High Deductible vs. Catastrophic Health Insurance Plan

Every year it seems we are faced with rising costs of health insurance. So when it comes to choosing the right health insurance plan, it's very tempting to choose the plan that has the smallest monthly premium.

However, those plans with the smallest monthly premiums are also the plans that have the highest out-of-pocket costs, too. Depending on your family's health, they may be a smart choice, or they may be a health and/or financial disaster for you.

The name "catastrophic" is supposed to refer to the fact that if you get very sick or injured badly—a catastrophic event—then you will have at least a minimum of health insurance to help you pay the exorbitant amount of money such an event will cost you. "High deductible" and "catastrophic" health insurance plans are two names for the same type of plan.

Here is some background information on how these catastrophic or high deductible insurance plans work and how you can decide if they are the right, or wrong choice, for you.

How They Work

The best way to figure out if a high deductible health insurance plan is the right choice is to understand how they work.

Let's begin with some definitions:

• A premium is your monthly payment for your insurance.
• A deductible is how much you will pay for your own medical care before the insurance company pays anything at all.
• There are two kinds of copays. The first is like a "get in the door" fee—it's usually $20-$60 or some amount that mostly makes you think twice about making that appointment or buying that drug. It means you realize that your healthcare isn't free—that first copay just kick-starts the rest of the payment process. The second kind is a percentage copay, like 80/20, also called "coinsurance," meaning that once you are past your deductible limit, you will pay 20% of the rest of the bills and your insurer will pay 80%.

Your health insurance company wants to collect as much money as it can from you and pay out as little money as possible on your behalf. They are in business to make a profit, so their formula is take, take, take—but don't pay too much.

The problem is, if you can't afford the premiums (the payments you make each month) then you won't buy their insurance at all. So they would rather give you an option that will cost you less in premiums each month and require you to pay more out of your pocket when you do need medical services. That means they won't have to pay anyone on your behalf until a certain, very high threshold is met.

So insurance companies set up a variety of plans that require you to assess your "risk"—the chances you will get sick or injured, the chances you will need to tap into your insurance, the chances they will need to pay too much for your medical problems.

A regular plan, with a higher premium but lower deductible, means you will pay the insurance company more and they will pay more on your behalf. You have decided that your risk of getting sick or hurt is high enough that it's worth it to pay more each month.

A high deductible, catastrophic plan with a very high deductible and lower premium means you will pay a lot more money initially before the insurance company begins to pay out on your behalf at all. You have decided that your risk of getting sick or hurt is lower and you can save some money by not paying so much money for insurance.

Examples

A regular insurance plan might ask you to pay $1,000 a month to the insurance company, and your deductible is $500. Once you've already paid out that deductible, when you go the practitioner and they write a prescription, the insurance company will tell you, "Okay patient—you pay a copay of $25 for your healthcare provider visit and $15 for your prescription and we'll pay the rest." At the end of the month, if you don't see the practitioner any more than that, then it has cost you $1,040 for your healthcare that month.

A high deductible/catastrophic insurance plan might ask you to pay $500 a month to the insurance company, but your deductible is $2,500. Same scenario—you go to the healthcare provider and they write a prescription. Only this time, you have paid for the office visit ($100) and for the drug ($15)—but because your deductible is so high, you haven't spent it yet that year, so the insurance company won't pay anything yet on your behalf. Your total cost that month is ($500 premium + $100 + $15 = ) $615.

Now, if you only have to go to the healthcare provider one time in that month, then it turns out your high deductible plan was a better deal for you because if you had paid for the more expensive health plan, then you would have spent $435 more than you paid with your catastrophic/high deductible health plan.

However, suppose your son falls off his skateboard. He suffers a concussion that knocks him out. Worse, he breaks his arm in three places, which requires surgery to set his arm and pin it so it will heal well. The expense! Those initial copays will be the least of your worries. You'll pay that entire $2,500 plus the 20% additional—potentially many thousands of dollars. With a regular health insurance plan, your out-of-pocket amount would be far less.

How to Decide If a Catastrophic Plan Will Work for You

If you and your family members are relatively healthy and don't require many healthcare provider visits, hospital stays or drug prescriptions in a year, then a high deductible plan might work very well for you.

On the other hand, if you and your family members have any medical challenges, like high susceptibility to catching whatever bug comes down the pike or a chronic condition of any type, then a high deductible health plan will probably cost you more from your pocket in the long run.

If you do think a high deductible/catastrophic health insurance plan will suit your needs, then you can save even more money by using a health savings account (HSA). HSAs allow you to save money, tax-free, to pay for any sort of medical expense. Unlike other deductible savings accounts, the money does not go away at the end of the year if you don't spend it, and it can be used any time during the rest of your life for medical expenses. Further, it's portable, meaning you can change jobs or retire and the money you have saved will continue to be available to you.