(Disclaimer: The following is an account of one family’s decisionmaking process. It is not meant to be taken as advice.)

In my previous post, I summarized my post-college experiences in dealing with health insurance.

Which leads me to “today” - after several years of traveling and working as 1099-contractors (and privately buying our health insurance), my husband recently became a salaried employee again. His company just had its open enrollment period, and I was pleased to see that several Health Savings Account (HSA)-affiliated, high-deductible plans were available. Just a few years ago, this wasn’t an option.

Not that we were lacking options - there were PPO plans, HMO plans, value plans, gold plans, etc offered by two different insurance companies. Add to this now the HSA option, and it was a mind-boggling array of decisions to make.

Things To Consider When Choosing a Health Insurance Plan

To start cutting through the morass, I started asking the following questions:

• How are we doing healthwise? Are there pre-existing conditions? Do we foresee any major health care expenses or events in the future? (Like having a baby or reaching an age milestone that requires more screening tests and preventative care.)
• Are the doctors we use within the networks of either or both of these companies? How much choice do we want/need in selecting a provider of care?
• Are we willing to go through a referral or pre-certification process to see a specialist if we ever need one?
• Are preventative care visits subject to the plan’s deductible? Some high-deductible plans cover one physical each year without having to pay the deductible.
• What kind of prescription drug benefits do we want? Are the drugs we regularly take on their formulary, or is there a generic option? Can we use a mail-order pharmacy?
• Would we prefer an “buffet” type of plan (pay more upfront but have extensive access for only small copays and low deductibles) or an “ala-carte” plan (pay low premiums but more for healthcare services as we use them)?

Obviously the answers to these questions will differ for each family. But thinking through these questions led us to narrow the choices down to a basic PPO-type of plan that included our primary care doctors in their network.

A Back-of-the-Envelope Analysis

Now the question was whether to take the “standard” PPO plan or the high-deductible PPO plan with the HSA. The difference in premiums was approximately $100 per month, which actually made going for the standard, non-HSA plan a little tempting for me.

But then I thought about it a little longer. Economists use a term called opportunity cost to describe the cost of forgoing one product to obtain another product. What would be the opportunity cost of choosing the non-HSA plan?

Here’s how I analyzed it:

1. The actual cost of the getting a “standard” PPO plan would be an additional $1200 each year.
2. But with an HSA, we get an above-the-line tax deduction on any contributions we make. So assuming that we put in the annual maximum for 2008 ($5800), at our highest marginal tax rate (28%) that is $1624 we save in taxes! (More than that if you’re in an even higher tax bracket.)
3. So without even assuming any potential gains that our HSA might yield for us in an investment, we already have an opportunity cost of $2824 ($1200 + $1624) if we don’t get the HSA.
4. Then I compared the deductibles. With the “standard” PPO plan, the family deductible is $1200; with the high-deductible PPO plan, the family deductible is $5000. That’s a difference of $3800. But if we subtract from that the opportunity cost, the difference is less than a thousand dollars.
5. So looking at the big picture, if we were to run into a health care cost that ran past our insurance deductibles, the non-HSA plan would save us just under a thousand dollars. Yet we would be giving up all of the investment, compounding, and eventually retirement opportunities of the HSA.

Now the above analysis is in no way thorough or rigorous. It takes in a lot of assumptions about our own health profiles, our usage of the network (because in-network and out-of-network coverages differ), and ignores various fine print about copays and preventative care visits. And, as I said earlier, different families have different health situations and priorities as well as different tolerances for risk, so this may not even be relevant for many families.

But this simple back-of-the-envelope analysis was enough to help us make the decision, and we went for the high-deductible PPO with HSA plan.

What can I say? We’re optimistic gamblers.

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Posted: 07|9|08 at 6:17 am. Filed under: healthcare, insurance.
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