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Choosing the right health insurance policy involves knowing the benefits and limitations of your options and giving some thought to your individual and family requirements. Two of the most popular options are compared here.
Preferred provider organizations (PPOs) are a popular type of health plan in which the group contracts with a network of healthcare providers and hospitals to take care of enrollees’ essential healthcare needs in exchange for a monthly premium and varying amounts of deductibles and copays. Enrollees may also use out-of-network providers for an additional fee.
A high-deductible health plan (HDHP) means that the enrollee is responsible for a deductible of at least $1,400 for individuals and $2,800 for families each year. In many cases it allows the enrollee to open a health savings account (HSA) and save and invest pretax dollars to cover medical expenses. In 2020 47% of U.S. employees were enrolled in a PPO, while 31% had an HDHP with a savings option, according to the annual national Employer Health Benefits Survey conducted by the Kaiser Family Foundation.
Key Takeaways
- More than half of American employees are now in HDHPs, and some are given no choice by their employers.
- Unlike traditional health insurance, HDHPs have high out-of-pocket expenses, such as deductibles and copays, which may not be compensated for by the somewhat reduced premiums.
- Opening an HSA to save for healthcare expenses is a benefit of an HDHP and allows people to use pretax dollars to pay for healthcare expenses. There is no tax on the interest in these accounts, and they can roll over from year to year.
- PPOs may be a better bet for people expecting frequent medical care and to cover unexpected expenses. Health maintenance organizations (HMOs) are another option that may be cheaper than PPOs, but also may have further limitations.
HDHP Plus HSA: Benefits and Limitations
An HDHP usually has a lower monthly premium fee and significantly higher deductibles and copays. In many cases it allows you to also create an HSA at a bank or an investment firm. Here you can save pretax dollars, deducted from your paycheck, to cover deductibles, copays, and qualified items not usually covered by PPOs or other health insurers.
For healthier, younger workers who do not expect much in the way of medical expenses, an HDHP seems to offer many economic advantages. There are lower premiums and a chance to save pretax dollars to cover such expenses as acupuncture, ambulance service, blood sugar test kits and strips, chiropractic therapy, hearing aids and batteries, infertility treatments, X-ray fees, dental and vision exams and treatments, and plan coinsurance fees.
If the dollars saved in an HSA are not needed, they can be rolled over from year to year. An HSA can become an effective investment account because the interest is tax free.
There’s a downside to having an HDHP: At least the first $1,400 in expenses must come out of your own pocket—and that can discourage the use of medical care. A recent study found that people who had to spend $1,000 or more in deductibles were less likely to seek emergency room care for chest pain and were sicker when they did show up for care compared with patients in health insurance plans with an annual deductible of $500 or less.
PPOs: Benefits and Limitations
PPO policies sold at healthcare.gov must cover essential health benefits, and most policies offered by employers also cover essential benefits. These include outpatient and emergency services, hospitalization, maternity and newborn care, prevention and chronic disease management, and many others.
Traditional health plans, such as PPOs and health maintenance organizations (HMOs), have higher premiums than HDHPs. For example, in 2020 annual worker premiums for PPOs averaged $1,335 for an individual and $6,017 for a family. HDHPs averaged $1,061 for an individual and $4,852 for a family. Worker premiums for HMO plans were somewhat lower than PPOs because HMOs generally limit care to doctors who work for or contract with the organization and cover out-of-network care only in an emergency. HMO premiums are still higher than HDHPs.
The higher premiums of a PPO or HMO may discourage low-income families from participating in traditional healthcare plans. However, studies have found that HDHPs also have a disproportionately bad economic and health effect on low-income families. People who are strapped for cash may in general delay care until they are sicker and harder to treat.
Best Choice for You
While the up-front costs of a PPO might be higher, it can be worth it if you need significant medical care or end up with something unexpected. The PPO network of contracted doctors gives you a place to go for care and may encourage development of a relationship with providers. Knowing your care is mostly covered by insurance may encourage you to go earlier and more often to identify and take care of health problems before they worsen.
If you and your family are healthy and seldom use medical care, an HDHP with an HSA might be able to save you money. It helps to be well organized financially, so you can save for expensive items, such as dental work or hearing aids, while depositing sufficient dollars in the HSA to cover deductibles and unexpected expenses. High-income individuals and families who are able to afford the deductible and can cover emergency bills may especially benefit from the tax advantages of an HSA.
| HSA vs PPO | |||
|---|---|---|---|
| CATEGORIES | HDHP + HSA | PPO | |
| Basics | In an HDHP the enrollee is responsible for a deductible of at least $1,400 for individuals and $2,800 for families. Enrollees may be eligible for an HSA to save pretax dollars to pay for the deductibles and qualified healthcare expenses. | A PPO is a type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use participating providers but can use hospitals and providers outside of the network for an additional cost. | |
| Eligibility | HDHP enrollees are eligible to save pretax dollars in an HSA. For 2021 individuals can contribute up to $3,600. The family limit is $7,200. For age 55 and older, making up to $1,000 in catch-up contributions is permitted. | PPO policies can be offered through an employer or purchased by individuals at healthcare.gov. Enrollees can use network providers at no extra cost. | |
| Premiums | Monthly premiums for HDHPs are generally lower than for other health plans. | PPO premiums may be higher, depending on the deductible and other out-of-pocket costs. | |
| Out-of-Pocket Limits | For 2021 the maximum out-of-pocket limit, excluding premiums for covered services from in-network providers, is $7,000 for an individual and $14,000 for a family. | The out-of-pocket limit for a healthcare.gov plan can’t be more than $8,550 for an individual and $17,100 for a family. | |
| Provider Network | None | Contracted health providers and hospitals | |
| Benefits | An HSA can be used to fund qualified medical expenses. These include acupuncture, ambulance service, blood sugar test kits and strips, chiropractic therapy, hearing aids and batteries, infertility treatments, X-ray fees, dental and vision exams and treatments, and co-insurance plan fees. | The PPO network helps guide enrollees to healthcare providers, who must meet a certain standard to be accepted into the network. | |
| Limitations | Studies show that the high deductible in an HDHP can discourage enrollees from using medical care. Those who don’t sufficiently fund their HSAs can be caught short. | Coverage is limited to health and medical conditions and providers listed in the policy. It may not include things such as dental, vision, and other services. | |
Sources: Internal Revenue Service (IRS) and Healthcare.gov