lower deductible, you do get to start paying 20% instead of 100% at a lower number, however your typical expenses are below the deductible amount for all of these options, so then you have to factor in the risk of having higher expenses against the additional cost.  Luckily the really-bad downside is even less different than I originally thought, so even if it turns out you chose poorly, you're not paying that much additional than had you chosen the absolute best option.

[ZiziPB]

Thanks again, dandarc.  Clear as mud is right!  In our new plans for 2015, it's a combined approach: family deductible but individual OOP.  That makes the calculations even more complicated.  In any event, I think it's still between option 1 and 2 for me.  The plan we have now is most similar to Option 3 but with a $2,500 family deductible.   But as you said, if we don't reach the deductible, then it really doesn't matter.  In the 4 years that I have been using HDHP, we have reached the deductible once due to some unexpected surgery.  Otherwise, our medical spending has been pretty consistent.

[dandarc]

Some employers / insurers have calculators where you can input stuff like '2 routine physicals, 6 diagnostic vists, 12 generic prescriptions', to help you decide on the plan.  Of course, it is unlikely your actual expenses will exactly match your estimates, but if there is one of those available, definitely worth 5 or 10 minutes to check it out.

[Heart of Tin]

I think you should go with Option 1. Since you generally spend only $2,000 per year towards your deductible between two people it's unlikely that you'll meet even the lowest individual deductible let alone any of the family deductibles. In the event that an unexpected large expense occurs you have enough money in the HSA to cover it. I think the guaranteed lower premium (net employer HSA contribution) is worth that risk.

By the way, all health plans should now count all copays and coinsurance and your deductible towards your out of pocket max.

[dandarc]

They call our copays 'per visit fees'.  Bet that is a very carefully chosen set of words, based on Heart of Tin's last sentence.