Why it is recommended to have High Deductible Health Insurance and to have HSA - Max out the pocket? I am not able to understand the benefit of having High Deductible Health Insurance and HSA.
With respect to health plans and HSA compatible, there are 3 relevant categories:
- Health plans that are not HSA compatible because the deductible is too low.
- Health plans that are not HSA compatible because the Max Out Of Pocket is too high.
- Health plans that are HSA compatible.
In general you want to avoid #2. Unfortunately there may still be some plans available on the Health Exchanges that fall into this category due to a mistake Congress made when the ACA was passed. (They forgot to make sure the HSA compatible limits and ACA compatible limits stay in sync, and they have since diverged leaving a gap of plans that aren't compatible because the MOOP is just barely too high.)
With respect to 1 vs 3, if you have the option of both you'll need to run the numbers to see which is better for your scenario. The reason HSA plans (HDHP) are sometimes preferably is partly due to the tax advantages of funds put into an HSA. That is one important factor in deciding between 1 and 3. But if you choose a plan that is HSA compatible, then it is always recommended to open an HSA account.
and HSA is a tax advantaged account according to IRS rules. That means you (and your company if it contributes) get to fund it with pre-tax dollars. You can also invest using your HSA account, which means you can grow the principle through investments rather than having it sit as cash, earning nothing. Lastly, you get to keep it forever, which means it is always there to fund medical related expenses. It's basically a Roth IRA for medical expenses. It also can be used to cover dental and vision expenses.
Therefore, it's a win for consumers. Try to max out contributions every year. It lowers your taxable income and shields a small bit of your wealth from taxation.
Don't confuse HDHP with traditional insurance. There are no insurance plans sold in the US anymore. An HDHP is a health care plan involving a third party payer that covers a set of procedures outlined in Obamacare regulations. Your HDHP is only related to an HSA in as much as Obamacare regulations specify that you are only allowed to contribute to an HSA when you have an HDHP. Very complex - only politicians could design a system this complex and inefficient.
If you are certain you will need expensive medical care (especially, if you're pregnant and planning to carry to term, and especially in the case of a marketplace plan, since the ACA allows you to switch down to a cheaper plan due to a change in size of family), a HDHP is not likely a good financial decision. You're often better off with a low deductible in that case.
If you don't know you'll need expensive care, your expected medical expenses (care plus insurance premiums) will be lower with a high-deductible plan. Of course this is a risky course of action if you can't afford the deductible (and max out-of-pocket), so essentially the availability of high-deductible plans is a sort of regressive tax. Note that even if you don't exceed the deductible, you are getting something of high value out of it, since providers typically charge you 5 to 10 times as much (and sometimes nearly 100 times as much) for the same treatment if you don't have insurance, due to special pricing contracts with the insurance companies whose networks they participate in.
As for a HSA, it's a tax break for "partial self-insuring", so another regressive tax. Whether it makes sense depends on your financial situation and health. Yes you save on taxes, but if you don't anticipate any major medical expenses for a long time, you might benefit more from having the funds liquid.
In a nutshell, you might pay less or about the same in total for for insurance and deductibles together than when you choose a low deductible plan.
However, if you don’t need the full deductible, you save money.
Even if you do (use it all), you save taxes on the whole amount.
Overall, chances are you getting away cheaper.
Of course you need to be able to plan ahead and keep your money available. if you tend to spend every cent you make soon, an HDHP might get you in trouble.
In addition to that all, you can use the HSA to save money tax free - like an additional IRA