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In 2016, we opted to go with the cheapest High Deductible Health Plan (HDHP) available through my employer based on the results of estimating total cost of the various plans. We went in to the year knowing that our medical expenses were going to be the highest they had ever been due to pregnancy and that we were guaranteed to hit at least one of our deductibles. So how did we fare?
- Total amount charged by medical providers: $66,646.68
- Insurance reduced the total charges to this amount: $28,967.95
- Amount insurance paid: $19,861.29
- Our liability: $9,106.66
- Premiums + Expenses - HSA Tax Savings (at a 25% tax rate) = Net Cost
- $1,879.00 + $9,106.66 - $1,687.50 = $9,298.16
Insurance alone reduced the total charges by over 55%. Of the negotiated insurance amount, our liability was $9k. From a net cost perspective, premiums and HSA tax savings were essentially a wash. All in all, my net cost estimates were pretty close to reality. At roughly $30k in medical expenses (ie, the insurance negotiated amount) I estimated net costs would be more like $8k. Unfortunately, my estimates assumed that all medical charges would go towards the deductible / through insurance, which unfortunately some did not (such as miscellaneous labs and uncovered procedures). Going forward, I’ll factor in an extra 5% of total medical charges to account for this.
Asset allocation and location changes
Over the course of the year, we made a few changes that required buying and selling in order to set us up with our desired asset allocation (what to own) and location (where to own it) priorities. On the HSA side, we were 100% US stocks with VFINX (Vanguard S&P 500 with expense ratio 0.16%). The HSA requires $1k be held in cash but we decided we wanted to keep a little more in less volatile assets (Treasury Inflation-Protected Securities via VIPSX were the cheapest available) in case we have another year with high medical expenses that we can’t cover out of pocket. With the remaining investable balance, we swapped VFINX for VGTSX (Vanguard Total International with expense ratio 0.18%). This decision was two-fold:
- VFINX is actually quite expensive for a core S&P 500 mutual fund. Relative to the Institutional equivalent VINIX available in my 401k, it is 0.12% more expensive. VGTSX on the other hand is only 0.09% more expensive than the Institutional equivalent VTSNX that is also available in my 401k. As such, it is cheaper to hold total international in our HSA and leave core S&P 500 holdings to the 401k.
- For all intents and purposes, an HSA should be treated as a Roth account with respect to asset location: all growth is tax-free. Thus, it makes sense to place assets with the highest expected return in the HSA.
Due to our reduced accumulation in the coming year(s), I opted to increase bond holdings with the target being around 3-8%; we were at virtually 0% at the start of 2016. Buying items at a discount is a great feeling, and stocks are the same way. Having a small bond portion allows us to take advantage of downturns. Second, we are holding TIPS in our HSA which will be a permanent feature going forward. Our largest bond holdings are BND (total bond market), MUB (municipal bonds), and VIPSX (treasury inflation-protected securities).
Throughout the year, we were also able to add to our emerging markets holdings like we set out to do, primarily with IEMG in my wife’s solo 401k with Fidelity. The increase in emerging markets and bonds meant that we reduced our US stock holdings closer to a market capitalization. Here is the breakdown as of January 19th, 2017: