HDHP always better than PPO? What am I missing?

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bd7
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

yakk0 wrote: Wed Jun 05, 2024 8:26 pm Even though the idea of the HDHP is that you as the patient are "responsible for managing your healthcare costs", in practice this is very difficult because the system of medical coding and billing is so opaque to the average consumer.

Are they "preventative" since at a certain age, they are recommended annually, or are they "non-preventative" since an abnormality has been detected before
You don't have to work very hard if you can't or don't want to because even though you are paying 100%, the insurance negotiated rates and policies still govern what you can be billed. If your provider is in-network, they cannot bill you for anything that the insurance company does not approve. The insurance company is incentivized to keep you from reaching your deductible so if they approve it, it's probably legit. This is why it is sometimes said that medical insurance would be well worth having even if the deductible were a million dollars.

The one issue that I've found is exactly what you're asking about here--the provider may be incentivized to bill things as other than preventive. Reasonable providers will often agree to schedule something like a colonoscopy as preventive (as long as you're due for one) even if you have an issue. Some won't and some won't discuss it (I don't handle billing) and then you as the consumer can decide what to do.
UALflyer
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

grabiner wrote: Wed Jun 05, 2024 8:25 pm
UALflyer wrote: Wed Jun 05, 2024 1:20 pm * If the OP is not already maxing out all available tax advantaged vehicles, then you are grossly overestimated the tax benefits associated with an HSA. In other words, if the OP is taking the funds that he would've used to fund his 401K and, instead, using them to fund the HSA, then there are no additional tax savings associated with him doing so.
This is misleading. You get the same immediate tax deduction for contributing to the HSA or the 401(k). However, the 401(k) withdrawals will be taxed in retirement, while the HSA withdrawals are tax-free if used for medical expenses. For example, $8300 in an HSA will grow to the same after-tax value as $10641 in a 401(k) if you withdraw the money at a 22% marginal tax rate.
Speaking of misleading, if a person is taking the money that would've gone into a traditional 401k and, instead, funding an HSA, it results in zero net tax savings up front. Hence, it is not only misleading, but completely indefensible to then add the up front tax savings associated with an HSA in a situation where the person will realize zero net tax savings.

Reallocating funds that would've gone into a 401k may or may not be appropriate (it depends on the fact pattern), but you cannot take a future benefit and use it to just invent an up front one.

Speaking of future growth, 88% of HSA owners keep their funds in cash or cashlike instruments (https://www.ebri.org/content/trends-in- ... -2011-2021). So, all this talk about future growth in the HSA only applies to approximately 12% of HSA holders. That's not surprising, as only 15% of retirement plan participants max out their accounts (https://www.cnbc.com/2024/01/04/how-hig ... 20research.) and even fewer also max out their Roth/backdoor Roth.
It's easier to view the comparison to a Roth IRA.
Easier doesn't make it right. You can't just set up a strawman argument for yourself to tear down; you have to look at the facts and take them how they are.

About 72%-80% of retirement plan participants make traditional 401k contributions rather than Roth (https://www.cnbc.com/2022/12/16/88perce ... 0or%20both.) That's also not surprising, as Roth is typically advantageous when you'll be in a higher tax bracket in retirement, which is not the situation the majority of retirement plan participants would find themselves in. When you combine it with the above data showing that only 15% of retirement plan participants actually max out their accounts, it starts to make sense that an overwhelming majority of the contributions are not in Roth.

Likewise, since 88% of HSA owners keep their funds in cash or cashline instruments, none of this matters, as the end result is all the same.

On a related note, with an employer sponsored health plan, the participant's health plan premiums are paid on a pre-tax basis. To take the OP's numbers here, with an HDHP, he'd pay a $3,500 annual premium and make a $6,800 HSA contribution ($8,300 family maximum in 2024 minus the $1,500 employer HSA passthrough contribution). This means that $10,300 would be excluded from his taxable income.

Alternatively, with a conventional plan, he'd pay $7,200 in annual premiums and make a $3,200 healthcare FSA contribution (we are talking about childbirth, so the entire FSA will be easily used up, although the IRS would allow a carryover of $640). This means that $10,400 would be excluded from his taxable income. This is a very common situation, where the income exclusion for an HDHP + HSA is virtually identical to that of a conventional plan + healthcare FSA.
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neurosphere
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

UALflyer wrote: Thu Jun 06, 2024 7:16 am Likewise, since 88% of HSA owners keep their funds in cash or cashline instruments, none of this matters, as the end result is all the same.
I'm confused. Is this thread about public policy and HSAs?..."88% of HSA owners..." or about educating the OP about all the variables/data which may affect their decision.

90% of stock investors time the market and/or rely on active funds. I don't think that's relevant to a thread where an OP may ask "which index fund is best for me?" or "what are the pros/cons of investing my 401k vs paying off my mortgage".
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

neurosphere wrote: Thu Jun 06, 2024 9:46 am
UALflyer wrote: Thu Jun 06, 2024 7:16 am Likewise, since 88% of HSA owners keep their funds in cash or cashline instruments, none of this matters, as the end result is all the same.
I'm confused. Is this thread about public policy and HSAs?..."88% of HSA owners..." or about educating the OP about all the variables/data which may affect their decision.
Is there a reason that you're posing this question to me rather than to quite a few posters in this thread who have responded with statements that haven't addressed the particulars of the OP's specific question and provided advice without knowing anything about the exact structure of his conventional plan or about his tax situation?
90% of stock investors time the market and/or rely on active funds. I don't think that's relevant to a thread where an OP may ask "which index fund is best for me?" or "what are the pros/cons of investing my 401k vs paying off my mortgage".
Please take a look at the post to which I was responding.
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neurosphere
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

UALflyer wrote: Thu Jun 06, 2024 10:05 am
neurosphere wrote: Thu Jun 06, 2024 9:46 am
UALflyer wrote: Thu Jun 06, 2024 7:16 am Likewise, since 88% of HSA owners keep their funds in cash or cashline instruments, none of this matters, as the end result is all the same.
I'm confused. Is this thread about public policy and HSAs?..."88% of HSA owners..." or about educating the OP about all the variables/data which may affect their decision.
Is there a reason that you're posing this question to me rather than to quite a few posters in this thread who have responded with statements that haven't addressed the particulars of the OP's specific question and provided advice without knowing anything about the exact structure of his conventional plan or about his tax situation?
90% of stock investors time the market and/or rely on active funds. I don't think that's relevant to a thread where an OP may ask "which index fund is best for me?" or "what are the pros/cons of investing my 401k vs paying off my mortgage".
Please take a look at the post to which I was responding.
Comments not directed "directly" to you. Just a general response trying to get things back on track regarding the OPs general situation/details. OP can provide clarifying details (marginal rate including FICA/NIIT considerations for premiums/FSA/HSA contributions, maxing out of 401k/IRA space, etc). OP may have already done so, I haven't yet gone through every post.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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neurosphere
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

UALflyer wrote: Wed Jun 05, 2024 1:20 pm Unfortunately, both the calculations and the spreadsheet are incorrect. Here are just some of the issues:

* It is exceptionally common on BH to create these calculations to factor in the tax savings associated with the HSA contributions, but then to completely omit the tax savings associated with a healthcare FSA that a conventional health plan member could use. The tax treatment of the healthcare FSA is identical to that of the HSA.
Agreed. Further below I have included an FSA contribution of $3200.
* I don't know why you're assuming a total marginal rate of 32%, which may be higher or lower than the actual blended tax rate of the participant.
I had to start somewhere. However, even enormous differences in total marginal rate (income tax, excess medicare, FICA, etc) makes VERY little difference, given that all health insurance premiums, FSA contributions and HSA contributions are subject to (essentially) the same marginal rates. The absolute values as on the y-axis change, but the differences between costs of each plan change trivially. Trivially is of course subjective.
* To the extent that the participant's income is above the Social Security wage cutoff for the year, the FICA savings calculations are incorrect.
That's incorrect. FICA is included in the definition of marginal rate in this case. I used 32% as the "all in". If one is under the FICA threshold the marginal rate is lower. Premiums, FSA/HSA contributions are all free of FICA, right? In any case, my calculator has toggle switches for whether one is below/above the SSWB and also above/below being assessed excess Medicare tax. I ignore NIIT.
* The patient's share of the billed medical expenses shown in your chart is totally incorrect. With a conventional plan, the origin and the nature of the charges determine the cost share, and a lot of charges are exempt from the deductible and are only subject to a flat copay. So, for instance, under the OP's HDHP, incurring a $5K emergency room charge on day one means that the entire $5K is paid by the OP out of pocket. On the other hand, under the OP's conventional plan, the exact same $5K emergency room charge results in a $250 flat copay, with insurance paying the remaining $4,750.
Yes, I stated this in my assumptions, when I wrote "assuming the share of billed medical expenses is identical". One can easily take the graph and adjust any of the values for such "point" discrepancies.
* If the OP is not already maxing out all available tax advantaged vehicles, then you are grossly overestimated the tax benefits associated with an HSA. In other words, if the OP is taking the funds that he would've used to fund his 401K and, instead, using them to fund the HSA, then there are no additional tax savings associated with him doing so.
I basically agree with Grabiner on this, but ok. If so, the benefits of the HSA contribution are a little overstated on the graph. OP has since clarified they are maxing other vehicles out.
* There is no clarity on the plan structure available to the OP. So, for instance, does either plan have an individual and family deductible and OOP max? Under the HDHP, are all charges subject to the OOP max (with some/many HDHP's, prescription charges are not subject to the OOP max)? Does the OP's conventional plan cover all delivery charges in full or subject to a relatively small flat copay?
I used the numbers that were provided. But even more importantly, the OP doesn't know whether an MRI (or any other test, visit, drug, or surgery) will cost $1000 vs $100,000 between the two plans. So except for the left and right extremes, everything in between is essentially a guess. How many ER visits will we have, 1 or 5? Will one member of the family need the care or will it be spread out evenly among 2-10 people? There are 10 hospitals in my area and each have different negotiated rates for various care. The OP (nor I) can be expected to create a 24-dimentional grid with slider bars to analyze plans "suppose I need 3 specialists at NYU, 2 general visits, 1 ER visit at Cornell" :D

Below is an updated graph with FSA contribution. You can see my assumptions. Note that in my previous graph I may have had an error. I think I used a 10% co-insurance estimate for the PPO rather than the 20% estimate given by the OP.

Personally, I use such graphs to look at best case and worst case scenarios. In the example below, if no care is needed, the HSA wins out by a huge amount (and even more when accounting for investment gains). If "extreme" care is needed, the difference is small but again with the HSA winning out (and of course subject to all the uncertainties/differences in billing with respect to medications/ER/etc as we've been discussing). For most people without known/existing ongoing medical issues, the HSA/HDHP in this particular example will be the best plan on average over time. If in any given year there is an emergency, a short-term specialty med, etc. Ok, the PPO perhaps would have been, in hindsight, the best choice for that year. If a person's medical situation changes (e.g. chronic expensive condition) they they switch to the other plan at year end.

Image
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
UALflyer
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

neurosphere wrote: Fri Jun 07, 2024 10:26 am I had to start somewhere. However, even enormous differences in total marginal rate (income tax, excess medicare, FICA, etc) makes VERY little difference, given that all health insurance premiums, FSA contributions and HSA contributions are subject to (essentially) the same marginal rates. The absolute values as on the y-axis change, but the differences between costs of each plan change trivially. Trivially is of course subjective.
In this particular case, it makes no difference whatsoever, as the OP has since clarified that he does max out all tax advantaged options available to them. In addition, as I have since pointed out above, in the OP's case the combination of the HDHP premium plus HSA contribution versus the conventional plan premiums plus healthcare FSA contribution results in a virtually identical income exclusion. In other words, in the OP's case, the tax reduction would be the same with either plan.
That's incorrect. FICA is included in the definition of marginal rate in this case. I used 32% as the "all in".
Thanks for clarifying your calculations. In the future, to avoid confusion, you may want to consider using the phrase "blended tax rate" rather than "marginal rate." It is not that the phrase "marginal rate" is incorrect, but without more it is frequently used to refer to the federal income tax brackets.
Yes, I stated this in my assumptions, when I wrote "assuming the share of billed medical expenses is identical". One can easily take the graph and adjust any of the values for such "point" discrepancies.
Between an HDHP and a conventional plan, the share of billed medical expenses would almost never be identical or even particularly close. This assumption is the primary reason that your chart continues to be way off, as the assumption is about as incorrect as one gets. The inapplicability of this assumption is also the primary reason that it is so common for conventional plans to come out ahead, as with a lot of plans and services, flat copays for some very expensive services end up being far cheaper than percentage cost sharing under the HDHP's.

In the OP's case, for instance, if his conventional plan included a fairly common provision whereby the labor and delivery services were covered at 100% or were only subject to a relatively small flat copay ($250 - $500 is common), his conventional plan would've been an easy winner.
But even more importantly, the OP doesn't know whether an MRI (or any other test, visit, drug, or surgery) will cost $1000 vs $100,000 between the two plans. So except for the left and right extremes, everything in between is essentially a guess. How many ER visits will we have, 1 or 5? Will one member of the family need the care or will it be spread out evenly among 2-10 people? There are 10 hospitals in my area and each have different negotiated rates for various care. The OP (nor I) can be expected to create a 24-dimentional grid with slider bars to analyze plans "suppose I need 3 specialists at NYU, 2 general visits, 1 ER visit at Cornell" :D
There is nothing particularly complex about modeling any of this, as there is a fairly universally accepted approach to these calculations. As I mentioned above, you look at the last 1-3 years of negotiated charges and then use both the charges themselves as well as what they're for to determine the approximate impact under both plans. Plenty of employers provide online calculators that use this exact approach. You can then make adjustments for things that you already know are on the horizon: in the OP's case, it's labor and delivery, plus the newborn thereafter incurring his/her own regular charges (including his/her own deductible).
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Re: HDHP always better than PPO? What am I missing?

Post by OrangeKiwi »

neurosphere wrote: Fri Jun 07, 2024 10:26 am

Below is an updated graph with FSA contribution. You can see my assumptions. Note that in my previous graph I may have had an error. I think I used a 10% co-insurance estimate for the PPO rather than the 20% estimate given by the OP.
Don’t you have to penalize the FSA scenario for years where you don’t reach that amount of medical spending and have to forfeit the money?

That concept alone turns me off FSAs.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

OrangeKiwi wrote: Fri Jun 07, 2024 12:07 pm
neurosphere wrote: Fri Jun 07, 2024 10:26 am

Below is an updated graph with FSA contribution. You can see my assumptions. Note that in my previous graph I may have had an error. I think I used a 10% co-insurance estimate for the PPO rather than the 20% estimate given by the OP.
Don’t you have to penalize the FSA scenario for years where you don’t reach that amount of medical spending and have to forfeit the money?

That concept alone turns me off FSAs.
I addressed this exact point upthread. Once again, for 2024, the IRS permits $640 in unused FSA funds to be carried over to the following year.

You may also want to go through the list of allowable charges under the FSA to see if some of them apply even outside of the insurance context. For instance, as I've pointed out in other threads, many people have routine expenses, such as contacts, glasses, massages, etc... that are reimbursable from the FSA but over which people have control. So, for instance, if your medical expenses are running low for the year, you may want to order new contacts in December rather than January to use up those FSA funds. If the opposite is true, you simply shift some of these expenses that you'd be incurring anyway by a month or two to the following year.

In the OP's case, with childbirth, the healthcare FSA would be fully used up (and, just in case, there's a $640 carryover allowance to the following year).
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

UALflyer wrote: Thu Jun 06, 2024 7:16 am On a related note, with an employer sponsored health plan, the participant's health plan premiums are paid on a pre-tax basis. To take the OP's numbers here, with an HDHP, he'd pay a $3,500 annual premium and make a $6,800 HSA contribution ($8,300 family maximum in 2024 minus the $1,500 employer HSA passthrough contribution). This means that $10,300 would be excluded from his taxable income.

Alternatively, with a conventional plan, he'd pay $7,200 in annual premiums and make a $3,200 healthcare FSA contribution (we are talking about childbirth, so the entire FSA will be easily used up, although the IRS would allow a carryover of $640). This means that $10,400 would be excluded from his taxable income. This is a very common situation, where the income exclusion for an HDHP + HSA is virtually identical to that of a conventional plan + healthcare FSA.
That all presumes a childbirth with the full utilization of the FSA funds and ignores the additional $5200 that the OP would have in saved premiums and employer contribution. And if the OP has not already maxed out every tax-advantaged saving, he would have the $3700 in premium savings to apply to a 401k. It's not very useful to say that the income exclusions are similar when there's a $3700 cash difference in the outcome.
I addressed this exact point upthread. Once again, for 2024, the IRS permits $640 in unused FSA funds to be carried over to the following year.
OTOH, I contributed a tax-deductible $4850 to my HSA last year and I haven't used a dime of it. It will be there 10 years from now when I might need it. The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

bd7 wrote: Fri Jun 07, 2024 12:59 pm That all presumes a childbirth with the full utilization of the FSA funds...
Correct, as these are the OP's facts.
... and ignores the additional $5200 that the OP would have in saved premiums and employer contribution.
It does not. Conventional plans provide coverage from the very first dollar in spending. Because of their more comprehensive nature, the up front premiums tend to be higher and the FSA contribution limits lower. On the other hand, by definition, HDHP provide no non-preventive coverage until the plan holder has met his/her deductible. Hence, the reason that the HDHP premiums are lower and the HSA contribution limits are higher, as the HSA contribution limit accounts for the up front deductible.

When you analyze HDHP vs. conventional plans, one of the things that you look at is the tax savings associated with their structure. As I've pointed out, in this case, the HDHP + HSA versus the conventional plan + FSA results in a virtually identical income exclusion. In other words, in the OP's case, there is no tax benefit to going with one type of plan versus the other. This won't always be the case, but is precisely the OP's situation.

The $5,200 to which you're referring are only there before a single dollar in non-preventive medical care is incurred. Because of the OP's facts, he already knows that there will be substantial medical charges, so he just needs to work through the approximate anticipated spending through each plan.
OTOH, I contributed a tax-deductible $4850 to my HSA last year and I haven't used a dime of it.
This has nothing to do with the OP's situation, as the OP is looking at $15K+ in charges.
The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
I don't disagree at all. Depending on each person's specific facts, however, this lack of flexibility may or may not be meaningful. In other words, with regular and predictable spending, plenty of people max out their healthcare FSA's anyway, which makes them a no brainer. For other people, it makes sense to allocate less than the contribution maximum. Again, it's fact specific.
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neurosphere
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

UALflyer wrote: Fri Jun 07, 2024 3:06 pm
bd7 wrote: That all presumes a childbirth with the full utilization of the FSA funds...
Correct, as these are the OP's facts.
Did I miss something? I thought the OP was planning for a child in "one or two years". So the child could occur in 2025 or 2026. And nature being what it is, a child could occur in 2027 or never. If one assumes a 100% chance of a child during a specific calendar year, but what if it's 50/50?

I knew a family that was pregnant with a due date in April so chose a PPO during open enrollment, but due to a complication lost the pregnancy in Dec.

We can only make our best guesses for what our future healthcare needs/spending may be, 2 to 14 months in advance.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

neurosphere wrote: Fri Jun 07, 2024 3:23 pm
UALflyer wrote: Fri Jun 07, 2024 3:06 pm
bd7 wrote: That all presumes a childbirth with the full utilization of the FSA funds...
Correct, as these are the OP's facts.
Did I miss something? I thought the OP was planning for a child in "one or two years". So the child could occur in 2025 or 2026. And nature being what it is, a child could occur in 2027 or never. If one assumes a 100% chance of a child during a specific calendar year, but what if it's 50/50?
That's fair. The OP was asking about the best plan in the year in which his wife would give birth, which is the question that I've been focusing on. Having said that, the pregnancy could obviously occur after the open period, in which case, in the absence of some other way to change healthcare plans, the OP would just have the plan that he'd have.
I knew a family that was pregnant with a due date in April so chose a PPO during open enrollment, but due to a complication lost the pregnancy in Dec.

We can only make our best guesses for what our future healthcare needs/spending may be, 2 to 14 months in advance.
Of course. Please note that even in a circumstance like that, there are frequently substantial medical expenses.
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Re: HDHP always better than PPO? What am I missing?

Post by senex »

Great, informative thread. Thanks to all who've posted.

My own analysis never made it so far due to uncertainty about out-of-pocket (OOP) max. Apparently it isn't your actual out of pocket max. It excludes out of network care and any amounts above the "allowed" amount. (see https://www.healthcare.gov/glossary/out ... mum-limit/ )

This adds a great deal of uncertainty if you, say, have a major incident on vacation, or can't find a hospital that accepts the "allowed" amount. Are your losses unlimited in that case, and is a PPO any better?

My personal experience with PPOs is that out-of-network stuff tends to work itself out (no idea how). But with HDHP, it seems like I could lose unlimited money if injured on vacation?
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

senex wrote: Fri Jun 07, 2024 4:08 pm This adds a great deal of uncertainty if you, say, have a major incident on vacation, or can't find a hospital that accepts the "allowed" amount. Are your losses unlimited in that case, and is a PPO any better?

My personal experience with PPOs is that out-of-network stuff tends to work itself out (no idea how). But with HDHP, it seems like I could lose unlimited money if injured on vacation?
I don't know why things would work out better with a LDHP PPO, but perhaps there's a reason or the plans are different. However, the No Surprises Act has made a big difference in how these things are handled. Essentially all emergency care (except ground ambulances) will cost you the in-network rate and for other subsequent care, they have to give you notice of how much things are going to cost and a list of available in-network providers.
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Re: HDHP always better than PPO? What am I missing?

Post by calvin111 »

Yes OP, your observation is correct. I have been using HDHP for last 10+ years and have no complains. There are some years when medical bills are high and hit the deductible, but there are many years there are no significant medical bills. So in total HDHP works out better.
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Re: HDHP always better than PPO? What am I missing?

Post by OrangeKiwi »

UALflyer wrote: Fri Jun 07, 2024 3:06 pm
OTOH, I contributed a tax-deductible $4850 to my HSA last year and I haven't used a dime of it.
This has nothing to do with the OP's situation, as the OP is looking at $15K+ in charges.
The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
I don't disagree at all. Depending on each person's specific facts, however, this lack of flexibility may or may not be meaningful. In other words, with regular and predictable spending, plenty of people max out their healthcare FSA's anyway, which makes them a no brainer. For other people, it makes sense to allocate less than the contribution maximum. Again, it's fact specific.
Assuming one has enough cash flow to pay for healthcare expenses as they come from after tax income AND max out HSA contributions, then there can be significant gains just from compounded equity returns for many decades before the HSA contributions are liquidated.
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

OrangeKiwi wrote: Sun Jun 09, 2024 2:10 am
UALflyer wrote: Fri Jun 07, 2024 3:06 pm
The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
I don't disagree at all. Depending on each person's specific facts, however, this lack of flexibility may or may not be meaningful. In other words, with regular and predictable spending, plenty of people max out their healthcare FSA's anyway, which makes them a no brainer. For other people, it makes sense to allocate less than the contribution maximum. Again, it's fact specific.
Assuming one has enough cash flow to pay for healthcare expenses as they come from after tax income AND max out HSA contributions, then there can be significant gains just from compounded equity returns for many decades before the HSA contributions are liquidated.
Let's assume one contributes the max to a family HSA (rounding to $8000) for two years prior to requesting reimbursement. Let's also assume for simplicity that interest rates don't change during that time, e.g. ~5% savings/MMF rate is available. What is that, about $1,200 in interest earned? and which can be used tax free for medical care. In NYC at my previous hospital/university a level 5 follow-up visit with ANY physician (all the rates are the same for a given insurer) was about $400. So that $1,200 represents 3 free office visits. Put another way, it reduces one year's worth of deductible by $1200. Or put yet another way, many would need to devote potentially $2000 in salary to pay for that in after-tax healthcare dollars. A knowledgeable person such as the OP would know to "invest" the cash (e.g. make sure only the minimum amount is earning zero in the default cash account) to get the maximum interest, and of course decide whether to risk fluctuating balances by investing in stock/bond funds.

And with respect to FSA vs HSA. I know people who indeed had planned medical expenses that did not materialize and lost the FSA money (including job changes) but of course there are those that got a "free" FSA from job changes too. But the biggest complaint I hear from FSAs is the "$&@#*@ reimbursement forms", admin delays, reimbursement getting denied for silly things (date not in the right place) etc. They are fixable but I know more than one person who simply said they would not bother with an FSA again. In contrast, HSA make it much easier to get your own money back. Just "take it". No third-party vetting. That of course has pros/cons if the IRS ever asks for receipts.

And personal anecdote, one year (2010?) I had assumed I would have health spending so maxed out the FSA (no HDHP was available to me). But we spent zero on health care that year. So wife and I went on a OTC buying spree at the "FSA Store": motrin, bandages, first aid kits, etc. All the stuff which was allowable at the time. We then made little gift baskets and care packages for some friends for Christmas. "What everyone needs in their medicine cabinet...Happy Holidays!". Looking back, I think that was illegal? I'm not sure what the law is for gifting away FSA purchases. :)

That's why threads like this are educational. Anyone can read the opinions and figure out what works best for them.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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neurosphere
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

bd7 wrote: Sat Jun 08, 2024 1:21 pm
senex wrote: Fri Jun 07, 2024 4:08 pm This adds a great deal of uncertainty if you, say, have a major incident on vacation, or can't find a hospital that accepts the "allowed" amount. Are your losses unlimited in that case, and is a PPO any better?

My personal experience with PPOs is that out-of-network stuff tends to work itself out (no idea how). But with HDHP, it seems like I could lose unlimited money if injured on vacation?
I don't know why things would work out better with a LDHP PPO, but perhaps there's a reason or the plans are different. However, the No Surprises Act has made a big difference in how these things are handled. Essentially all emergency care (except ground ambulances) will cost you the in-network rate and for other subsequent care, they have to give you notice of how much things are going to cost and a list of available in-network providers.
The no surprises act has been AMAZING, particularly in states (such as NY) that have additional protections. There are still some gotchas, though.

My current insurance does not provide any out of network care. And all our main physicians are out of network. Our negotiated cash rates are competitive with insurance company rates. So while our payments don't count towards the deductible, our savings on premiums more than makes up for fact that we pay out of pocket for our doctors. However, every facility (imaging for example), emergency room, and hospital in the area is in-network for such care. So it's only office visits where we have to make a decision whether to go out of network, and we choose to do so for convenience.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: HDHP always better than PPO? What am I missing?

Post by OrangeKiwi »

neurosphere wrote: Sun Jun 09, 2024 3:27 am
OrangeKiwi wrote: Sun Jun 09, 2024 2:10 am
UALflyer wrote: Fri Jun 07, 2024 3:06 pm
The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
I don't disagree at all. Depending on each person's specific facts, however, this lack of flexibility may or may not be meaningful. In other words, with regular and predictable spending, plenty of people max out their healthcare FSA's anyway, which makes them a no brainer. For other people, it makes sense to allocate less than the contribution maximum. Again, it's fact specific.
Assuming one has enough cash flow to pay for healthcare expenses as they come from after tax income AND max out HSA contributions, then there can be significant gains just from compounded equity returns for many decades before the HSA contributions are liquidated.
Let's assume one contributes the max to a family HSA (rounding to $8000) for two years prior to requesting reimbursement. Let's also assume for simplicity that interest rates don't change during that time, e.g. ~5% savings/MMF rate is available. What is that, about $1,200 in interest earned? and which can be used tax free for medical care.
I wouldn’t assume that. I would assume going all in on equities, such as VOO, due to quadruple tax advantage of HSA. And I wouldn’t assume only two years of compounding, because the premise is you have enough cash flow to pay for a few thousand dollars of expenses in a calendar year (out of pocket maximum). Over decades of investment, I would expect tens of thousands of dollars of tax free gains (since you can use it for Medicare Advantage premiums).
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

neurosphere wrote: Sun Jun 09, 2024 3:27 am
OrangeKiwi wrote: Sun Jun 09, 2024 2:10 am
UALflyer wrote: Fri Jun 07, 2024 3:06 pm
The FSA is only useful if you have a good idea what you'll be spending on healthcare in a year. It isn't very, um, flexible.
I don't disagree at all. Depending on each person's specific facts, however, this lack of flexibility may or may not be meaningful. In other words, with regular and predictable spending, plenty of people max out their healthcare FSA's anyway, which makes them a no brainer. For other people, it makes sense to allocate less than the contribution maximum. Again, it's fact specific.
Assuming one has enough cash flow to pay for healthcare expenses as they come from after tax income AND max out HSA contributions, then there can be significant gains just from compounded equity returns for many decades before the HSA contributions are liquidated.
Let's assume one contributes the max to a family HSA (rounding to $8000) for two years prior to requesting reimbursement. Let's also assume for simplicity that interest rates don't change during that time, e.g. ~5% savings/MMF rate is available. What is that, about $1,200 in interest earned? and which can be used tax free for medical care. In NYC at my previous hospital/university a level 5 follow-up visit with ANY physician (all the rates are the same for a given insurer) was about $400. So that $1,200 represents 3 free office visits. Put another way, it reduces one year's worth of deductible by $1200.
You have the same flaws in your calculations that I see on BH all the time.

With an employer provided HSA, your contributions are made periodicially throughout the year. So, even if you do leave all your HSA contributions in and pay for care with aftertax dollars (and 80%+ of HSA participants do not have the money to fully fund all their tax advantaged accounts, plus HSA's and then invest the HSA proceeds), your appreciation, if any, only applies to the dollars that are invested at that point. Hence, in your example, the earnings would be substantially lower than your calculations.

Most importantly, the HSA's do not have any miraculous investment options that aren't available in taxable accounts (in fact, with a lot of employer sponsored HSA's, the investment options are significantly more limited; you can obviously initiate transfers out, however). Even in the best case scenario for the HSA funds, whatever appreciation you earn there would be exactly the same as the appreciation that you'd have in a taxable account. So, regardless of which account would be invested, the appreciation, if any, would be the same; the advantage of the HSA is that you're not paying taxes on the gains (in return for less flexibility), which is very nice, but obviously represents a fraction of the amounts in your post.

Once again, the above also only applies to people who already max out all their tax advantaged accounts, invest the HSA funds long term and pay the expenses with aftertax dollars. An overwhelming majority of the population (over 80%) simply doesn't do this.

Overall, you have to look at the total cost (and ease of use, flexibility, etc...) of your options rather than focus on just one or two variables. It obviously makes no sense, for instance, to elect an HDHP with an HSA because you are solely focused on the flexibility of the HSA's and miss the fact that in your particular scenario, a conventional plan alternative would be cheaper and would remove some of the dangerous disincentives that HDHP's have to seeking care when you're under the deductible. In other words, you don't want to focus solely on gaining $100 in tax savings, while missing the fact that you're unnecessarily paying $200 for it.
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

UALflyer wrote: Sun Jun 09, 2024 8:55 am Once again, the above also only applies to people who already max out all their tax advantaged accounts, invest the HSA funds long term and pay the expenses with aftertax dollars. An overwhelming majority of the population (over 80%) simply doesn't do this.
I'm not sure what your point is when you repeatedly bring up what 80% of the population may or may not do. This is Bogleheads, we're all above average and most of us are above the 80th percentile, right? Yes, the maximum possible advantages of an HDHP/HSA are realized by those that max out everything and invest their HSAs long term. But it still can work very nicely for people not quite up to that level.
Overall, you have to look at the total cost (and ease of use, flexibility, etc...) of your options rather than focus on just one or two variables. It obviously makes no sense, for instance, to elect an HDHP with an HSA because you are solely focused on the flexibility of the HSA's and miss the fact that in your particular scenario, a conventional plan alternative would be cheaper and would remove some of the dangerous disincentives that HDHP's have to seeking care when you're under the deductible. In other words, you don't want to focus solely on gaining $100 in tax savings, while missing the fact that you're unnecessarily paying $200 for it.
To be clear, I'm not denying that a LDHP PPO might end up with lower overall costs in many in-the-middle circumstances even where the min and max scenarios favor the HDHP/HSA. I get that. My main sticking point with your pro-LDHP arguments are that it is very difficult to predict what those actual costs are going to be. I referred to everyone thinking that the grass is greener on their side because in both cases, the total costs are usually much lower than would be expected by a simplistic analysis.

Here's my personal example: We have a 3200/4000/20%/3200/6000 "Two tier embedded deductible" plan. I have spend $492.70 so far this year on total healthcare costs, but my deductible and OOP MAX (which are the same at the individual level) have been satisfied and I will not spend another nickel this year on healthcare no matter what happens (unless I go out of network or exceed my PT visits or something like that). You could call this a quirk or a loophole, but it is not an uncommon situation. If I had a LDHP with drug copays, I might think that a $125 copay on my Tier 3 drug was a good deal, not knowing that with the HDHP/HSA the effective copay on the same drug is about -$550. Yes, negative $550. I pay $10 for the drug and get credited with $560 or so towards the deductible. The HDHP/HSA incentivizes me to work the system in my own favor, not the insurance company. Again, this is not a unique, one-off and you just aren't going to get this sort of information by reading the plan documentation. Or at least I'm not. This is why you can read--in this thread and elsewhere--about how happy some people are with their HDHP/HSA even when they had significant medical expenses.

To summarize: I pay $492.70, I get to contribute $4850 to my HSA and save about $1500 in income taxes. This clearly works and undoubtedly wins any comparison. I'm clearly "in the middle", not maxed out and not at the minumum, when it comes to the amount of healthcare I'll need this year. YMMV, of course.
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Re: HDHP always better than PPO? What am I missing?

Post by BetterPaws »

The HDHP vs PPO calculation may be correct in the financial sense, but I caution two issues:

1. Network access. In my case, the HDHP plan and the PPO plan are from different insurers; they have their own in-network options. I have to choose the more expensive one that give me access to my preferred hospitals and providers.

2. Prior Authorization. Similar to the disadvantage of Medicare Advantage, many major insurers make (more) money by rejecting prior authorization requests and/or hold off payment. For a typical consumer, it is nearly impossible to know who is a better payor, though.
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Re: HDHP always better than PPO? What am I missing?

Post by investor4life »

I did a similar analysis as the OP several years ago (my deductible and coinsurance numbers were lower than OP's) and concluded that HDHP is better than PPO. This was borne out subsequently when I added up the expenses at the end of each year and compared under both scenarios.

But...it does take a certain mindset to write out those big checks until the deductible is met. Psychologically, I found myself postponing doctor visits (that I'd have made with a PPO and copay) to avoid those big initial bills but have now grown out of it.
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Re: HDHP always better than PPO? What am I missing?

Post by InvisibleAerobar »

BetterPaws wrote: Sun Jun 09, 2024 3:31 pm The HDHP vs PPO calculation may be correct in the financial sense, but I caution two issues:

1. Network access. In my case, the HDHP plan and the PPO plan are from different insurers; they have their own in-network options. I have to choose the more expensive one that give me access to my preferred hospitals and providers.

2. Prior Authorization. Similar to the disadvantage of Medicare Advantage, many major insurers make (more) money by rejecting prior authorization requests and/or hold off payment. For a typical consumer, it is nearly impossible to know who is a better payor, though.
Re: point 2), is it the case that most (and perhaps all) LDHP PPOs do not have prior auth? I ask, b/c this has been a real sticking point (the other being the really high ratio of allowed vs initially billed).

There is even indication that the currently denied prior auth get approved, but it really isn’t fun. Worse is when the HDHP delegates two different entities for prior auth, and one entity denies prior auth on a claim that the other entity states no prior auth is even needed. Whole thing can get kafkaesque.
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Re: HDHP always better than PPO? What am I missing?

Post by neurosphere »

InvisibleAerobar wrote: Mon Jun 10, 2024 6:08 am
BetterPaws wrote: Sun Jun 09, 2024 3:31 pm The HDHP vs PPO calculation may be correct in the financial sense, but I caution two issues:

1. Network access. In my case, the HDHP plan and the PPO plan are from different insurers; they have their own in-network options. I have to choose the more expensive one that give me access to my preferred hospitals and providers.

2. Prior Authorization. Similar to the disadvantage of Medicare Advantage, many major insurers make (more) money by rejecting prior authorization requests and/or hold off payment. For a typical consumer, it is nearly impossible to know who is a better payor, though.
Re: point 2), is it the case that most (and perhaps all) LDHP PPOs do not have prior auth? I ask, b/c this has been a real sticking point (the other being the really high ratio of allowed vs initially billed).

There is even indication that the currently denied prior auth get approved, but it really isn’t fun. Worse is when the HDHP delegates two different entities for prior auth, and one entity denies prior auth on a claim that the other entity states no prior auth is even needed. Whole thing can get kafkaesque.
Anecdotally as both a physician and consumer of healthcare, I have never noticed a difference in prior auth frequency/requirements in the states where I have worked (SD, NY, AL). Many/most LDHP PPOs most certainly have prior auths and likely at the same frequency as HDHPs. I assume it depends much more the actual insurer as opposed to the insurance "type". E.g. I can't imagine that the choice of bonze/gold/silver/platinum nor HDHP vs not is going to influence the prior auth rate for plans all issued by, for example, Blue Cross in a particular state. I'd be curious to see hard data on this, if it exists.
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Re: HDHP always better than PPO? What am I missing?

Post by InvisibleAerobar »

Thanks for the insight.
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Re: HDHP always better than PPO? What am I missing?

Post by SlurpleBrain »

When I turned 26 and also started a new job, I picked the HDHP, figuring I would rarely go to the doctor being in such good health at a young age. That first year I ended up going to the ER twice ($1k each visit), seeing my family doctor 4 times with multiple blood panels, and getting an X Ray. Didn't even hit my deductible, let alone the OOP.

Of course I didn't have anything in my HSA yet because I had just started. I burned through a lot of savings that year.

That experience slapped me so hard, I switched to the PPO option the next year and have stayed since. However now reading this and having much more significant savings I will have to review my plan options at my next open enrollment. Thanks everyone.
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Re: HDHP always better than PPO? What am I missing?

Post by JamesSFO »

It’s sad this is so complicated. I commend the OP for asking the question(s). I condemn our healthcare and insurance for making this so hard.

My finger-to-the-wind rule of thumb is that the HDHP wins out vs. “traditional” (“low-deductible”) if you have really high medical expenses or basically none.

Personal example, pre COVID, I almost never saw my doctor and even got a call threatening to kick me out of the practice if I didn’t get my annual physical. My HSA just accumulated. Clear win for the HDHP.

Now, post COVID, I’ve develop an impressive (sarcasm) array of long COVID health issues. My first prescription each year blows through the deductible. The HDHP again wins.
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Re: HDHP always better than PPO? What am I missing?

Post by grabiner »

SlurpleBrain wrote: Mon Jun 10, 2024 7:16 am When I turned 26 and also started a new job, I picked the HDHP, figuring I would rarely go to the doctor being in such good health at a young age. That first year I ended up going to the ER twice ($1k each visit), seeing my family doctor 4 times with multiple blood panels, and getting an X Ray. Didn't even hit my deductible, let alone the OOP.

Of course I didn't have anything in my HSA yet because I had just started. I burned through a lot of savings that year.
You could have gotten an immediate savings by contributing enough to the HSA to cover those doctor bills. If you were in a 22% tax bracket at the time, putting $3000 in your HSA and immediately taking it out would have saved you $660 in taxes compared to paying the bills out of pocket.

Or, if you contributed to the HSA over time, you could reimburse yourself for the $3000 you had already paid out of pocket once you had the money in the HSA. This would give you the same benefit, plus the FICA savings from using payroll deduction if your employer allows that and the FICA savings are an advantage. (Depending on how much you earn over your career, reducing your Social Security tax paid may sometimes be a net loss because it costs you more in future SS benefits than the payment saved.)

(This is independent of the benefit of having extra money in the HSA for savings for future medical bills.)
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Re: HDHP always better than PPO? What am I missing?

Post by qBxCA »

Great discussion, I've learned about comparing both options. I personally find the healthcare situation in the US too complicated to even think about the added complexity of the HDHP option.

I'm curious about how much the advantage of the HSA is reduced if most people invest in in cash or bonds, and/or if the overall fees are close or above 1% total
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

bd7 wrote: Sun Jun 09, 2024 3:19 pmI'm not sure what your point is when you repeatedly bring up what 80% of the population may or may not do.
There is a number of people on BH who have been consistently posting general advice without flagging the fact that their calculations only apply to the less than 20% (it's actually much less than 20%; the less than 20% figure applies to those who invest HSA balances, some/many of whom do not max out their tax advantaged accounts) of the population that maxes out all their tax advantaged accounts, invests HSA proceeds and pays healthcare expenses with aftertax dollars. Some of these posts are in this thread.
This is Bogleheads, we're all above average and most of us are above the 80th percentile, right?
Is this like over 90% of drivers who consider themselves above average?

There is obviously no scientific study on Bogleheads, but just reading through all the various retirement threads makes it quite apparent that most Bogleheads do not, in fact, max out their tax advantaged accounts. In fact, a number of posters in this thread who have posted about the benefits of the HSA's do not actually max out all their tax advantaged accounts. I've seen their posts in other threads on this subject.

Please also keep in mind that maxing out all tax advantaged accounts, paying healthcare costs with aftertax dollars and investing HSA proceeds isn't all about being able to afford to do so. There are some serious concerns that by not using up HSA balances people are exposing themselves to future adverse changes in tax laws, audit concerns about the backup documentation getting misplaced or becoming no longer readable, being told that what they have is not sufficient, etc...
Here's my personal example: We have a 3200/4000/20%/3200/6000 "Two tier embedded deductible" plan. I have spend $492.70 so far this year on total healthcare costs, but my deductible and OOP MAX (which are the same at the individual level) have been satisfied and I will not spend another nickel this year on healthcare no matter what happens (unless I go out of network or exceed my PT visits or something like that). You could call this a quirk or a loophole, but it is not an uncommon situation. If I had a LDHP with drug copays, I might think that a $125 copay on my Tier 3 drug was a good deal, not knowing that with the HDHP/HSA the effective copay on the same drug is about -$550. Yes, negative $550. I pay $10 for the drug and get credited with $560 or so towards the deductible. The HDHP/HSA incentivizes me to work the system in my own favor, not the insurance company.
There is a reason that I haven't been addressing this situation, which you keep advertising. The way that your health plan is processing this is a clear mistake and is specifically addressed in your summary plan description, which contains a section on copay cards and the like. If the health plan administrator audits it and catches it, they will seek to recoup the overpayments from you. In the meantime, there is a strong argument that this mistake is creating taxable income for you, which you are presumably not reporting.

I won't get into a discussion of further consequences to you, and am not saying that you've done something to have caused it. What I am saying is that this isn't a "feature" that you've discovered.
Last edited by UALflyer on Mon Jun 10, 2024 11:26 am, edited 1 time in total.
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Re: HDHP always better than PPO? What am I missing?

Post by invest4 »

If family is healthy and do not see or may struggle with costs that would be particularly relevant to them vs PPO, it is an easy choice imo for all the benefits already cited.

However, if there is ongoing illness or other recurring health issues, one must take a closer look and make an assessment for their specific situation and plan.
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

UALflyer wrote: Mon Jun 10, 2024 10:22 am In fact, a number of posters in this thread who have posted about the benefits of the HSA's do not actually max out all their tax advantaged accounts. I've seen their posts in other threads on this subject.
It is not necessary to be able to max out all tax-advantaged accounts for an HDHP/HSA to be a better alternative on average, although there are always going to be cases where in a particular year the HDHP is not the winner. That depends heavily on the plan particulars. If your situation is such that the deductible itself would totally wipe you out or cause you not to seek medical care when needed, then perhaps it isn't the appropriate plan.
There are some serious concerns by not using up HSA balances people are exposing themselves to future adverse changes in tax laws, audit concerns about the backup documentation getting misplaced or becoming no longer readable, being told that what they have is not sufficient, etc...
I don't think very many people have such concerns, that sounds like FUD to me....
The way that your health plan is processing this is a clear mistake and is specifically addressed in your summary plan description, which contains a section on copay cards and the like. If the health plan administrator audits it and catches it, they will seek to recoup the overpayments from you. In the meantime, there is a strong argument that this mistake is creating taxable income for you, which you are presumably not reporting.
Since you don't want to discuss it further, I'll just say that the US DC District Court disagrees with you on the copay issue--and this final decision is not being appealed by the current administration. Bug or feature, that's the law now. Even before this decision, the previous rule (2021 NBPP) did not prohibit insurance companies from accepting copay card assistance as satisfying the deductible--it merely allowed them to choose whether to do so. And as for the tax issue, I go in and I pay $10 and get my prescription. There's a long line of cases holding that rebates or discounts are not taxable income in a wide variety of circumstances. I'm going to worry about something else.

https://law.justia.com/cases/federal/di ... 246787/42/
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

bd7 wrote: Mon Jun 10, 2024 11:49 amIt is not necessary to be able to max out all tax-advantaged accounts for an HDHP/HSA to be a better alternative on average...
Obviously not, as the analysis is multi-factorial. It is, however, necessary to be able to max out all tax-advantaged accounts for you to count the tax benefit of the difference between the HSA's and healthcare FSA's in your overall benefit calculations. In other words, if you don't max out all tax advantaged accounts, and are simply shifting the contributions from a 401k to an HSA, there is no net tax benefit up front, so there is nothing for you to add to the calculations.

I won't provide a substantive response to the rest, except to say that you're on very dangerous grounds there.
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Re: HDHP always better than PPO? What am I missing?

Post by OrangeKiwi »

UALflyer wrote: Mon Jun 10, 2024 12:20 pm It is, however, necessary to be able to max out all tax-advantaged accounts for you to count the tax benefit of the difference between the HSA's and healthcare FSA's in your overall benefit calculations.
Why? Comparing just the FSA and HSA vehicles themselves (ignoring differences in the terms of the health plan associated with them), the HSA is the same as an FSA, except you never risk losing your money and at worst, it is slightly better than a 401k, and at best, the money and investment earnings are never taxed, at all.
UALflyer wrote: Mon Jun 10, 2024 12:20 pm In other words, if you don't max out all tax advantaged accounts, and are simply shifting the contributions from a 401k to an HSA, there is no net tax benefit up front, so there is nothing for you to add to the calculations.
Avoiding FICA tax would count as a net tax benefit in my perspective. Plus, having money under your control at Fidelity at all times with all of Fidelity's investment options available to you is a benefit compared to having it restricted to your employer's 401k custodian's options. Assuming I can afford to pay for the HDHP deductible and out of pocket maximum, my first priority would be contributing up to employer match in 401k, and then maxing HSA, and then maxing 401k.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

OrangeKiwi wrote: Mon Jun 10, 2024 12:41 pm
UALflyer wrote: Mon Jun 10, 2024 12:20 pm It is, however, necessary to be able to max out all tax-advantaged accounts for you to count the tax benefit of the difference between the HSA's and healthcare FSA's in your overall benefit calculations.
Why? Comparing just the FSA and HSA vehicles themselves (ignoring differences in the terms of the health plan associated with them), the HSA is the same as an FSA, except you never risk losing your money and at worst, it is slightly better than a 401k, and at best, the money and investment earnings are never taxed, at all.
Let's say that you don't have the money to fully max out all your tax advantaged accounts (meaning your and your spouse's 401k/403b/TSP and direct or backdoor Roth IRA's) while simultaneously maxing out your HSA. So, in order for you to max out your HSA, you need to reduce your 401K contribution by the amount needed to fund the HSA.

Doing so may be the right move, but when you calculate the tax benefit associated with an HSA, you have to look at the up front net tax benefit, if any. In other words, if, in round numbers, you could've saved $2K in taxes by making a 401k contribution, but will, instead, save $2K by making an HSA contribution, you shouldn't be adding $2K to your HDHP benefit calculations. You should be using $0, as your up front net tax liability has remained the same.

The above miscalculation is something that happens all the time. Likewise, people constantly fail to account for the healthcare FSA contributions that they couldn't made instead, which further reduces the net tax benefit of the HSA.
Avoiding FICA tax would count as a net tax benefit in my perspective.
As I mentioned above, this only happens if you are under the Social Security wage cap for the year, which for 2024 is $168,600/person. Most people under the wage cap probably can't afford to max out all their tax advantaged accounts.

Further, to the extent that you are under the Social Security wage cap for the year, pre-FICA withdrawals also reduce your Social Security benefits down the road. This may or may not be meaningful, but the point here is that there is a cost to doing so.
Plus, having money under your control at Fidelity at all times with all of Fidelity's investment options available to you is a benefit compared to having it restricted to your employer's 401k custodian's options.
This depends. Although there are plenty of terrible 401k's out there, there are also plenty of superb ones out there that give their participants' access to lower cost institutional shares of various funds, etc...
Assuming I can afford to pay for the HDHP deductible and out of pocket maximum, my first priority would be contributing up to employer match in 401k, and then maxing HSA, and then maxing 401k.
There's no problem with that. What I am saying is that in running the calculations between an HDHP and a conventional plan, you should only be looking at the net tax differences. Otherwise, you're moving money from your left to your right pocket and saying that you've suddenly gotten wealthier.
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

UALflyer wrote: Mon Jun 10, 2024 12:20 pm if you don't max out all tax advantaged accounts, and are simply shifting the contributions from a 401k to an HSA, there is no net tax benefit up front, so there is nothing for you to add to the calculations.
Agreed, mostly. However, to go back to the OPs case, he has $5200 in premium reduction and employer contribution--that's real. So any comparison needs to take all of those factors into consideration. If the differences in plan cost make it possible to increase pre-tax contributions, even if not maxed out, then credit for that should be figured in. So for the OP, even if he were not contributing anything before and only put the additional $5200 in an HSA, then the tax savings from that would count as benefit of the plan.
I won't provide a substantive response to the rest, except to say that you're on very dangerous grounds there.
I'm not sensing danger. The copay accumulator issue is done and dusted IMO. As for the tax issue, if you don't like the rebate/discount argument, I'll point out that even though the IRS finds ways to impute taxable income to a wide variety of things, there are also pretty good exceptions carved out for payments on behalf of a person directly to a provider of educational or medical services. It's possible this could change in the future, but the odds that they would pursue it retroactively based on current law are very low, IMO.

For those of you who have or are considering an HDHP/HSA plan but don't want to read the court decision I posted, here's a good explanation of the topic:

https://www.crohnscolitisfoundation.org ... r-programs

Basically the manufacturers of certain drugs will agree to subsidize a portion of the copay or deductible for their drugs when purchased through a participating pharmacy for a patient who has commercial insurance. Medicare has a separate rule that prohibits this practice. The result is that when you pick up your expensive drug, instead of paying the full copay or the entire cost (HDHP), you pay whatever the copay card mandates and the drug manufacturer reimburses the pharmacy for the balance. This is a windfall for the HDHP consumer as they get the drug cheaply and get credit towards their deductible. Some insurance companies decided they wanted the windfall for themselves and got the DHSS to issue a rule 2021 NBPP that allowed (but did not mandate) that insurance companies could use what they called a "copay accumulator" , or some other nice name, to keep the money for themselves and not credit the consumer toward their deductible. Thus it became a windfall for the insurance company.

2021 NBPP specifies that its enablement of copay accumulators is subject to state law and a number of states have passed laws prohibiting the practice. The court decision I posted overrules 2021 NBPP in the case of drugs that do not have an available generic equivalent. So for the case of an expensive Tier 3 or Tier 4 drug without a generic equivalent, the drug companies are free to promote their products in this manner.

To provide one other data point, our previous insurer (Anthem Blue Cross California) paid for these drugs and others 100% from the start, no deductible so no copay card. I was surprised by this since they don't appear on the list of covered preventive drugs. However, apparently they are allowed to do this and still meet the HSA eligibility requirement. This is not an ACA plan, this was a premium employer-provided plan with a total cost of $27,389 per year. Just another example of plans paying more than you expect.
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Re: HDHP always better than PPO? What am I missing?

Post by SmileyFace »

JamesSFO wrote: Mon Jun 10, 2024 7:18 am
My finger-to-the-wind rule of thumb is that the HDHP wins out vs. “traditional” (“low-deductible”) if you have really high medical expenses or basically none.
This pretty much sums up my conclusion based upon all the analysis I have done each time have have compared plans.
I never had to pay as much out of pocket for the premium as the OP however.
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Re: HDHP always better than PPO? What am I missing?

Post by BetterPaws »

A latter poster is correct. Prior Auth is insurance-dependent. My earlier point may be confusing; I was trying to say that my HDHP and PPO are from different insurance companies; the HDHP one is notorious for its Prior Auth policy.
InvisibleAerobar wrote: Mon Jun 10, 2024 6:08 am
BetterPaws wrote: Sun Jun 09, 2024 3:31 pm The HDHP vs PPO calculation may be correct in the financial sense, but I caution two issues:

1. Network access. In my case, the HDHP plan and the PPO plan are from different insurers; they have their own in-network options. I have to choose the more expensive one that give me access to my preferred hospitals and providers.

2. Prior Authorization. Similar to the disadvantage of Medicare Advantage, many major insurers make (more) money by rejecting prior authorization requests and/or hold off payment. For a typical consumer, it is nearly impossible to know who is a better payor, though.
Re: point 2), is it the case that most (and perhaps all) LDHP PPOs do not have prior auth? I ask, b/c this has been a real sticking point (the other being the really high ratio of allowed vs initially billed).

There is even indication that the currently denied prior auth get approved, but it really isn’t fun. Worse is when the HDHP delegates two different entities for prior auth, and one entity denies prior auth on a claim that the other entity states no prior auth is even needed. Whole thing can get kafkaesque.
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Re: HDHP always better than PPO? What am I missing?

Post by AnEngineer »

In my experience, it is not uncommon for HDHPs to be superior to alternatives available to the same person at both no medical spending and when hitting OOP max on both plans just considering premiums and employer HSA contributions (so that tax benefits are added gravy). In such a situation, the HDHP is a no brainer unless there are network differences or other significant plan feature differences, but these would have to do with the particular plan, not the fact that one is a HDHP.

The idea that one should spend several thousands of dollars in fixed upfront costs to reduce the marginal cost of some medical care makes no sense. In many cases the total cost with the HDHP will be lower. If you think you need to use a more expensive traditional plan so that you don't skip a necessary visit because of the possible expense you should instead look at the big picture. Additionally, the discussion about ER co-pays overlooks the fact that if there really is a medical issue when you go to the ER, even on a traditional plan you may pay much more than an ER copay as care occurs.

While traditional plans often (but not always) have a zone of medical spending at which they are better, it is hard to predict. Part is the unknowns of what and how much care and part is that in my experience it is impossible to get accurate costs or billing amounts ahead of time. Sometimes the numbers are high, sometimes they are low, sometimes they refuse, sometimes they are not legally allowed to say (or at least claim that). I've tried to estimate the zone where a traditional plan is better including the difference in how a traditional plan has co-pays and a HDHP gets the full bill, but I don't think there's a lot of real benefit in getting that granular given the uncertainties involved.

However, even if a traditional plan is somewhat likely to be cheaper at some point, one should consider the cumulative effects over several years. Maybe one year or two would have been lower cost with a traditional plan. However, you didn't know that ahead of time and all the other years you almost certainly more than made up for it.

There is also the somewhat perverse, but arguably beneficial, incentive of HDHPs when you hit the OOP max (which is easier to do and generally less costly overall in a plan worth having) in that you now have completely free medical care for the rest of the year and have incentive to quickly take care of the little things you might not otherwise worry about. This isn't a reason to get one, just an experience you'll likely have if you do.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

bd7 wrote: Mon Jun 10, 2024 2:24 pm
UALflyer wrote: Mon Jun 10, 2024 12:20 pm if you don't max out all tax advantaged accounts, and are simply shifting the contributions from a 401k to an HSA, there is no net tax benefit up front, so there is nothing for you to add to the calculations.
Agreed, mostly. However, to go back to the OPs case, he has $5200 in premium reduction and employer contribution--that's real. So any comparison needs to take all of those factors into consideration.
I agree with the concept, but please remember that it's not actually $5,200. To get to that number you're taking the difference between the annual HDHP and conventional premiums and adding in the HSA passthrough contribution. For an employer provided healthcare plan, plan premiums are deducted on a pretax basis. So, although in the OP's case the difference between the two is $3,700, his actual cost is $3,700 minus his blended tax rate.

This is also something that I see all the time, as people mix up pretax and post-tax amounts in their calculations.
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

AnEngineer wrote: Mon Jun 10, 2024 10:42 pm There is also the somewhat perverse, but arguably beneficial, incentive of HDHPs when you hit the OOP max (which is easier to do and generally less costly overall in a plan worth having) in that you now have completely free medical care for the rest of the year and have incentive to quickly take care of the little things you might not otherwise worry about. This isn't a reason to get one, just an experience you'll likely have if you do.
Correct this is! :sharebeer
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Re: HDHP always better than PPO? What am I missing?

Post by PNWpilot »

I've been following this thread for a few days, so I decided to compare my companies PPO and HDHP.

Using the $10,000 in medical costs I incurred in 2023, I would have saved just $200 with a HDHP. This includes premiums and employer contribution to HSA. It also assumes equal reimbursement rates between the two plans. I know that is unlikely, but I don't have any other data.

Insurance companies exist to make money. If the consumer "saved" a bunch of money consistently, the insurance companies would stop offering them. These plans are designed to lower your healthcare consumption. People are turned off by the high deductible and go to the doctor less. This leads to more profit for the insurance company.

I'll stick with the PPO. $200 savings is not enough to justify the HDHP in my mind.
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Re: HDHP always better than PPO? What am I missing?

Post by grabiner »

PNWpilot wrote: Tue Jun 11, 2024 2:07 pm Insurance companies exist to make money. If the consumer "saved" a bunch of money consistently, the insurance companies would stop offering them. These plans are designed to lower your healthcare consumption. People are turned off by the high deductible and go to the doctor less. This leads to more profit for the insurance company.
However, it is not zero-sum. If an insurance company expects to make a profit of $500 with an HDHP compared to a conventional plan, but you can save $2000 in taxes because of the HSA contribution, the HDHP may be better for both you and the insurance compan.y (The real cost here is that if you are deterred from getting needed care, you may save money but damage your health.)
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Re: HDHP always better than PPO? What am I missing?

Post by AnEngineer »

UALflyer wrote: Mon Jun 10, 2024 1:10 pmWhat I am saying is that in running the calculations between an HDHP and a conventional plan, you should only be looking at the net tax differences. Otherwise, you're moving money from your left to your right pocket and saying that you've suddenly gotten wealthier.
To this point, it seems most appropriate to use the difference between your current marginal tax rate and your retirement marginal tax rate to calculate the benefit for those who are not already maxing out retirement accounts. With a traditional 401k/IRA, you get a deduction now, but must pay taxes later. With an HSA (unless you already have a large balance) you pay no tax ever.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

AnEngineer wrote: Wed Jun 12, 2024 7:54 am
UALflyer wrote: Mon Jun 10, 2024 1:10 pmWhat I am saying is that in running the calculations between an HDHP and a conventional plan, you should only be looking at the net tax differences. Otherwise, you're moving money from your left to your right pocket and saying that you've suddenly gotten wealthier.
To this point, it seems most appropriate to use the difference between your current marginal tax rate and your retirement marginal tax rate to calculate the benefit for those who are not already maxing out retirement accounts.
No, you don't just invent a non-existent up front tax benefit and apply it to your calculations. This approach is simply indefensible. The only people who do that are the ones trying to come up with an excuse to get to a predetermined answer.

To the extent that you wish to calculate a net present value, there is a standard approach for doing so, which, among other things, requires you to select a discount rate.
The idea that one should spend several thousands of dollars in fixed upfront costs to reduce the marginal cost of some medical care makes no sense.
I am not entirely sure what you mean. When you purchase auto insurance, homeowner's insurance, etc..., you look at the features, the deductibles and the costs and then decide how much coverage makes sense in your situation. When you add comprehensive and collision coverage to your auto policy, or decide on a $1K or $5K or $10K or whatever deductible on your HO policy, you are making a decision to pay more or less in premiums up front in exchange for more or less coverage. In fact, with an auto or HO policy, you're frequently making this decision with far less information about the future than you do when you're comparing an HDHP vs. conventional health plan with several years of healthcare claims data and fairly stable range of healthcare utilization.
Part is the unknowns of what and how much care and part is that in my experience it is impossible to get accurate costs or billing amounts ahead of time. Sometimes the numbers are high, sometimes they are low, sometimes they refuse, sometimes they are not legally allowed to say (or at least claim that).
What you are saying here is correct and plays a substantial part in the usual complaints about HDHP's and is one of the differentiators between HDHP's and conventional plans. With an HDHP, you're paying 100% of the non-preventive healthcare costs until you get to the deductible, and you then have percentage based cost sharing. This means that until and unless you get to the out of pocket maximum for the year, under every HDHP out there you at all times have exposure to variable healthcare costs, which can be very difficult to determine up front.

This is also the part that people tend to enjoy about most conventional plans, as a substantial number of services covered by these plans are subject to a flat copayment. So, if you anticipate a straightforward office visit, but for whatever reason it becomes a lot more complex, with a conventional plan you pay the same flat copayment either way. With an HDHP, even after the deductible you pay a percentage based cost sharing bill that has suddenly gone way up. The same is true with most other healthcare services.

In theory, percentage based cost sharing is supposed to incentivize consumers to become more active participants in their care by shopping around. In practice, the situation is exactly what you've outlined, where shopping around is typically impractical. So, what the HDHP structure tends to do, particularly for people who anticipate staying under the deductible for the year, is to discourage them from obtaining care. This is the reason that I keep highlighting the fact that in situations where the HDHP vs. conventional plan financial calculations are likely to end up being close, folks would generally be better served by going with a conventional plan.
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Re: HDHP always better than PPO? What am I missing?

Post by grabiner »

UALflyer wrote: Wed Jun 12, 2024 8:39 am
AnEngineer wrote: Wed Jun 12, 2024 7:54 am
UALflyer wrote: Mon Jun 10, 2024 1:10 pmWhat I am saying is that in running the calculations between an HDHP and a conventional plan, you should only be looking at the net tax differences. Otherwise, you're moving money from your left to your right pocket and saying that you've suddenly gotten wealthier.
To this point, it seems most appropriate to use the difference between your current marginal tax rate and your retirement marginal tax rate to calculate the benefit for those who are not already maxing out retirement accounts.
No, you don't just invent a non-existent up front tax benefit and apply it to your calculations. This approach is simply indefensible. The only people who do that are the ones trying to come up with an excuse to get to a predetermined answer.

To the extent that you wish to calculate a net present value, there is a standard approach for doing so, which, among other things, requires you to select a discount rate.
The discount rate cancels out here, because you are comparing money that would be spent at the same time whether you contribute to an HSA or 401(k). The "future values" in the discussion below all correspond to the investment growth only; if you contribute $1000 in your HSA or 401(k) and investments double in value, you have $2000 to withdraw.

Suppose you will retire in a 12% bracket. If you contribute $1000 to your 401(k) now, and withdraw the future value of $880 for medical costs in retirement, that uses up the contribution. If you contribute $1000 to your HSA now, and withdraw the future value of $880 for medical costs in retirement, you still have the future value of $120 growing tax-free; this is just as good as if you had contributed an extra $120 to a Roth IRA/401(k).

If you spend the money in a future year while you are still working, the gain is at your marginal tax rate then. If you are in a 22% bracket when you have a medical bill of the future value of $780, and you don't have an HSA/FSA to cover the bill, you must spend the future value of $1000 that you would otherwise be able to contribute to a 401(k). So you give up the future value of $780 in the HSA to save the future value of $1000 in the 401(k), keeping an extra $220 in the HSA growing tax-free for retirement.

You do have to compare the other after-tax costs. If having the HDHP means that you spend $1000 more out-of-pocket on medical costs themselves (ignoring the HSA except for any employer contribution which reduces your out-of-pocket medical costs dollar for dollar, and counting any tax savings from an FSA or payroll deduction), that costs you the present value of $1000, it is $1000 less you can contribute to your Roth account, or $1282 less you can contribute to your 401(k) which would have cost you $1000 out of pocket. So the HDHP in this situation would cost you $1000 in present value, before considering the tax benefits of your own contribution to the HSA.

My normal methodology for the HDHP versus conventional plan comparison is to start with the day-one cost: if you never see a doctor for anything except a free annual checkup, how much will you pay after tax? (For some heavily subsidized plans such as the US government plans, the day-one cost of an HDHP could be negative; the employer contribution to your HSA and the tax savings on your own contribution exceed the after-tax premium.) Now consider how much you will pay for medical expenses, reducing this by the tax savings on an FSA if you can use one. At what levels of medical costs does the HDHP come out ahead? For highly subsidized HDHPs (the US goverment plans are in this category in most tax brackets), the answer can be at all levels; otherwise, it's likely that the HDHP comes out ahead if you are well under or well over the deductible but not if you are close to it.
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Re: HDHP always better than PPO? What am I missing?

Post by UALflyer »

grabiner wrote: Wed Jun 12, 2024 9:29 amThe discount rate cancels out here, because you are comparing money that would be spent at the same time whether you contribute to an HSA or 401(k).
Take a look at the post to which I responded. The person was suggesting using "the difference between your current marginal tax rate and your retirement marginal tax rate to calculate the benefit for those who are not already maxing out retirement accounts." If you wish to do so, you have to select a discount rate and perform NPV calculations.

You cannot say that your current blended tax rate is X%, your anticipated retirement blended tax rate is X%-10%, so, although there is no net tax benefit up front, you're just going to use that future 10% benefit without running NPV calculations, which require a discount rate. Again, you can't just invent an up front tax benefit where there is none.
My normal methodology for the HDHP versus conventional plan comparison is to start with the day-one cost: if you never see a doctor for anything except a free annual checkup, how much will you pay after tax?
I agree with this approach (provided that you don't stop there. Next, you have to determine what happens when you meet the HDHP deductible, at which point it becomes structurally similar to a conventional plan; from that point forward, you can really see how various usage impacts each plan). The problem is that plenty of people (including you, in some of your prior posts) do not calculate this correctly. So, they fail to account for the fact that with an employer provided health plan, healthcare premiums come out on a pretax basis (so, a more comprehensive healthcare plan with higher premiums doesn't cost you the difference between it and the plan with lower premiums; the net difference is lower, as the premiums are withdrawn on a pretax basis), the tax reduction associated with an HSA has to be reduced by the tax reduction associated with an FSA (up to whatever level it would make sense to fund), there is frequently very little or no up front net tax advantage to an HSA (as people don't have the money to max out all their tax advantaged accounts, plus an HSA, so they just reallocate their 401k contributions and the like to an HSA), etc...
For some heavily subsidized plans such as the US government plans...
This doesn't have anything to do with the calculations, but you've been posting this extensively, so I thought I'd address it. When compared to the private market, the US government healthcare plans are not heavily subsidized. The US government pays roughly 72% to 75% of the healthcare premiums (and less so for part time employees). In the private sector, it is very common for employers to pay 75%-85%+. So, the federal government subsidy is actually at the lower end of the market range out there.

Since the federal government employs so many people, however, it is able to get very advantageous pricing on the plans. So, although the subsidy itself is not particularly generous, because the overall plan pricing is highly competitive, the net cost to the employees is reasonable. Likewise, because of its size, the government is able to offer far more health plans, which means that federal employees have more choices.
For highly subsidized HDHPs (the US goverment plans are in this category in most tax brackets), the answer can be at all levels; otherwise, it's likely that the HDHP comes out ahead if you are well under or well over the deductible but not if you are close to it.
You and I have previously had discussions of this, and I've posted specific examples and calculations showing that your statements to this effect are objectively incorrect.
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Re: HDHP always better than PPO? What am I missing?

Post by bd7 »

UALflyer wrote: Wed Jun 12, 2024 8:39 am In theory, percentage based cost sharing is supposed to incentivize consumers to become more active participants in their care by shopping around. In practice, the situation is exactly what you've outlined, where shopping around is typically impractical.
Years ago, perhaps not too many years, it could be very difficult to shop healthcare prices. I can't speak for all states but in CA it is the state regulations, and now in all states the No Surprises Act, that have made it quite a bit easier. And if you are willing to view your insurance company as neither friend nor foe but just another player in the game, you may find that they are very helpful as well in assisting you with your shopping. This is especially true with imaging--they all seem to have some real hang-ups with imaging.

I've been subject to abuses in the past, like waiting two weeks for an "estimate" for an ultrasound that was $400-600 (very expensive) and then getting a bill for $800. Also, some providers will give HDHP patients two estimates--one being the insurance allowed rate if you go through your insurance and then a lower rate if you pay upfront--but you will not get a coded invoice or anything that might permit you to file a manual claim. Another nice trick is a local hospital buying a standalone clinic and then tacking on a $60 "facility fee" to every office visit even though you literally only used the office and the only instruments involved were a scale and a blood pressure cuff.

These days I don't see that difficulty. DW needed a brain MRI, we went to a good local independent radiology group and ended up paying $104.17 (20%). No drama, not much money. If some other provider had refused to disclose or cap costs or created any problems, as the HDHP consumers we'd be out the door or on the phone to the insurance company.

The most recent change (proposed or final, IDK) is going to be a blanket prohibition of putting medical debt on credit reports. This will prompt all providers to tell you the cost upfront in the process of collecting it from you. So anyway, other than the inevitable mistakes that will be made, getting upfront costs seems pretty easy to me. YMMV.
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