By Dr. Joy Eberhardt De Master, WCI Columnist
Without question, I’m a donut+. I wish that meant I ate a donut a day. It doesn’t. I'm talking about health insurance, and the way I visualize it is that, depending on how much of it you use, you're either a donut hole, a donut, or a donut+. Me ? I use a lot of it. Which means I'm a donut+.
You see, my child has an other ability and needs support—like intensive outpatient care costing thousands a week. Some children need walking support, some kids need talking support, and others need behavioral support.
Most of you probably love to save money. But you probably abhor picking your health insurance plan.
What if I told you a little secret?
Health insurance plans don’t tell you what you need to know unless you dive down into the details. Yeah, you see the premium, the deductible, and the max out-of-pocket expense. But what does that really mean to your savings and investments? I can tell you.
When making a decision, you need to know what you bring to the table: Are you a donut hole, a donut, or a donut+?
The donut hole is a low healthcare utilizer. (In my definition, it has nothing to do with Medicare!) You don’t have a chronic illness; you go in for preventative visits or not at all. You just don’t need healthcare services on a regular basis. Or (and this is important!) the healthcare you access is 100% covered.
The donut is moderate healthcare utilizers. You may have kids with the occasional sick visit or ER trip. You access urgent care. You take medications for an illness with low acuity or for a chronic illness with a low support need. You are not hospitalized. You don’t use intensive outpatient services.
Donut+ are high healthcare utilizers. You have a chronic illness that needs moderate to high support. You may need to be hospitalized and have surgery (or two). You have kids with chronic conditions who need ongoing support—medication and/or therapy. You know it if you are a high utilizer.
Let’s take me, for example. I am in a family of four with two adults and two kids. I had both of my kids while fully insured with the same healthcare organization. I had one difference—the type of insurance. For my first birth, I had a PPO version; for my second, an HMO.
Frankly, if you want to stop reading after this paragraph and are planning to get pregnant and have a healthy child, pick the HMO or the plan that carries an HSA (aka a health savings account) and assume it covers pregnancy and birth. Mine did. I ended up paying a lot more with the PPO privilege for my pregnancy and birth. Granted, I did have more choice of who I would see, but I also had less coverage.
So, this is where the question comes in about the donut hole, the donut, and the donut+.
If pregnancy and delivery are 100% covered by your insurance without meeting any deductible or premium, you can have a kid and still be a low utilizer. Yup, you are a donut hole. (Please remember that maternal care does not equal neonatal care—if you have a baby with issues, you could be saddled with a hefty NICU bill. Doesn’t it feel like picking an insurance plan is like playing blackjack? Still, you gotta know your chances to make the best guess.)
In front of me right now, I have two plans for my family of four: a high deductible health plan with an HSA option and a lower deductible in-network plan with no HSA. (Yes, thanks to my partner's recent employment, we won’t have to pay $2,500 per month for COBRA for my HMO plan.)
The EPO (exclusive provider organization) is the in-network-only plan with the higher premiums and the higher out-of-pocket max but also the lower deductible. The HSA has the lower premiums and the lower out-of-pocket max but a higher deductible.
OK, let’s look at the numbers.
The HSA: The premium is $36.09 per pay period ($938.34 per year in 26 pay periods), the deductible is $3,000, and the max out-of-pocket expense is $6,000.
The EPO: The premium is $118.48 per pay period ($3,080.48 per year), the deductible is $900, and the max out-of-pocket is $7,500.
You have to remember that the HSA is filled by pre-tax dollars. The healthcare plan doesn’t mention the limit. But I’ll tell you. In 2022, its contribution is limited by the government to $7,300 per year for a family and $3,650 per year for an individual. That means the pre-tax cost of the HSA is the stated cost multiplied by your takeaway percentage from taxes.
Note: Feel free to skip the next part and jump to the double pound sign (##) below if you want to avoid a pre- and post-tax headache.
($36.09/pay period * 26 pay period/year) = $938.34/year post tax cost of the yearly premium
$3,000/year post tax deductible * (100% – actual tax percent you pay) = the pre-tax cost of the deductible
$6,000/year post tax max out-of-pocket expense * (100% – actual tax percent you pay) = the pre-tax cost of the max out-of-pocket expense
Let’s imagine you have a tax rate of 32%. (Note: This is the stated tax rate of someone who earns between $164,926-$209,425 as an individual or $329,851-$418,850 for married couples filing jointly).
So, (100%-32%) = 68% or 0.68. That means 0.68 of your deductible and out-of-pocket expense will be the pre-tax rate. The HSA premiums will not be at the pre-tax rate. (If only!) But both the deductible and out-of-pocket expenses are to the allowed max ($7,300 family, $3,650 individual).
Let’s look at the HSA vs. EPO post-tax numbers again and multiply the non-premium numbers of HSA by 0.68. Below we have the pre-tax numbers.
Premium: HSA $938.34/year, EPO $3,080.48/year. Not pre tax.
Deductible: HSA $2,040/year, EPO $900.
Max out-of-pocket expense: HSA $4,080, EPO $7,500.
The sum of the above is as follows: HSA $2,978.34 per year, EPO $3980.48 per year.
The HSA clearly becomes the better and better option. The question then becomes: Is there ever a time when it makes sense to choose the EPO over the HDHP/HSA?
I think it depends on the plan offered to you. You have to look at the numbers. It is possible if your deductible and premiums are low enough on your EPO plan and if you are a donut (mid-utilized). Then, the EPO could be the better option. That would mean in this example that the EPO premium and the deductible would have to be under $2,978.34 per year and that the EPO offers what you need.
Remember you have to look at what is covered and to what percent in each plan. If you are covered up to 80%, you may still reach your out-of-pocket max even after you’ve paid your deductible. And premiums don’t count toward your out-of-pocket max.
OK, Let’s take me again as the example.
My child receives 30 hours per week of intensive outpatient services. For simplicity, we will say it costs $150 per hour. (In reality, it is broken up into 15-minute units where the units are anywhere from $37.50 per unit to $57.50 per unit.) In one week, my healthcare costs are $4,500. It takes less than two weeks for me to meet my out-of-pocket max. I’m clearly a high utilizer.
Another thing I take into account is if a plan has a max payout. (My dental plan does on orthodontia at $2,000 for the lifetime.) This can change based on state law so it gets even trickier. Luckily, my neighbor is an insurance lawyer and helps me out. If you aren’t so lucky, you may need to ask an expert or look into the legislation AND look at how your insurance plan applies the legislation. (Laws aren’t all cut and dry, and their application to reality is the key.)
OK, I imagine you are insuranced out. I know I am.
Before you leave, I would be remiss not to tell you that the HSA plan is also a retirement benefit. Yes, not only is it a pre-tax contribution, but it also can be used as an investment. That creates another layer and leads me to wonder if, at times, it’d be best to invest the HSA money even if you need to pay healthcare expenses to reach your yearly max out-of-pocket. I would guess that if you can swing it, invest your HSA and pay your healthcare expenses out-of-pocket—unless you can find a better investment for the same amount of money. But that is up to you to decide.
Whether you're a donut hole, a donut, or a donut-plus, make sure you know the details of your insurance plan AND the state you live in, because picking the wrong health insurance could put a bad taste in your mouth.
Are you a donut hole, a donut, or a donut+, and does it affect how you choose your healthcare plan? Do you think using an HDHP is worth it for the HSA? Is there anything you would choose differently? Comment below!