Does the benefit of a HDHP with an HSA disappear if the premium is the same as a PPO plan

Question

I'm comparing a couple of different health insurance plans as part of open enrollment at work. Based on answers to some other questions as well as my own analysis, high-deductible plans with an HSA are almost always better than PPO plans. However, those situations seem to always be where the HDHP has a lower premium than the PPO plan.

If the premiums are the same, is the answer as clear cut as when they are different?

To put some specific numbers for context: the PPO plan has a deductible of $250/$750, 10% coinsurance, and an OOP max of $2000/$4000. The HDHP has a deductible of $1500/$3000, 10% coinsurance, and an OOP max of $2500/$5000. The PPO has a $25 co-pay for PCP and specialist visits, $75 co-pay for ER visits, and the employer chips in $1000 to the HSA when on the HDHP. Premiums are $300 every 2 weeks for either plan. One other notable difference is that the PPO has a $0 co-pay for outpatient lab work and imaging (including CT, PET, and MRI) whereas the HDHP has those services at 10% co-insurance.

My analysis, which takes into account federal tax savings (but not state), shows if we hit the OOP max the HDHP plan comes out ahead (but not by much, ~$900), but if we only have a couple doctor visits throughout the year we could probably do better with the PPO (depending on the negotiated rate for each visit, which is unknown at this point). Is it really a shot in the dark guess about how much we'll use the services as to which is better?

Edit to clarify some things rather than keeping them in comments:

• Both policies are through the same insurance company.
• We will be getting the family coverage (2 adults and 2 small kids)
• We have the PPO plan for 2020. Premiums go up slightly for 2021 but coverage looks to be the same
• If we went with the HDHP+HSA, we would fully fund the HSA

Answer 1

The cost of the premium certainly affects how beneficial a plan is.

HDHPs have two big advantages over traditional PPO plans:

1. Lower premiums, because the deductible is higher:
2. Access to the HSA, a tax-free saving account.

If you take away one of those benefits, the HDHP looks a lot less attractive.

There are two reasons why the higher deductible generally causes premiums to be lower with HDHPs than with PPOs:

• The insurance plan doesn't have to start paying out benefits as quickly, which means that the consumer pays more out-of-pocket early on.
• The fact that the consumer has to pay for more of their own care out of pocket (and keeps what they don't spend) provides an incentive for the consumer to use less medical care unless necessary, keeping costs down.

But if the HDHP plan has abnormally high premiums (or your PPO option has abnormally low premiums), then all you have left is the disadvantages of the HDHP without one of the advantages.

Remember that the amount your employer is telling you is probably not the entire premium amount; generally, they are also paying a portion of the premium. It is possible that, for whatever reason, your employer has decided to pay less of the premium for the employees that choose the HDHP, which means that, although the total premium of the HDHP might be less that the total premium of the PPO, the cost that you see coming out of your paycheck between the two options is similar.

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When you do your analysis comparing the two, there are two things you need to keep in mind. First, remember to include the fact that the employer is giving you $1000 (for your HSA) of tax-free money when you choose the HDHP. Second, because your plan is to fully fund your HSA, you can factor in the tax savings that you will enjoy with the HSA.

Running your specific numbers, let's look at the high-end, where you have catastrophically large amount of medical expenses, hitting your out of pocket maximum. (This represents more than $33,000 of medical expenses.) Assuming the 22% tax bracket and also assuming that you will contribute the maximum to your HSA:

• PPO: $7800 (premium) + $4000 (out-of-pocket maximum) = $11,800
• HDHP: $7800 (premium) + $5000 (out-of-pocket maximum) - $1000 (employer HSA contribution) - $6200 * 22% (tax savings from employee HSA contribution) = $10,436

On the low end, let's look at what happens if you have no medical expenses for the year:

• PPO: $7800 (premium) = $7800
• HDHP: $7800 (premium) - $1000 (employer HSA contribution) - $6200 * 22% (tax savings from employee HSA contribution) = $5436

Because of the employer's HSA contribution as well as the tax savings resulting from your own HSA contribution, the ultimate cost to you is $2364 less with the HDHP with no medical expenses. However, because the PPO starts paying early, as you go up in medical expenses, this savings starts to vanish. Even at the worst case for the HDHP, where you have just hit your $3000 deductible, the HDHP still comes out ahead:

• PPO: $7800 (premium) + $750 (deductible) + $2250 * 10% (coinsurance) = $8775
• HDHP: $7800 (premium) + $3000 (deductible) - $1000 (employer HSA contribution) - $6200 * 22% (tax savings from employee HSA contribution) = $8436

Once you have hit your out of pocket maximum for the HDHP (at $23,000 of medical expenses), the savings you enjoy with the HDHP vs. the PPO start to increase once again, as you are done paying with the HDHP, but still have a ways to go with the PPO before you have hit your maximum:

• PPO: $7800 (premium) + $750 (deductible) + $22,250 * 10% (coinsurance) = $10,775
• HDHP: $7800 (premium) + $3000 (deductible) + $20,000 * 10% (coinsurance) - $1000 (employer HSA contribution) - $6200 * 22% (tax savings from employee HSA contribution) = $10,436

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To sum up, even though the PPO gives you a lower deductible for the same premium, the combination of the extra $1000 that your employer gives you and the tax deduction you will enjoy by contributing the maximum to your HSA means that the HDHP is a better choice no matter what your medical expenses end up being. The HDHP will save you somewhere between $339 and $2364 over the PPO.

Tax savings in your state from your HSA contribution may apply as well, and as has been mentioned mhoran_psprep's answer, if you contribute to your HSA through payroll deduction, you can also enjoy additional payroll (FICA) tax savings.

Answer 2

I am assuming that the two policies are through the same insurance company, therefore the negotiated rates for the two policies is the same. I am also going to assume that all medical visits will be in-network. I am also assuming that you will open the HSA, and accept the $1,000 from the employer. I am also looking at the family numbers because you used we in the question.

If you have zero medical bills for the year, then the HDHP has a slight edge because they gave you $1,000 that you can use in future years.

If you have a very expensive year, such that you hit the maximums, then the the two plans seem very similar. The HDHP will be $5,000 minus the $1,000 from your employer. The PPO will be $4,000. The big difference will be that the $4,000 for your part of the HDHP should be funneled through the HSA, which will save you money on Federal, and State taxes, plus if done through payroll deduction it can also save you money on FICA.

The big advantage, that can't easily be put into numbers, is that when the numbers are close is the flexibility you have with the HDHP and HSA:

• The amount of money you can put into the HSA is larger than the FSA.
• The HSA money can be rolled over into the next year, without any risk of loss.
• You can change the amount you are putting into the HSA at any point in the year, where the FSA you pretty much have to set the amount during open season.

Answer 3

So, for the same cost, you have basically two different scenarios.

1. You pay the first $750, and then 10% of the next $32500, to a maximum of $4k.
2. You pay nothing until $1000, then pay the next $2000, and then 10% of the next $20000, to a maximum of $4k.

So around $2k you start paying more in the HDHP, and do so until you hit mid $20k range of expenses.

One important detail to factor in here, is whether you're going to have an FSA under the PPO option. If you don't, then the math is slightly different than Ben's math, because of taxation. If you're assuming you fully fund the HSA (which covers your entire out of pocket, for the most part), then that $2000 you're paying in deductible is tax free, while the $750 you're paying on the PPO comes out of taxed income - so assuming around a 40% marginal rate all together, you're starting out at $1250. That pushes the actual ROI some towards the HDHP; it means you're not breaking even with the PPO until around $2500 or so in expenses. Further, you can consider the PPO OOP to be at a 5/3 rate also, so instead of $4k it's really almost $7k - much higher than the HDHP now.

Of course, if you have an FSA then this is moot - the PPO is equivalent. But FSA is use it or lose it; so it's only appropriate if you have known medical expenses, or if you have a certain level you are expecting to consistently reach. The HSA has no such restriction, and so is fine to use even if you don't use it.

I think overall the HDHP ends up being the better choice, even if the PPO is the same rate, for anyone who expects to be on the low end (you just expect regular dr visits and not much else), because of that initial $1000 the employer funds the HSA with. If you expect to have some significant bills - a pregnancy, a child who has a chronic condition, a child like mine who has the chronic condition of "daredevil", etc. - you may prefer the PPO. But I certainly would love to have your HDHP option (I don't, sadly), as it would save me money most years and let me save up some extra retirement money if I don't use it! And since they both have similar "tops" (OOP maximum), it doesn't seem too risky either. Of course compare the other details, like medicine coverage and available doctors.

Answer 4

That's a bit of an odd-ball situation. The whole point of High Deductible plan is to bring down the premium. It may be worth chatting with HR/Benefits and ask why the higher deductible plan is not cheaper.

As for your current situation, I think the devil is in the details. An HSA is a fairly attractive vehicle to save pre-tax money. If you are already maxing out 401k, 529, etc HSA could be the next best step. Caution though: HSA typically allows you to invest the money (just like a 401k) but they also can charge a hefty fee for this privilige, so reading the fine print is important.

Keep in mind that preventive care is typically covered for free. If you are generally healthy, you are probably better off with the HSA.