Andrew D. Tucker, JD, CPA, CFP
John K. McGill, JD, MBA, CPA
When it comes to us making recommendations to our clients, few show more resistance than when we recommend converting to a high deductible health plan (HDHP). The term alone invokes fears of spiraling health-care expenses and looming financial catastrophe in the event of a medical emergency. However, this is a fundamental misconception. The key difference between traditional health insurance and an HDHP has little to do with changes in actual health-care expenses-rather, it has to do with the adjustments in how medical expenses are incurred when adopting one of the plans.
What distinguishes HDHPs?
Maintaining coverage under an HDHP is the main requirement to fund tax-deductible contributions to a health savings account (HSA). Three characteristics distinguish an HDHP from a traditional health insurance policy:
• It must have a minimum deductible of $1,300 for employee-only coverage and $2,600 for family coverage in 2016.
• It must have an out-of-pocket maximum of $13,100 or less for family coverage in 2016.
• It may not provide "first-dollar coverage" until the deductible is met for anything other than wellness expenses. This third point is the biggest source of confusion for most doctors and the biggest reason most don't switch when they should.
First-dollar coverage means that insurance coverage is provided without meeting the deductible. This is the type of health insurance most doctors are familiar with, with copays for both doctor visits and prescriptions. HDHPs are not permitted to provide first-dollar coverage. As a result, office visits (with the exception of annual wellness physicals) and most prescriptions cannot be subject to a copay prior to the deductible.
Factors to consider in switching to an HDHP
So how could an insurance policy with no copay be better than a policy with copays? Because health-care and health insurance expenses have hemorrhaged in recent years, and the premiums on copay policies are increasing dramatically. As policies with robust benefits begin to be phased out, the premiums for new copay policies replacing those older copay policies are dramatically more expensive.
Compare this with the HDHP plan. While the deductible is appreciably higher than the traditional low deductible policy, the tradeoff is that premiums are often significantly lower than low deductible counterparts. As a reference point, a doctor recently experienced a premium savings of $270 per month for a family of four. While this level of saving is not guaranteed, it is not uncommon for those shifting away from ultra-low deductibles ($500 to $700) compared to the current exchange deductibles ($4,000 to $12,000).
In addition to the cheaper premiums, HDHPs also allow doctors to fund tax-deductible contributions into an HSA. Since the deduction is not available without coverage under an HDHP, the tax savings must be considered in determining whether switching to this type of policy is cost effective. The same doctor mentioned above has a combined 45.6% top marginal tax bracket. A contribution of $6,750 into his family's HSA (the maximum in 2016) will result in $3,078 in tax savings that would have been unattainable without the HDHP.
Putting it all together
Consider the example above. The doctor will save $3,240 annually ($270 per month) in health insurance premiums. When adjusting for income tax deductibility of the premiums, the doctor experiences a net premium savings of $1,763 per year. Additionally, the doctor will reduce income taxes with an HSA contribution by $3,078 per year. This results in a total savings of $4,841 per year. This means that the doctor has to incur $4,841 of medical expenses before breaking even with a copay policy. Combined with the fact that the patient pays a reduced network PPO fee for the visit that accumulates toward his deductible (that acts like a larger "copay" since the patient is paying a reduced fee for treatment), it becomes clear that this doctor is better off in the HDHP.
This isn't a one-size-fits-all solution to health-care issues. However, if you have avoided high deductible health plans due to concerns about the expense, take a look at the numbers, calculate the savings, and determine if an HDHP is right for you.
Andrew D. Tucker, JD, CPA, CFP, and John K. McGill, JD, MBA, CPA, provide tax and business planning exclusively for the dental profession. Mr. McGill publishes the McGill Advisory newsletter through John K. McGill & Company Inc. Both are members of the McGill & Hill Group LLC, the one-stop resource for tax and business planning, practice transitions, legal advice, retirement plan administration, and CPA and investment advisory services. Visit mcgillhillgroup.com.