To Deduct or Not To Deduct

I’m frustrated with the health insurance that we have.

First I should tell you that we don’t have traditional health insurance. For my family, I have a high deductable health plan (HDHP) which allows me to contribute money to a health savings account (HSA). The money that I put into my HSA goes in before taxes are calculated on my paycheck. I can then take that money out of my HSA tax free as long as it’s used for certain health related expenses that the IRS has decided are acceptable. The list of things that the IRS allows includes the vast majority of things you’d expect to be called health expenses. And several things that most insurance companies don’t cover.

There are a few reasons that I do this:

1. The cost of an HDHP is a *LOT* less than traditional health insurance. This doesn’t necessarily mean it’s a better deal. But when I calculate the worst case scenario of HDHP + HSA and compare it to the worst case scenario of traditional health insurance they come out about the same. The worst case scenario costs are the annual sum of all premiums plus the plan’s maximum out of pocket expenses. Add those up, and HDHP+HSA is roughly equal cost to traditional health insurance.
   
   Where the HDHP+HSA really makes up the difference is in best case scenario. In the best case scenario, I have no out of pocket expenses (e.g. I don’t use health care at all for the year) but I pay only the premium. For traditional health insurance the best case scenario is only a tiny bit less expensive than the worst case scenario. But with the HDHP+HSA plan, the best case scenario is a *LOT* less expensive than the best case scenario of traditional health insurance. Thus, with an HDHP+HSA plan, I get rewarded for consuming wisely.
   
   Now, IMHO, neither the worst case scenario nor the best case scenario are very likely. More realistically, we’ll spend more than the best case scenario and much less than the worst case scenario. But the worst that can happen is that we’ll spend exactly the same as traditional health insurance. And more than likely, we’ll save a lot of money.
   
   
2. There are some tax advantages to HDHP+HSA that aren’t available with traditional insurance. With traditional insurance, I can only deduct the premium expenses from my taxes, if I get the insurance from my employer. That’s still true with an HDHP. But with the HSA, I get to deduct $6000 per year (in contributions to the HSA) that I can’t deduct if I’m self employed or  not getting insurance through my employer.
   
   
3. If I’m frugal and don’t spend that $6000 contribution this year, I still get the tax deduction. But I also keep that money in the HSA. I’m not left with a “use it or lose it” type scenario like with flexible spending accounts.
   

All told, I think HDHP+HSA makes a lot of sense. It makes the health insurance market much more like other insurance markets. Encouraging this type of health insurance is the type of reform that would actually drive health care costs down.

I like the plan that I have. My frustration stems from how health care providers have to react in light of it.

So my wife just called me from visiting a chiropractor – an allowed expense. When she went to pay for the we were stuck with a decision. We get the insurance negotiated price, which in this case is $42 per visit. However, the Chiropractor offers a package deal to customers. E.g. buy 5 visits, and the price per visit is $35. That saves $7 per visit compared to the insurance negotiated price. So you’d think, well that’s a good deal, let’s go with that.

Unfortunately, it’s not that simple. Our HDHP has (of course) a high deductible. $4000 for the family. All of our expenses count against that deductible. Prior to meeting the deductible, we pay 100% of those expenses out of our HSA. After meeting the deductible, we pay 20% of those expenses and insurances covers the remaining 80% until we get to our maximum out of pocket. Once we get there we pay 0% and insurance covers 100%. So there are 2 levels to be concerned with:

1. The deductable - $4000 of expenses
   
2. Max out of pocket - $8000 of expenses
   

And here’s the problem. If we choose that 5pack of coverage – saving $35, the whole cost ($175) won’t count against our deductible nor our max out of pocket. It can’t. If the provider submits this fee to the insurance company, the insurance company will then try to renegotiate his prices. The provider who used to have a $42 rate will now be forced down to a $35 rate, and he’ll get less reimbursement from the insurance company.

So we’re stuck with this decision: is it better to pay $35 per visit (saving $7) but not have it count against our deductible? Or is it better to pay the $42 per visit and have each visit count against our deductible? If we choose the former, we save $7 now, but we might have to pay an additional $175 later if we get close to our deductible. If we choose the latter, then we lose $7 now.

And you’d be surprised how frequently we’re stuck with this type of decision. There are many times when we’re talking to a health care provider who, knowing that we’re paying for a service out of our pocket, is willing to cut us a deal. But in doing so, we forfeit the ability to have those fees count against our deductible and max out of pocket.

And these costs matter. Because they change the worst case scenario calculations that I made above. They increase the worst case scenario cost of having an HDHP+HSA.

I think in the example that we’re talking about. Saving $7 per visit is really not that much savings – only about 16% savings. In this case, the differences are close enough that it probably makes more sense to pay the $7 to have it count against our deductible. But there are other providers for whom the deal that they’re willing to cut us is about 50% savings. That’s a much bigger immediate savings and a much bigger cost as we get closer to the deductible. One example is where the out of pocket cost is $200 and it applies to our deductible. But if we pay it out of pocket directly, it only costs $100. What do you do then? Do I save $100 now, or pay $200 in additional deductible later? I’m tempted to save the $100 now. But it’s not obvious that’s the right plan.