Catastrophic Health Insurance: Pros and Cons

Amid rising health insurance costs and a tough economy, a growing number of consumers and employers are turning to high-deductible health plans (HDHPs), often known as "catastrophic health insurance."

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These plans feature lower-than-average premiums in exchange for higher-than-average deductibles, and many on the market today are paired with tax-advantaged health savings accounts (HSAs).

Under a high-deductible health plan, you pay for all your medical expenses – except for qualified preventive care – up to the annual deductible. After that, some plans pay 100 percent of your covered medical expenses. Others initially pay a share of your medical bills – such as 80 percent – before paying 100 percent when you reach an out-of-pocket maximum.

Your premiums do not count toward your deductible or your out-of-pocket maximum.

These plans are sometimes referred to as catastrophic health insurance plans, but the name is a bit of a misnomer. Under health care reform, the plans must cover 100 percent of preventive care, even before you pay the deductible.

In addition, many of the plans cover a full range of health care services – not just hospital and emergency medical costs you might associate with catastrophic care.

The HSA health insurance option
HSA-qualified, high-deductible health plans are a popular option. Made possible by a federal law that went into effect in 2004, these plans are coupled with a health savings account that lets you set aside pre-tax money to use for medical care today or in retirement.

"More and more consumers are looking for ways to save money on health care and on taxes, so they're taking another look at HSAs," says Ellen Laden, a spokeswoman for Golden Rule Insurance Co., which underwrites individual health insurance plans for UnitedHealthcare.

Golden Rule pioneered the first medical savings account in 1993, a forerunner to the HSA.

Consumers shopping for affordable individual health insurance were the first to gravitate toward HSA-eligible plans, followed by small employers. Mid-size employers have also embraced HSA plans.

"Many small and mid-size employers use HSA-type plans as a cost-saving measure, and many employees, especially those that are seeking more "catastrophic" type coverage and don't have any major health concerns, see them as a way to save money on premiums and still cap their exposure in the event something happens," explains Cory Friedman, Vice President with GCG Financial.

While some large employers use HDHPs, many of the biggest employers self-insure. "All size employers use HDHP plans in some regard, but many larger employers are able to control costs by moving to self-insured plans without necessarily needing to increase deductible exposure to employees," says Friedman

Data shows that the popularity of HDHP and HSAs continues to grow. According to the America's Health Insurance Plans (AHIP) 2016 survey, 20.2 million people were enrolled in a HDHP/HSA plans either through their employer or individually in 2015.

Data from the Centers for Disease Control and Prevention (CDC) concurs, finding that the percentage of privately insured adults with HDHP plans aged 18 to 64 has risen from 26.3 percent in 2011 to a whopping 39.3 percent in 2016 which is an increase of almost 50 percent.

How these health insurance plans work
Not all high-deductible health plans can be paired with an HSA. In order to qualify for HDHP status in 2018, the plan must have a deductible of at least $1,350 for an individual and $2,700 for a family. Out-of-pocket maximums can be no more than $6,650 for an individual and $13,300 for a family.

You can contribute up to $3,450 per year in pre-tax dollars to an HSA as an individual or up to $6,900 as a family. You can save an additional $1,000 in the account if you're 55 or older.

The money in the account grows tax-free, and in some cases companies that service the accounts provide investment options, such as mutual funds to promote further savings growth, Laden says.

When you withdraw the funds, you do not have to pay taxes so long as the withdrawals you take are for qualified medical expenses, such as the HDHP's deductible or medical costs not covered under the plan, including dental and vision care. You can also use the accounts to save for long-term care not covered by Medicare.

Laden says she knew one man who poured as much as he could into his HSA to pay for orthodontic bills he knew he'd eventually face for his children.

"All three little girls were thumbsuckers, and he knew they'd need braces," she says.

HSA funds can also be used for non-medical expenses, but you'll pay a 20 percent tax penalty on top of income taxes on any money you withdraw for non-medical expenses before age 65, Laden says. You pay only ordinary income tax - no penalty - on withdrawals for non-medical expenses after age 65.

An HSA account is portable. Even if you switch to a different type of health plan or change employers, the money is still yours to spend on health care.

Is a high-deductible health plan right for you?
Most types of consumers can benefit from high-deductible health plans but there are two types of consumers that will often benefit the most from a HDHP.

The young and healthy are prime customers. "HDHP plans typically cost less, so why pay more in premiums for a richer benefit plan that you don't expect to use," advises Friedman. "They would be better off taking some of the premium savings and funding an HSA, so that they have some money set aside in the event they incur unforeseen medical costs," he continues.

On the other hand, if you know you will hit your maximum out of pocket, an HDHP is a great option. "All things being equal, if your out-of-pocket is the same on an HDHP as it is on a traditional PPO, you get to pay a portion with tax-free dollars assuming your HDHP plan is HSA-eligible, which means your healthcare dollars go further," points out Friedman.

Remember, though, that not all high-deductible plans are HSA-qualified. In addition, HDHPs vary in what they cover and how they're priced.

Consider the following, Laden says:

• How much can you afford to pay for health insurance?
• What coverage do you need?
• What does the plan cover, and what does the plan not cover?
• How much is the deductible, and how much, if any, would you pay in coinsurance up to the out-of-pocket maximum?
• How will you save for the HSA? Many plans require members to contribute a certain amount each month to the HSA, $25 a month is a common amount.
• Does the plan offer a strong network of providers, and is the network national?

If you sift through health insurance quotes and consider a "catastrophic health insurance plan," make sure you understand how the plan works, what it covers and how much you might end up paying out of pocket.