The “Out of Pocket” in a Health Savings Account Qualified PPO Health Plan
Versus a Traditional PPO Health Plan
Although more than 4 million health savings accounts have been opened since HSAs were instituted by Congress in 2004, confusion and misconceptions about these tax advantaged accounts and the accompanying qualified health insurance plans have kept many consumers locked into their high premium, traditional health insurance.
The HSA-qualified plan is a simple concept: raise the deductible and lower the premium. Then, place the money saved on premiums into a triple tax-advantaged account: Contributions, interest gained, and deductions are not subject to tax if used for qualified medical expenses. Nearly one-third of all HSA owners were previously uninsured.
What’s the difference in savings between these two types of plans? That depends on the benefits being compared. When moving from a typical, traditional PPO (with co-pays, a $500 deductible, and an 80/20 coinsurance plan) to an HSA-compatible insurance plan (with about a $2500 deductible, no co-pays, and 100% coinsurance), the savings is usually 30 to 60 percent depending on the carrier and benefits selected. For example, if a 33-year-old male living in zip code 63105 were comparing similar plans as described above, the traditional plan premium would be $227 a month and the HSA-compatible plan with the same carrier would be $98 a month. That’s an annual savings of $1,548. And surprisingly, the actual out of pocket risk is often less with the HSA-qualified plan.
How is that possible?
A traditional PPO is built on a framework of co-pays: $25 to $35 for an office visit, $50 to $70 for specialists, and $75 to $100 for an emergency room visit. And prescription co-pays can be very pricey. There could be a separate prescription deductible of up to $500, plus co-pays of $10 to $20 for generics, $30 to $45 for brand-name drugs, and $50 to $80 for nonformulary brands. Some expensive medications have co-pays of 25 to 75 percent of the drug cost. Cancer medications can cost more than $4,000 per month.) These co-pays typically never apply to the medical deductible of $250 to $1,000 or to the coinsurance, which is usually 20 percent up to $2,000. So what would the maximum total out of pocket risk be in a given year? It would be impossible to predict.
In the most common HSA plan above, the consumer pays the negotiated, discounted rate for covered medical expenses, including prescriptions and office visits. The annual maximum out of pocket risk is the deductible. In this case, $2,600. Period. In reality, the consumer saved $1,548 in premiums which he could put in his health savings account, so his actual out-of-pocket risk is only $1,052. Which plan seems more confusing?
Another misconception is that consumers with HSA-qualified plans will forego necessary medical care. On the contrary, an October 2006 Aetna study found not only lower medical costs, but maintained or improved chronic and preventive care with members joining the “consumer driven” plans. Many carriers include a free physical with their HSA plans. Now that consumers are interested in checking the prices of medications, they are discovering the alternative list of more than 200 prescriptions for $4 each offered at retail chains like Target and Wal-Mart.
As former Secretary of Treasury John Snow said, “HSAs are a terrific option that I think every American ought to consider.”
Written by Beverly Gossage
Director, HSA Benefits Consulting