The concept was designed to benefit working individuals and families. Unfortunately for most, it hasn’t worked as expected. For many Americans between the ages of 40 and 65, the post-Covid economy is likely to make things even worse.
High Deductible Health Plans (HDHPs) were introduced in 2004. The idea was a plan that would lower the cost of health insurance coverage. HDHPs would especially benefit the millions of workers who are covered by the workplace health plan. The plans would especially benefit younger people who typically have little or no health-related costs.
To sweeten the deal, the government approved tax-advantaged Health Savings Accounts (HSAs). People would contribute dollars to their individual HSA on a pre-tax basis. When withdrawn for medical expenses, the money would not be taxable.
So what is the problem? And why is a post-Covid economy likely to make things worse for many working-age Americans?
Since their introduction, high deductible health plans have increased dramatically in acceptance. Among adults ages 16 to 64 who have employment-based health coverage, the percentage enrolled in a traditional health plan dropped from 85% to 57% according to the US Department of Health and Human Services. Meanwhile, 19% have an HDHP along with an HSA. One in four (24.5%) have a high-deductible plan without the tax-advantaged savings benefit of an HSA.
Without a doubt, those with few or no medical problems each year benefit from the money saved by selecting a high-deductible plan.
The same is not true for many of those with more serious medical needs. Many of us are one diagnosis away from a very significant financial crisis. Consider that one American adult is diagnosed with cancer every 21 seconds and another has a heart attack every 40 seconds. Added to this are accidents, pregnancies, diabetes and now, of course, the Covid virus.
People are likely to be affected in three ways when they experience any serious health problem. First, they are likely to meet their health plan deductible. Second, they are likely to face meeting out-of-pocket maximums. Eventually, they may find that their insurance plan won’t cover all health-related costs (including prescription drugs).
Here are some hard facts. For individuals covered by an HSA-qualified HDHP, the ‘average’ annual deductible is $2,476 for individual coverage and $4,673 for family coverage. The “average” out-of-pocket maximum is $4,492 per covered plan participant. The word average is placed in quotation marks because the IRS defines a high-deductible health plan as any plan in which total yearly out-of-pocket expenses (including deductibles, copays, and coinsurance) cannot be more than $6,900 for an individual or $13,800 for a family
The plan would work when people contribute at least that much to their Health Savings Plan. Unfortunately, that is not the case.
While the maximum contribution amounts for 2020 are $3,550 for individuals and $7,100 for families, few contribute the maximum. For those with accounts open for one year, the average individual HSA contribution was $1,166, according to the Employee Benefits Research Institute. In 2018, the average HSA balance was $2,803.
A low-cost supplement to your health savings account
With the majority of working-age adults between the ages of 40 and 65 diagnosed with a serious financial emergency, an alternative way of planning is warranted.
Today, some five million Americans have purchased critical illness insurance according to the 2020 industry analysis by the American Critical Illness Insurance Association (AACII). About 1.5 million people buy coverage each year, the majority through coverage offered by their employer.
A modest amount of coverage can be an inexpensive way to ensure sufficient funds beyond what you have in your health savings account. Today, the best ci insurance plans offer both cancer-only insurance coverage and comprehensive critical illness coverage. The latter pays a lump sum cash benefit not only for a cancer diagnosis, but also for conditions like heart attack, stroke, and organ transplants.
For a 45-year-old man who does not use tobacco products, a $10,000 benefit for cancer alone will cost about $50 to $60 a year. Women tend to pay more (about $85 per year) due to the increased risk of breast cancer.
Most critical illness insurance purchases tend to be modest. In 2020, AACII reported that the average number of policies purchased through employers ranged from $12,961 to $15,408. While there is always a case for more insurance, this modest approach to planning is affordable and robust.
After tough financial times, personal bankruptcies skyrocket. In 2006, 597,965 Americans filed for personal bankruptcy. By 2010, the number had skyrocketed to over 1.5 million.
A Harvard University study found that two-thirds of bankruptcies were related to medical and health-related bills. Most of those who filed for bankruptcy were middle class and had health insurance. Hospital bills were the single largest expense for about half of all families in medical bankruptcy; prescription drugs were the largest expense for 18.6 percent.
A modest insurance policy just for cancer or critical illness makes enormous financial sense for those with a high-deductible health plan. This is especially true for people ages 40, 50, and 60 prior to Medicare eligibility. For just a few dollars a week, you can ensure the peace of mind that you can focus on your recovery instead of worrying about a growing pile of unpaid bills.
According to the Association’s Cost Calculator, a 45-year-old woman would pay about $82 a year for a cancer insurance policy as a non-tobacco user. A woman of the same age would pay about $108 a year if she used tobacco products. Many companies offer critical illness insurance coverage for employers, and shopping around can help you get better coverage for less money.