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The Pros and Cons of High Deductible Health Insurance Plans for Self Employed and Small Businesses

Regardless of your personal feelings on the Supreme Court’s ruling on the 2010 Affordable Care Act, if you are a small business and relatively healthy and can afford it, you need to immediately explore the pros and cons of high deductible health insurance plans (or “HDHP”).  Should you ever decide to move forward with a high deductible insurance plan one of the tendencies you MUST avoid is letting small health problems go unattended.  This is a MAJOR pitfall of consumer driven healthcare and you must always prioritize and never compromise the health of you or your loved ones.

The premise of a high-deductible insurance plan is charging lower monthly premiums than a traditional plan because the consumer is responsible for paying anywhere from an initial $1,200 for individuals  ($2,400 minimum for families) to $5,000+ in medical bills before the insurance provider pays a penny.

A Theoretical Example

In order to begin to determine if a high deductible health plan makes financial sense, one must compare it to a similar traditional plan.  But before doing that, if you cannot answer an emphatic yes to any of these questions, a HDHP is not for you.

Individual High Deductible Health Insurance Plan Checklist (If You Answer No, a HDHP is probably not for you)

  1. As an individual, I have at least $2,500 set aside now that I will use for health care related expenses only.
  2. As an individual, I spend on average less than $1,000 annually on medical related expenses.
  3. As an individual, even though I am paying for it out of my pocket, I will still seek medical attention at all times.
If you’re still reading, then you’ve passed the first test.  So let’s examine the economics.  On average, I would expect the same benefits package of an HDHP to be approximately 30%-50% cheaper than its traditional counterpart.  Therefore, if your traditional plan requires you to pay $800 monthly, or $9,600 annually, you can expect to pay anywhere from $400-$560 monthly, or $4,000-6,720 annually for an HDHP.  This appears to be great!  However, don’t forget that insurance companies do not pay a cent until the deductible is met.  This is similar to the car insurance deductible in many ways.  Not until the insurer’s “qualified” medical expense deductible is met, will they begin to pay out.  Let’s assume that for an individual, the deductible is $2,500.  To remain conservative, consider this as additional premium that should be added.  It isn’t paid to the insurance company but should be placed into a separate health care account called a health savings account (or “HSA”).  Therefore, on any yearly basis, the maximum cost of an HDHP plan is between $7,300 and $9,220 which represents savings of $2,300 to $380 respectfully.
So Why a High Deductible Insurance Plan?
Well, this is not for everyone.  However, if you meet the basic criteria there are some potential advantages.  Before mentioning the common highly commercialized advantages, one simplistic economic premise is that if your medical expenses average less than the deductible threshold, you save.   For example, if your medical expenses were only $1,000, you kept $1,500 for yourself.  Not only can these funds be invested tax free, but can be used for other IRS qualified HDHP medical expenses, including more exotic and atypical health services (i.e. not covered by your health carrier) such as acupuncture, dental treatments, therapy, chiropractor and eyeglasses to name a few.
In addition, in 2012, an individual (family) was allowed to $3,100 ($6,250) in her HSA account.  The HSA has been called the triple threat in that the 1) Deposits are a) pre-tax payroll or employer contributions; 2) Interest and and Investment Gains are tax free and 3) the money spent on qualified medical expenses is also tax free.  And finally for those those who have been diligent in maximizing the contribution, at age 65, the money in the HSA can be used for ANY purpose (but this will be taxed as income for non-qualified medical expenses).

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