Should I Join a High Deductible Plan in the FEHB Program?

Several national companies and some local HMO organizations now offer High Deductible or Consumer-Driven plans. Aetna offers such plans in almost all parts of the country, and UnitedHealthcare in many places. These plans differ in detail, but all share two main features. First, they provide some form of savings account for health care expenses, financed on a tax-free basis through the premium paid to the plan and, in some cases, through additional contributions by enrollees. This account is typically about $1,000 for a self-only enrollment, and twice as much for a family enrollment. During the year, you can use this account to pay for any of your qualified health care expenses, including expenses that the plan does not otherwise cover, such as a hearing aid. Second, if you use up the account on other expenses (or decide to save it rather than use it), you face a high deductible, often almost twice as much as the savings account. Thereafter, you typically pay 10 or 15 percent of expenses, up to an out-of-pocket spending limit, though some plans pay everything above the deductible. The focus of these plans is to encourage you to be a prudent purchaser. If you are relatively healthy and spend wisely, you may avoid any out of pocket expenses. Furthermore, your unused account balances "roll over" and you can build up a substantial cushion that even earns interest. Your total cost under these plans can be LESS than your tax-preferred premium share.

Because of this design, there is no simple answer to "what is my copayment" or "what is my deductible." If you stay within your spending account, both are zero. After your account is used up you pay 100 percent, until you pass your deductible amount. In our Guide we provide the percentage that applies after your deductible and until you hit the catastrophic limit.

Two other important features that these plans share is that routine preventive care does not count against either the spending account or the deductible, and you have good catastrophic expense protection. Most of these plans' limits have none of the loopholes found in other plans.

The High Deductible plans offer two kinds of spending accounts. Which one you get depends on your eligibility. A "Health Savings Account" (HSA) not only lets you accumulate funds, but also lets you retain the savings account when you change plans or retire. Moreover, you can earn interest or capital gains, tax-free, for decades to come. The HSA is your property. In contrast, a "Health Reimbursement Arrangement" (HRA), or "Personal Care Account" as it is called in some plans, works almost the same but terminates when you change plans. In that case, the unspent balance remains with the plan. The Consumer-Driven plans offer only HRAs. Unlike HSAs, HRAs do not let you grow the account through interest. You can use an HRA, but not an HSA, if you are covered by other health insurance, such as TRICARE, a spouse's plan, or Medicare. In the HDHP plans, annuitants with Medicare get an HRA in the same amount as the HSA received by other enrollees. To fully understand these complex plans, you should read the explanations in their brochures carefully, and you may want to consult material at opm.gov.

The other important characteristic of an HSA account (in contrast to an HRA) is that you can make voluntary contributions to it during the year. This feature comes into play if your expenses are much higher than you expected, but you can make contributions regardless of your expected expenses. In an HSA you can make voluntary contributions up to the amount of the deductible, less the personal account amount funded by the plan. Your contributions are tax preferred. Thus, if you need to spend an extra thousand dollars, rather than pay it directly to providers you can contribute it to the HSA account, lower your taxable income by a thousand dollars, and pay providers from the HSA account. If you are in a 33 percent tax bracket, this saves you over three hundred dollars compared to traditional health insurance plans. This is a better arrangement for you than under Flexible Spending Accounts, because there is no "use or lose" penalty. HSA accounts are sometimes described as "Trifecta" benefits because the contribution is tax-free, the account grows tax-free, and disbursements from the account are tax-free when spent for health care.

Retirees are eligible for these plans, but most of these plans do not provide extra benefits for having Medicare Parts A and B (significant exceptions are the Aetna Direct CDHP and MHBP HDHP national plans, and CareFirst HDHP in the Washington DC area). However, these spending accounts cover many expenses that Medicare does not, and Medicare protects you from substantial copayment expense. For hospital expenses, you will almost always get the zero percent Medicare rate (after deductible) rather than the plan's rate of cost sharing. Therefore, they can work well for retirees with Medicare. Once you have Medicare the law allows you to contribute only to an HRA, not to an HSA, and the HDHP plans all allow for that.