A catastrophic health insurance plan is a private plan that comes with a low monthly premium and high deductible. You are only eligible if you are under the age of 30 or if you qualify for a hardship exemption. Hardship exemptions are given to those who cannot afford health insurance or face another obstacle to getting coverage, like homelessness.
Catastrophic plans are designed to have low premiums, while still protecting you from serious medical debt if you suffer from a true catastrophe. They cover three primary care visits each year but you could end up paying for most medical procedures, beyond preventive care and other essential care, out of pocket. For example, a catastrophic plan may only cover a limited list of prescription drugs. Once you pay enough to reach the deductible — $8,150 for 2020 — your insurance will cover the rest of your expenses.
If you cannot afford a regular health insurance plan, a catastrophic plan is one thing to consider because it will have a lower premium than individual plans available through state and federal insurance exchanges.
Some standard health plans may not be that much more expensive though, and you can likely get lower premiums if you can sign up for health coverage through an employer.
Catastrophic coverage has been one way to avoid paying the Affordable Care Act (Obamacare) penalty for not having health insurance. However, starting in 2019, the penalty has been indefinitely suspended, so it isn’t necessary to get a plan just to avoid that penalty. Some states do still impose a penalty for going uninsured.
Review: your deductible vs out-of-pocket maximum
To understand how a catastrophic plan works, it’s important to review a couple of key health insurance concepts: your deductible vs your out-of-pocket maximum.
Just about every health insurance plan has a deductible. That’s the amount of money you need to spend on your health expenses before your insurance starts paying for anything. A higher deductible means you will have more out-of-pocket expenses before insurance starts sharing costs with you.
The out-of-pocket maximum, also called the out-of-pocket limit, is the most you will ever have to pay, in a given year, on health services that your insurance covers. Once you spend enough to hit that limit, your insurance will cover 100% of the rest of your health expenses for the year. (Note that a year is defined by the start of your policy with the insurance company, and not necessarily by the calendar year.) The highest possible out-of-pocket limit for 2020 is $8,150.
Catastrophic health insurance plans have a deductible that is the same as your out-of-pocket limit. The tradeoff is catastrophic plans have lower monthly premiums — the amount you pay each month in order to keep your insurance policy active — compared to most health insurance plans since you could be on the hook to pay some health costs yourself.
Who should consider a catastrophic health insurance plan
Catastrophic health insurance plans are not the best option for most people. Because of the high deductible — so high that most healthy individuals will never reach it — these plans won’t cover all the regular health care costs that most people have.
While you’ll get coverage for three primary care visits per year, catastrophic plans usually don’t cover much beyond preventive care. The exception is that once you pay enough to hit your deductible, your insurer will pay for the rest of your coverage.
However, there are a couple of situations when you are eligible for, and should consider getting, catastrophic coverage: if you’re under age 30 and just need to avoid a penalty for not having insurance, or if you have a hardship that prevents you from getting health insurance elsewhere. But even if you are eligible, there may be better options to consider.
Healthy individuals under age 30
If you are under 30, you are eligible to purchase catastrophic health coverage. But you should only consider a catastrophic health insurance plan if you rarely get sick, you are not suffering from a chronic medical condition, or your goal is to spend as little as possible on health insurance.
Under the Affordable Care Act, these plans have been a way for young, healthy individuals to avoid paying the individual mandate penalty (for not having insurance) without spending a lot on health insurance they don’t want. This is less important after 2019, though, because Obamacare’s individual mandate was suspended and so there’s no federal penalty for going without insurance. Depending where you live, your state may still require you to have health insurance coverage.
(Here’s a quick review of what the Affordable Care Act is.)
However, if you’re looking to purchase an individual plan through the Obamacare marketplace, you can likely find other health care plans that aren’t much more expensive and that provide more coverage for common medical expenses. If you have employer-sponsored health insurance (group health insurance), your premiums will probably be cheaper than a catastrophic plan.
Additionally, consider pairing a health savings account (HSA) with your catastrophic health insurance plan. Setting up an HSA helps you save on taxes while also savings for expenses that you catastrophic plan may not cover.
Individuals with a financial hardship
People affected by the health insurance mandate may be eligible to avoid the penalty if they claim a hardship exemption. A hardship is a financial situation or other circumstance that prevents you from being able to get health insurance.
You can qualify for an exemption if your income is too low or you otherwise just can’t afford health insurance, from the marketplace or from your work. You may also qualify for a hardship if you met one of these circumstances during the year:
You were homeless
You were evicted
You faced eviction or foreclosure
You received a shut-off notice from a utility company
You filed for bankruptcy
You had substantial medical debt that you couldn’t pay
You were a victim of domestic violence
You suffered the death of a family member
A fire, flood, or other disaster (natural or human-caused) resulted in substantial damage to your property
Your expenses increased unexpectedly from caring for a sick, disabled, or aging family member
You were ineligible for Medicaid because your state didn’t expand Medicaid eligibility under Obamacare
Other hardships may qualify you, so talk with your insurance provider if you have a question about a specific situation.
If you do qualify for an exemption, you can claim it on your annual tax return and get money back. (Will you get a tax refund this year?)
Alternatives to catastrophic health insurance
Catastrophic plans are cheaper than many other plans, but they may not provide the coverage that you need. Some individuals with a hardship may also find that catastrophic coverage is still too expensive. There are a couple of alternatives to consider.
If you purchase a more traditional health insurance plan, but you can’t afford the premiums, one option is a premium subsidy. A premium subsidy reduces your monthly premium payments. Officially, it’s a tax credit — the advance premium tax credit (APTC) — and you get money back when you claim it on your federal tax return.
You may qualify for a subsidy if your household income is 100% to 400% above the federal poverty level (also known as federal poverty guidelines). Premium subsidies cannot be used on catastrophic plans, but they can help you afford a plan with better health coverage that would otherwise be too expensive for you.
You may also qualify for Medicaid, which provides healthcare coverage at low or no cost. Many states have expanded Medicaid, thanks to a provision of the Affordable Care Act that increased Medicaid eligibility for individuals and families who make less than 138% of the federal poverty level.
Here’s a state-by-state guide to Medicaid and who qualifies.
Additionally, it may be possible for you to get a complete exemption because health coverage is unaffordable. If the lowest-cost Bronze-level plan in the Obamacare marketplace costs more than 8.16% of your annual household income, you can qualify for a health coverage exemption. The same is true if the lowest-cost plan from your employer costs more than 8.16% of your household income. The exemption means that you won’t have to pay any penalty for being uninsured for the months that the coverage was unaffordable.
It’s important to reiterate that the penalty in the Affordable Care Act has been suspended for 2019 and future tax years, but it could still apply to prior-year taxes.
What does a catastrophic health plan cover?
Catastrophic health insurance plans generally cover just the basic health benefits and preventive services. They cover three primary care visits each year, which may include annual check-ups, vaccinations, some birth control, some prescription drugs, and other health screenings. They also cover essential health benefits like emergency services, care for substance abuse, pregnancy and maternity or newborn care.
However, the plans from different insurance carriers (remember that these are private plans) may differ slightly in what and how much they. It’s important to check the details for any plan before you get it.
What doesn’t a catastrophic health plan cover?
Because of the high deductible for a catastrophic plan, you must pay out of pocket for virtually everything outside of basic preventive care until you hit your deductible. So if you receive emergency care that is less than your deductible, you will need to pay all of it on your own.