Healthcare is something all adults need to have a strategy for. Medical costs have risen significantly over the years. If you do not have any type of health insurance, then you could be out a significant amount of money. That being said, let’s take a look at the different options available, and if you should use a Health Savings Account (HSA).
Common healthcare wisdom
The most common thought on healthcare is that you should choose the healthcare plan that has the lowest deductible. Doing so would mean that your out-of- pocket expenses would be lowest whenever you need healthcare.
This strategy makes sense if you have serious health concerns or if you are expecting a costly health expense in the future. However, that isn’t necessarily the case for everyone. Younger adults tend to be healthier and have fewer health issues as a result.
Weighing Your Options
Let’s take a closer look at the different options we have when it comes to healthcare. As mentioned, the plan with the lowest deductible may not always be the best choice.
Preferred Provider Organization (PPOs)
A PPO is a common type of healthcare plan where the insurance provider works with healthcare providers to negotiate cheaper rates for the insurers. In return for this network of providers that the insurer can choose from, the insurer pays a fee to the insurance provider.
Since the insurance provider is giving the insurer an option with lower deductibles, these plans come with higher premiums. This means that the insurer is paying more money out-of-pocket for this plan than they would on alternative healthcare plans.
To read more about PPOs, click here.
Health Maintenance Organization (HMOs)
Another common healthcare plan is an HMO. HMOs are similar to PPOs in that they limit the insurer to the healthcare providers within the insurance provider’s network. The difference is that this type of plan is generally more cost-effective in return for having more restrictions.
Insurers must pick a primary care physician within the network of the HMO. In order to see a health care specialist, the insurer must receive a referral from their primary care physician.
To read more about HMOs, click here.
High Deductible Health Plans (HDHPs)
A high deductible health plan is practically the opposite of a PPO: These plans come with much lower premiums but have higher deductibles.
These plans are a good option for relatively healthy people who only need coverage for emergencies because, while the annual deductibles are higher, they have a catastrophic limit. For example, the limit on the out-of-pocket maximum for a family in 2022 is $14,100.
Another benefit to these plans is that they allow access to an HSA, or a Health Savings Account. HSAs are offered only to people partaking in an HDHP plan. These savings accounts are tax advantaged and allow people to withdraw to pay their deductibles.
If you want to learn more on HDHPs, click here.
Health Savings Account (HSA)
HSAs are a great option that everyone should consider when it comes to planning for healthcare. These savings accounts are designed specifically for health care costs. You can think of an HSA like a retirement account in that you receive a tax write off for the contributions you make.
However, there are restrictions on who qualifies for an HSA. As mentioned above, you must be on an HDHP to use an HSA.
You can contribute up to $3650 per year as of 2022 and receive a tax write off for that amount. If you end up not withdrawing that money for any healthcare expenses that year, you can roll it over to the next year indefinitely.
Let’s compare how this strategy stacks up against a PPO:
- Option 1 is to enroll in a PPO that charges a $600/month premium.
- Option 2 is a HDHP that charges a $300/month premium.
If you were to choose option 2 and invest an additional $300/month into an HSA, you would be contributing $3600/year to the HSA while spending the same amount per month as in option 1. If you are in good health, then you could keep the money invested in stocks, bonds, and other assets within the HSA to grow over time.
Starting an HSA while you are young and healthy is a great way to build up a healthcare nest egg to use when you are older and need it.
Or if you never need the funds for healthcare expenses, they can be withdrawn at the age of 65 with no penalties, though you’d have to pay taxes on the distributions. In that way, it functions a lot like a traditional IRA.
Conclusion – Optimizing Your Healthcare
When it comes to picking the right healthcare option for you and your family, it is important to first asses the status of your family’s health. If someone that your plan would cover would need expensive recurring medical care, then a PPO could be a great option.
However, if you are younger and relatively healthy, an HDHP plan paired with a maxed-out HSA (Health Savings Account) could set you up for success later in life by building up funds to grow over time. Then you can pay for medical care when you actually need it.
The important thing is to stay informed on the options available. Everyone’s situation is different, and different options will be better for different people.
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