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Choosing a healthcare plan through my employer has always been a no brainer – Core HDHP. This plan has the cheapest premiums, allows the usage of an HSA account, and I don’t have any ongoing health problems. In 2016, my wife and I are adding a new child to our family and we thought long and hard about whether the basic HDHP still made sense in light of high costs associated with a pregnancy, birth, and subsequent pediatric care. Both of us only have preventative experience with the United State healthcare system. Our due date is July 24th, so the lion’s share of medical expenses were all in this year (ie, counting towards the same annual deductible). The question is, when does it make sense to choose a different plan.

Anyone who has been in and out of doctors offices for one reason or another can relate to the fog surrounding costs. Even with a major medical insurance carrier (Blue Cross Blue Shield), the degree to which we can know whether a visit or lab is truly covered by our plan feels a bit like playing Russian roulette. What is in-network for us? Does the doctor know prior to sending off a lab? How much will it cost? All this to say, estimating medical costs is much more of an art than any definitive mathematical proof.

So what to do? Well, let’s start with the coverage options available through my employer:

Medical Benefits Summary

And the premiums associated with each, per pay period (bi-monthly salary; 24 pay periods per year):

Premium Contributions

Looking at the Employee + Family pricing only, base premiums are:

  • $2,016 for the Core HDHP
  • $7,284 for the Premium HDHP and PPO
  • We did not consider the EPO plan

This means that off the bat, the Premium HDHP and PPO have a $5,000 hurdle to jump.

For Core and Premium HDHP plans, we can max out HSA with a current tax year benefit of {tax rate} * {contribution}. At the maximum contribution of $6,750 here are the tax savings for various tax brackets:

Tax Rate Tax Savings
10% $675
15% $1,012.50
25% $1,687.50
28% $1,890
33% $2,227.50

So at a minimum with zero medical expenses, 25% tax bracket, and maximum HSA contribution it truly is a no brainer. The net cost of medical coverage is $328 for the whole year! That’s a savings of $5,268 for the Premium HDHP and a whopping $6,955 savings versus the PPO.

Net Costs ($0 Expenses)

But let’s not kid ourselves… Who has zero medical expenses in a year? It has happened a number of years, but the older I get the less likely that is. Add kids and a wife into the mix, and it would be fantasy to expect zero medical expenses every year. To simulate various levels of medical expenses with the HDHP plans, I used the following assumption – no individual deductible is ever met; only family deductible is considered in calculations. For PPO, the same family deductible only applies, but I made a major assumption about co-pays / costs – flat 5% of medical expenses (any reader who would like suggest an alternative assumption, I’m open!). So if a family has $1,000 in medical expenses, they would only pay $50 with the PPO plan. If anything, I think that is overly fair for the PPO scenario.

I looked at a range of medical expenses – from $0 to $40,000 and came up with a Net Cost = Premiums + Expenses - HSA Tax Savings (at a 25% tax rate).

Net Costs ($0 to $40,000 Expenses)

It’s worth noting that max out of pocket happens at the $45,200 medical expenses mark for Core HDHP or $42,600 for the Premium HDHP. When that expense level is reached, the net cost becomes a horizontal line.

Can anyone spot the point where it makes sense to not stick with the Core HDHP? Yeah, neither could I! The savings erode as medical expenses increase, but there is never a point where Core HDHP’s net costs are more than Premium HDHP or PPO. For us and our available medical plans, we’ll be sticking with Core HDHP.

It goes without saying that this is a simplistic look at medical expenses. I didn’t consider prescription medications separately at all – they are bundled in with the overall medical expenses. For someone who has an expensive prescription medication, its possible the Premium HDHP or PPO plans will be cheaper. If medical expenses are concentrated with one individual, Premium HDHP or PPO plans could also be cheaper, though this seems less likely from scenarios I tested. The savings gap between the plans would shrink, but I don’t see any clearcut or obvious advantage switching to Premium HDHP or PPO. One other note, I don’t know how representative my available plans are to others on the market, so run the numbers with your plan options and deductible levels.

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