The HSA Required High Deductible Plan Design

A common misconception.
One of the most common misconceptions about HSA savings account plans is that people can just use their existing health insurance policy, especially if it happens to have a “high deductible.”  In most cases, this is incorrect—the law requires a specially designed high deductible policy, technically known as an HDHP (high deductible health plan).  Although it “sounds like” an ordinary policy with a “high” deductible, that is not the case.  The required HDHP policy has special features not found in most policies issued prior to the advent of the HSA. So first and foremost, be sure you have a properly qualified HSA insurance policy; otherwise, you may not be eligible for the many tax advantages offered by the HSA.  

Why is an HSA insurance policy required at all?
But why do you need an insurance policy at all? Why couldn't you just have a special savings account, and that's all? Because when Congress originally designed the predecessor to the HSA, it did so with the idea that each person or family funding a savings account for medical expenses should always be required to carry insurance as a back-up in the event “catastrophic” medical expenses should strike. This appears to be a wise requirement; otherwise, some individuals would be under the false and mistaken impression that they could “save” their way to financial freedom from the high cost of health insurance.

So is a "catastrophic" policy required?
The insurance policy required by law is often described as a “catastrophic” type of coverage because it requires a “high deductible” and allows no “co-pays” prior to meeting the deductible (except for preventative services). This does not mean, however, that the actual insurance policy must cover only "big expenses," i.e., those incurred in the hospital. Insurance companies now offer everything from true catastrophic policies, providing only in-hospital coverage, to full-blown comprehensive major medical coverage, and everything in between. The common demoninator shared by all of these policies is a deductible and out-of-pocket maximums, designed to qualify as an HDHP pursuant to IRS regulations. Needless to say, policies that cover only hospitalization expenses are going to be less expensive than true major medical policy designs. (Our agency carries all varieties of acceptable plan designs.)

So just pick the lowest price, right?
Actually, what you really need to do is to resist the temptation to select one policy over another based solely on the premium, or on the size of the deductible for that matter. What is more important is what is actually "covered" under any particular policy. Carefully review the list of "covered expenses" in a policy, in conjunction with the exclusions and limitations. Be sure the expenses actually covered are sufficient to meet your needs. After all, expenses not actually covered under a policy do not accumulate toward the deductible in the first place. (For more tips on deductible designs, review my special White Paper Report on deductibles--see the link on the right hand side entitled White Papers-Insider Secrets.)  

What constitutes a "family" deductible?
The size of the deductible depends on the number of people actually being insured.  If there is only one adult to be insured, then it is classified as a “single” plan (even if the insured person is married).  If the policy covers two or more people, it is classified as a “family” plan. 

What are allowable deductible sizes?
With both the single and family plans, there is a minimum and a maximum deductible amount established by Congress, implemented by the IRS.  Those numbers change annually. Here is the current list for the tax year 2009:

 

Minimum Deductible

Maximum Deductible

Single Plan

1,150

5,800

Family Plan

2,300

11,600

Note About Family Plan Deductible Designs

With the family plan HSA policy, the deductible takes on a special feature—it can be a per family deductible or a “per person”deductible, so long as the total family deductible stays within the prescribed guidelines. Orignally, all HSA family policies were required to be per family, but the IRS loosened that requirement shortly after the HSA was instituted in 2004. (Tip: A family plan with individual deductibles can save 15% to 20% compared to an otherwise identical policy with a "per family" deductible.)

What about out-of-pocket maximums?
Another important characteristic of an HSA-qualified policy is the out-of-pocket maximum. This includes your deductible and any co-insurance. The total out-of-pocket maximums are the same as the maximum deductibles shown in the chart above. In other words, a single person could have a policy with a 5,800 deductible that then pays 100% of covered expense. Stated another way, that policy would have no co-insurance, so the total out-of-pocket maximum would be equal to the deductible. As another example, a single person could have a deductible of 2,500, followed by co-insurance of 50% of the next 2,000 in expenses. This would yield a total out-of-pocket maximum of 3,500, which is well below the maximum threshold of $5,800 (50% of 2,000 = 1,000 + 2,500 = 3,500).

Caveat:
Just because you have reached your maximum out-of-pocket does not necessarily mean that you have no additional expenses to pay out of your own pocket! This is a common misconception, across the board, with virtually all health insurance plans.

Rule of Thumb: You always are responsible for all expenses incurred that are not actually "covered" under the policy. Remember earlier, when we mentioned that the most important thing to know about a policy is what expenses actually are covered? This is why! When you incur expenses that are not "covered" under your contract, those expenses do not accumulate toward your deductible, nor are they eligible for reimbursement once the deductible has been satisfied.

For more info about HSA plan designs, click the link on the right hand side entitled Current HSA Guidelines.  

What about underwriting and “pre-existing” conditions?

Unless you are applying for employer-sponsored coverage, i.e., group insurance, your insurance policy will be individually underwritten.  As such, issuance of coverage is subject to underwriting on a case-by-case basis.  Premiums and ultimate offers are determined by the age, sex, location, and health factors of each person or family to be insured. In general, you will not get special underwriting consideration just because the policy has a high deductible; that has already been accounted for in the lower premiums. So if you have serious pre-existing conditions that you need coverage for, it may be difficult to secure coverage.  Depending on the laws in your state, coverage for certain conditions may be excluded or modified, a higher premium may be charged, or coverage could be completely denied.

Usually, there is no physical exam required; however, each company reserves the right to request a physical exam (typically a “paramed” exam) should they feel it necessary as a prerequisite to assessing the risk.  In most cases, underwriting consists simply of the completion of an application being forwarded to the company for review, with a follow-up phone call from an insurance underwriter. 

Should you be concerned about carrying a "high deductible"?

For an enlightening discussion regarding deductibles and their use in health insurance, please take a moment to read my White Paper Report on deductibles. You'll find a link on the right hand side of this page. I wrote this particular article in an effort to help people better understand what deductibles really are, what their function is, and why it makes a lot of sense to buy larger deductibles (and save the difference!).

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