What’s the Difference Between an HSA-Based and PPO Health Plan?
If you’re shopping around for health insurance, you’re probably getting sick from the alphabet soup of plan names you’re taking in. What is an HSA? What about HDHP? Pondering the HSA vs. PPO decision alone may be giving you a headache. But don’t pay to see a doctor just yet. This article will explain in plain English the difference between a health savings account (HSA) and a preferred provider organization (PPO). We’ll also explore the pros and cons of each to help you make the best healthcare decision for you.
What Is an HSA?
An HSA serves as a tax-advantaged medical savings account designed to cover eligible medical expenses. These include services your health insurance plan may not cover. In addition, there are three main tax reasons to contribute to a health savings account.
You can open an HSA with any HSA-eligible health plan, and use those tax deductible funds to pay for eligible medical costs. It’s a stand alone tax-advantaged savings account that is separate from your health plan, and your monthly premiums for your health plan do not get added to your HSA. You or your employer can contribute to an HSA account.
An HSA is different from PPO, HMO or EPO plan types. Any of these plan types can be an HSA-eligible plan. So, you can get a PPO that is also HSA-eligible, but not every HSA-eligible plan is a PPO, and PPOs aren’t available in every state. HSA-eligible plans are available in pretty much every state.
HSA-based plans, which are typically cheaper than non-HSA eligible plans, are separate from the type of network options of a PPO, HMO, etc.
A PPO is a type of plan where you don’t need a referral to see a specialist. You’re also likely to pay smaller co-payments to see specialists as opposed to other plans, and you may be covered for procedures not covered under common health insurance plans. Deductibles typically range from $500 to $1,000.
High Deductible Health Plans
In order to be HSA eligible, your health insurance must qualify as “high-deductible.” The IRS defines a high deductible health plan (HDHP) as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.
The HSA-HDHP connection results in lower health insurance premiums than a typical PPO plan with a $500 or $1,000 deductible. The savings from the lower premiums along with the tax deductions could be $5,000 or more every year.
However, with an HSA, you generally have a higher medical deductible, and you won’t enjoy office visit and prescription co-pay benefits typical of PPO and HMO plans. But, you still generally share the same PPO provider network of traditional PPO plans (and in some cases, HMO plan networks). For the large majority of consumers, HSAs produce a net financial gain.
Consider these advantages of an HSA-Based plan over a PPO plan:
- Reduced health insurance premium
- Reduced rate of increase in health insurance premium
- Taxable income reduced by HSA deposits
- Out-of-pocket health care expenses paid with pre-tax funds
- Preventive care benefits included at no cost (applies to all ACA plans)
- A new source of long-term savings
Example of HSA Plan Savings
Below is an example comparing how much a typical PPO plan with a $500 deductible and 80% coinsurance might cost, compared to a typical HSA plan with a $5,000 family deductible and 80% coinsurance.
This example is based on the average health insurance premium of an individual with a family of four living in Chicago, with $1700 in medical expenses. This illustrates the difference in plan costs if the plan holder is in a 22% federal tax bracket, pays the 3% Illinois state income tax, and deposits $5,000 into his HSA.
PPO: $1000/month premium $500 Deductible $1000 Max OOP (In-network) 20% Coinsurance HSA Plan: $600/month premium $5000 Deductible $10000 Max OOP (In-network) 20% Coinsurance $5,000 HSA contribution Medical Expenses: $1,700 PPO Plan: – $12,000 Premiums – $500 Deductible – $240 Coinsurance TOTAL: $12,740 HSA Plan: – $7,200 Premiums – $1,700 Deductible – Tax Savings: Federal (22%): + $1,100 State (3%) : + $150 TOTAL: $7,650 Plus: $5000 in HSA savings SEE GRAPH