PPO, HMO, or HDHP/HSA? (All premiums covered)

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curiouskitty
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PPO, HMO, or HDHP/HSA? (All premiums covered)

Post by curiouskitty »

I have an option between several employer-provided health insurance plans in CA.

1. Blue Shield PPO 500 Premier
$500 deductible, 20% copayment, $3500 annual copayment max
2. Blue Shield HMO 30
No deductible or copayment, $3500 annual copayment max
3. Blue Shield PPO Savings 3000 (with Wells Fargo HSA)
$3000 deductible, 0% copayment after deductible, $4500 copayment max

If I choose the HDHP/HSA option, then the company will contribute $100/month to the HSA. The Wells Fargo HSA has a $4.25/month fee which the company may or may not cover, I'm not sure.

The employer covers all health insurance premiums. I am only 25, take no medications, and rarely go to the doctor. I am considering the HSA/HDHP option but I'm not sure if it's worth it when I get the other plans for the same premium (minus the HSA account + contributions).

Thanks!
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grabiner
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Re: PPO, HMO, or HDHP/HSA? (All premiums covered)

Post by grabiner »

curiouskitty wrote:I have an option between several employer-provided health insurance plans in CA.

1. Blue Shield PPO 500 Premier
$500 deductible, 20% copayment, $3500 annual copayment max
2. Blue Shield HMO 30
No deductible or copayment, $3500 annual copayment max
3. Blue Shield PPO Savings 3000 (with Wells Fargo HSA)
$3000 deductible, 0% copayment after deductible, $4500 copayment max

If I choose the HDHP/HSA option, then the company will contribute $100/month to the HSA. The Wells Fargo HSA has a $4.25/month fee which the company may or may not cover, I'm not sure!
Compare the costs under various scenarios. The PPO/HMO is not an easy comparison to make, because it depends on how much you would be likely to go out of network, and convenience issues (in an HMO, do you need to get a referral from your primary care physician every time you see a specialist, and is that a waste of time for your ongoing care?)

But the PPO/HDHP is a fairly easy comparison. Your company contributes $1200 to your HSA, and you can contribute another $1850 on your own. The $1200 is nearly free money (it is taxable in CA), and the $1850 is tax deductible (but not in CA). If you are in a 9.55% CA and 25% federal bracket, then the employer HSA contribution is worth $1085, and your own HSA contribution is worth $413 (compared to the value of putting the same money in a Roth IRA, for example).

Thus your day-one benefit is $1598, or $1547 if you have to pay the $4.25 fee. That is the amount you will save with the HDHP if you do not see the doctor for anything except an annual checkup (which most HDHPs cover in full).

Now, you subtract any other medical expenses. If you have $2000 in expenses, then the PPO will cost you the $500 deductible plus 20%, which is $800, so even if that happens, the HDHP comes out ahead. If you have $3000 in expenses, then the PPO will cost you $1000, so the HDHP comes out slightly behind. If you have more than $3000 in expenses, the HDHP starts to come out better again because of the lower copayments; in the worst case, if you get cancer or get hit by a truck, the PPO costs $3500 and the HDHP costs $4500, so the HDHP comes out ahead again.
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archbish99
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Post by archbish99 »

Sounds a lot like my options at work, except they're phasing out the PPO option after 2012. We're staying on the PPO until the bitter end, because my wife and I have enough chronic conditions that we have to assume the high end of the probabilities. (And Lord willing, there'll be a childbirth before the end of 2012, too, which isn't cheap.) In our particular menu, the PPO is the better deal at the high end of the scale.

That said, the HSA looks like a good deal for most of the spectrum -- even if you were to max it out, the long-term benefit of the tax-free growth is not negligible.

Skewing things even more, if your employer allows HSA contributions from your paycheck, it's not only tax-deductible, I believe it avoids payroll taxes as well.
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interplanetjanet
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Post by interplanetjanet »

archbish99 wrote:Skewing things even more, if your employer allows HSA contributions from your paycheck, it's not only tax-deductible, I believe it avoids payroll taxes as well.
On the other hand, if you have available to you and can make use of an FSA, you not only avoid payroll taxes but may have superior state tax treatment as well (FSAs avoid California state tax, HSAs do not). I'm not sure of how many states this is true for.

-janet
BruDude
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Post by BruDude »

If you can change elections each year and are healthy now, I'd take the HSA plan. You can always change plans at the next open enrollment if you have a health change. The cost of prescriptions under the other plans should also factor into your thinking. An HMO plan will severely limit the provider network you can use.
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dm200
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Post by dm200 »

One thing to check (if it matters) is which physicians participate in the HMO vs the PPO. Just because they are in one, do not assume they are in the other.
MoneyOCD
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Post by MoneyOCD »

interplanetjanet wrote:
archbish99 wrote:Skewing things even more, if your employer allows HSA contributions from your paycheck, it's not only tax-deductible, I believe it avoids payroll taxes as well.
On the other hand, if you have available to you and can make use of an FSA, you not only avoid payroll taxes but may have superior state tax treatment as well (FSAs avoid California state tax, HSAs do not). I'm not sure of how many states this is true for.

-janet
FSA does not allow to accumulate money, you need to spend each year what you put in, and Employer in OP's case will not contribute anythng.
FSA is not that attractive unless you know for sure how much money you will spend each year for healthcare.
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archbish99
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Post by archbish99 »

Agreed. FSAs are useful for getting a tax break (and effectively 0% financing for a year) on well-known large expenditures, or areas where your spending is very regular and you can predict an annual floor with reasonable accuracy (e.g. my wife's contacts). It's not a substitute for an HSA, which allows you to save over time for the unpredictable expenses (ER visits, etc.).
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curiouskitty
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Post by curiouskitty »

Thank you everybody for your responses. I did end up electing to go with the HSA option. Since there are only five more months in the year, it made sense to me to take advantage of the fact that I could put in the maximum contribution for this year and next year.

A special thanks to grabiner for walking me through the math. I had done a similar comparison but it's always reassuring to see that I am not missing anything major!
madbrain
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Post by madbrain »

Employers "participate" in the FSA in the sense that they give you an advance on the money you planned to save for the year. If you get terminated, whether voluntarily or not, and you have already used the entire FSA money, you do not have to pay back any of the difference. The deficit is funded by other employees who overfund their FSAs. It is sort of an "exit bonus".
If you ever plan on quitting, or think you are on a layoff list, make sure you fully spend your FSA first. For example by ordering refills for as long as possible, moving up routine appointments, etc. I have used this strategy 4 different times already to my advantage. Most recently in the last week, having just exhausted my FSA last week, and getting laid off yesterday.

The trick is to budget your FSA as accurately as possible, on the low side, so you never leave any money on the table at the end of the year.
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Post by madbrain »

On the original topic, if you have any notable issues, the HMO are usually the least expensive choices. I have been with Kaiser for a decade. I didn't have many issues then but now I take 7 daily prescriptions including 3 brand name drugs. Also including dietary supplements, I take about my age in dailly pills. My partner has 1 brand name and another 2 generic.
We have about 50-80 blood tests annually each (usually in groups of 8+ per lab visit), all with $0 lab copay.

The prescription copays alone are way higher than all the non-Kaiser plans I have seen, especially for brand name. It was never even close. Kaiser has an annual $1500 out-of-pocket (though med copays don't count towards it, only doctor visits, ER, etc).

And of course monthly premiums are much lower for the HMO.
On first approximation, it might not matter that much when the employer picks up approximately 80% of the premium.

However the 80% employer contribution to my partner's coverage is counted as income to me, and gets taxed at about 40% including all payroll taxes (federal, SS, medicare, state income tax, state disability, etc). It's actually about 46% marginal, but some taxes like SS eventually max out, so it goes back down on annual basis.

The math works like this. If I choose Kaiser, my partner's premium is about $400/month. The employer pays $320 towards his cost.
The government taxes this $320 to me as income, so I owe 40% of that or $128 in extra taxes.
Then I am responsible for the remaining $80 of his coverage. This also has to be paid with after-tax money since we can't be married. It takes $133 of gross income to get $80 after-tax.
So, adding my partner to my Kaiser HMO coverage reduces my net payroll by $261/month, instead of $80 if we could get married.

Then look at the numbers with PPO premiums which would be about $600/month.
Employer contribution = $480 . Taxes on this employer contribution = $192.
Employee contribution = $120. It takes $200 of gross income to generate that $120 after-tax.
So, adding my partner to a PPO reduces my net payroll by $192 + $200 = $392/month. Instead of $120 if we could get married.

That's a long way of saying - employer healthcare premiums cost 226% more for same-sex partners due to taxes.

And of course my partner's copays / coinsurance would be higher with the PPO in addition, and I'm not allowed to use FSA money for his healthcare expenses, only mine. So, the tax picture only gets worse, and the PPO is the worst buy by a very long shot.
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