How to make a high-deductible health plan work for you

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Updated Sept. 9, 2019: High-deductible health plans are taking over health insurance. Fewer than 15% of people with employer-provided health insurance had these plans in 2007 and now more than 40% do, according to the National Center for Health Statistics.

While HDHPs are becoming more popular, people still have misconceptions about them. These plans, as their name implies, ask participants to pay more health costs out-of-pocket with a high deductible. Many people think this increases their financial risks if they get sick.

But a study published in the National Bureau of Economic Research shows this may not be the case. The paper by Justin Sydnor, an associate professor of risk and insurance at the University of Wisconsin-Madison, and Chenyuan Liu, who is pursuing a doctorate the University of Wisconsin-Madison, finds that at companies offering both a HDHP and a low-deductible plan, selecting the HDHP typically saves more than $500 a year.

"High-deductible plans often have much lower employee premiums," Sydnor said.

In addition, people with HDHPs can often take part in health savings accounts, which they can use for medical expenses or, if you don't have many expenses, retirement savings. Many companies contribute to HSAs. The combination of lower premiums and HSA contributions can more than outweigh the higher out-of-pocket costs of an HDHP, Sydnor said.

Why people avoid HDHPs

Despite Sydnor and Liu's findings, many people still choose more "generous" health plans with higher premiums, even if they lead to higher overall spending. One reason might be something called "status quo bias," said Jeff Kullgren, a research scientist at the Veterans Affairs Center for Clinical Management Research. HDHPs are still relatively new plans, having been around for 15 years or so, and people accustomed to their existing health plans may be reluctant to switch.

People also tend to dislike spending on deductibles more than premiums, said Kullgren, also an assistant professor of internal medicine at the University of Michigan. Premiums are automatically deducted from your paycheck, while deductibles are spent out of pocket, so people notice premiums less. The same psychology makes automatic retirement deductions so effective. HDHPs also encourage people to shop around, which might be unfamiliar to them.

"Some people may well be willing to pay more for their health care to avoid having to engage in those kinds of behaviors," Kullgren said.

How do you choose the right health plan?

It can be hard to tell which health plan is the best choice when it's time for open enrollment. Health plans have complicated rules about what they'll cover and where you can seek care. But some simple math can help you decide whether an HDHP is a good financial deal compared to other choices, Sydnor said.

For each plan available, add the premium for the year and the deductible, and subtract any HSA contributions your company will make. (Note: Many companies don't contribute to HSAs.)

"That total gives you a realistic estimate of what a 'high cost' year would look like with that plan," Sydnor said.

You can also add the out-of-pocket maximum instead of the deductible to see the "worst-case scenario" for each plan, if you happen to experience a serious illness. Whichever plan gets you the lowest number is probably the best financial deal regardless of your health needs, Sydnor said.

How do you get the most out of an HDHP?

HDHPs, as we mentioned, take some work to maximize their benefits. By shifting costs to consumers, they ideally encourage people to become more savvy health care shoppers and spend less on unnecessary health care. But research shows people spend less on health overall, even on things they need, when they have an HDHP, Kullgren said.

There are a few things to do to get the most out of an HDHP:

Use an HSA: Contributions and withdrawals for health spending are tax-free, so you can use an HSA to plan ahead for any medical needs. Plus, you can keep what you don't spend.

Compare prices: Use a health care price transparency tool like Fair Health or Healthcare Bluebook to find the best price for medical services.

Negotiate: Talk with your doctors and other health care providers about costs you might face before paying for services. If you get a big bill, try talking with the provider about lowering what you owe or paying in installments.

"When people in these plans are able to engage in some of these behaviors, people who have done so often feel like it helps them get the care they need and spend less on their health care," Kullgren said.

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