High-deductible health plans (HDHPs) and preferred provider organizations (PPOs) are two of the most common employer-sponsored health plans in the market. Most employees have to elect one of these plans during open enrollment or when they have started a new job. I often get the question: which is better, a HDHP vs PPO? As is everything with health insurance, the answer is complicated.
High-deductible health plans can be a very good, affordable health plan for the right person. This is the type of plan I am using, although I am healthy and conscious of my health expenses.
A HDHP is exactly what it sounds like. It has a high-deductible that you are responsible for paying should you incur health expenses. One benefit of the HDHP is that your monthly premiums are generally very low. My premium is covered by my employer, so nothing gets taken out of my paycheck for health insurance premiums. My prior role at another company took about $35 per paycheck towards my health insurance premiums, which is still minimal.
Downside vs Upside to a HDHP
The downside to a HDHP is that you pay more upfront before your insurance plan kicks in. This means that you should plan ahead and prepare to have an emergency fund set aside for health expenses. I suggest having at least the amount of your deductible to cover yourself in case of an illness or injury. If you utilize the doctor or prescriptions very little, a HDHP can be a great way to save money on your health insurance.
Another benefit of HDHPs are the Health Savings Accounts (HSAs) that usually accompany them. HSAs are tax-advantaged dollars that you can use towards eligible health expenses. The HSA sponsor (like Optum HSA) will send you a debit card and an online account to monitor your balance. You can then work with your HR department to set aside a specific amount of money each paycheck that you want to put in your HSA. These funds are pre-tax!
My personal choice
My wife and I typically max out our HSAs for a few reasons. If we want to buy an HSA eligible item, we can do it with pre-tax money, giving us a discount on health expenses. These can be used towards things like chiropractic care, dental care, vision care and more. Unlike a Flexible Spending Account, the money rolls over from one year to the next and will stay in your account. If you leave your job, the account stays with you.
This past year alone, I spent my HSA money at the chiropractor, physical therapist, dentist and on new glasses. There is a list of IRS-approved expenses that are too long to include here, but this link is a great place to start.
Why I like HSAs and HDHPs
Another benefit to an HSA is that it grows tax-free. Essentially it is like a savings account that you can max out every year (currently at about $3,600 for individuals, $7,200 for a family). You can store funds here and use them for health expenses tax-free. At age 65, you can draw funds from it like a traditional IRA, albeit finally taxed. In fact, my wife is still reimbursing herself for expenses incurred during her pregnancy almost six months ago through her HSA!
The HDHP with an HSA can be quite the weapon from a tax-advantaged, low-cost, flexibility standpoint. HDHPs aren’t for everyone, however. If you incur high medical expenses, are pregnant, or have a chronic condition – the PPO is the way to go. HDHP vs PPO is a classic question, so lets dig into PPOs.
When you think of traditional health insurance, you’re probably thinking of a PPO. PPOs offer great coverage, decent flexibility in choosing your providers and pharmacies, and are the most common choice among beneficiaries.
PPOs differ from HDHPs in that they typically have higher monthly premiums. You will feel this in your paycheck each month, but the good news is the low deductible. With a PPO, you typically will not spend much money out of pocket to get your insurance to kick in. A common PPO deductible is $500 for an individual whereas a HDHP minimum in 2021 is $1,400.
Why does the PPO feel so comfortable?
The PPO is based on traditional insurance concepts – pay an amount each month to avoid paying a large, unexpected expense. When you do have large health expenses, your insurance will provide excellent coverage sooner than a HDHP will. If you have regular health expenses, I recommend a PPO that will get you covered quickly and reduce out of pocket expenses.
My wife and I wished she had a PPO when we had our first child. Her HDHP had a super high deductible and we ended up paying a lot of money out of pocket. Unfortunately, we found out she was pregnant after open enrollment ended and couldn’t change our plan.
To read more about our story, click here.
Which one is better for a family? PPO or HDHP?
As always, the answer depends on the health status of the family, their risk tolerance, what is being offered by their employer(s), and their financial goals. My video above may help may break it down concisely.