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. Below is an overview.
- Your contributions are taken from your paycheck before it’s taxed, so they reduce your taxable income.
- Any interest, dividends or capital gains your account earns are tax free.
- You can make tax-free withdrawals for qualified medical expenses any time.
But one crucial thing to remember is that unlike a PPO plan, an HSA is not a health insurance plan. And in order to open an HSA, you need to be covered by an eligible high deductible health plan (HDHP) and have no other coverage.
So when you’re thinking about your HSA vs. PPO choice, what you really should be pondering is HDHP vs. PPO. So let’s explore what an HDHP is and how it can work in tandem with an HSA.
What Is an HDHP?
According to the IRS, an HDHP in 2018 must have a minimum deductible of $1,350 and a maximum out-of-pocket cost of $6,650 for single coverage. The deductible minimum for family coverage climbs to $2,700, and the out-of-pocket maximum is $13,300 for family coverage.
A deductible is the amount you must pay for covered health expenses before your insurance company begins to cover its share for non-preventive healthcare services. But while deductibles may be high, your monthly premiums tend to dip much lower than most other types of health insurance plans.
In addition, an HDHP may make you eligible to open an HSA account. Beyond the HSA tax benefits, these accounts also offer additional perks. Unlike with a Flexible Spending Account (FSA), for example, your HSA funds roll over into the next year. So whatever money you don’t use keeps on growing.
Some tax-advantaged accounts like individual retirement accounts (IRA) set strict rules as to when you can make qualified withdrawals. With an HSA, you can withdraw money tax-free to cover eligible medical expenses any time. And what exactly are these elusive “eligible” medical expenses? They include various medical, dental and vision healthcare services. Your HSA can also cover deductibles and coinsurance, which is the portion of covered services you pay after meeting your deductible.
Of course, your particular insurance carrier or employer-provided plan decides the specifics. But below are some general examples of services HSAs cover:
- Artificial limbs
- Birth control treatment
- Blood sugar test kits for diabetics
- Doctor’s office visits
- Drug prescriptions
- Surgery (not cosmetic)
- Walkers, wheelchairs, canes
For a full review of qualified medical expenses, view IRS Publication 502.
Is an HSA sounding good? If you receive your health insurance coverage through your employer, it may also offer an HSA. But as long as you have an eligible HDHP, you can shop around for the best HSA accounts. Several financial institutions including the best banks and mutual fund companies offer these accounts. Some of the best banks in America pay competitive HSA interest rates.
You can also work with a financial institution that will invest your HSA money in securities like stocks, bonds and mutual funds aiming for a stronger return. But keep in mind that these firms may charge high fees or require large opening balances. It’s important to shop around for the best deals.
But HDHPs and therefore HSAs aren’t the best options for everyone. So let’s explore your other choices.
What Is a PPO?
A preferred provider organization (PPO) plan gives you access to a “network” of healthcare providers and medical facilities at reduced prices—generally. But in fact, PPO out-of-pocket costs can climb quite high depending on the insurance company you’re working with.
Still, PPOs stand out for flexibility and access. Unlike another popular type of plan like a health maintenance organization (HMO), you don’t need a referral from your primary care physician to see a specialist. You’d also likely pay smaller co-payments to see specialists as opposed to other plans. Yet, because of the overall lower in-network costs, PPO premiums tend to rise high.
PPO coverage typically extends further than that of other common health insurance plans. Depending on the carrier you enroll with, for example, it may be able to cover alternative procedures like acupuncture.
But what if you get sick a few states away from your home and you can’t find an in-network physician? Some health insurance plans won’t pay a dime for services you receive out-of-network. A PPO at least contributes something toward these costs. However, you’d be on the hook for most of the bill.
For example, let’s say you owe a $40 co-payment after seeing a physician in-network. You then get sick while abroad for business and you visit an out-of-network physician. That doctor sends you a $400 bill, and your PPO plan says you owe 50% co-insurance. Now, you’re looking at a $250 bill for the same service.
In addition, you have to keep a record of out-of-network medical services and file them with the insurance company. This can be tedious. And in some cases, you’re stuck thinking about what to do when your health insurance claim is denied.
Still, you may see value in having a plan that covers some out-of-network needs if you travel frequently wheather for business, pleasure or both.
Who Should Get an HDHP With an HSA?
An HDHP may suit you if you’re young, healthy and don’t expect much medical attention throughout the year. This type of plan keeps premiums low, so you won’t sacrifice much for services you’re not likely to need. In addition, you can divert premium savings into an HSA account. This arrangement establishes an emergency fund for medical expenses in case you need it. If you don’t, your balance stays with you at year’s end.
But keep in mind that the trade off for low premiums means you may need to shell out a large amount of money to meet your medical needs before your insurance kicks in. So make sure you can at least afford to pay your deductible within 30 days of receiving emergency medical services.
And your HSA delivers the strongest punch only if you save aggressively. So make sure you have enough money to set aside after you’ve met your debt obligations each month.
Who Should Get a PPO?
If you expect to make several doctor visits or need continuous medication, a low-deductible health plan may be right for you. The same may apply to pregnant women who require frequent check-ups. In theory, both types of individuals will meet their deductibles and therefore insurance benefits sooner.
Several PPOs tend to carry lower deductibles as opposed to HDHPs. Of course, the true difference lies between which type of insurance carrier you’re looking at and the types of services you need. But overall, PPO networks span large areas. So if you need frequent medical attention, you’re likely to find in-network healthcare providers in your area.
And don’t fret if you’re traveling. Your PPO still covers out-of-network services. The types of services covered and to what extent again depends on the specific type of insurance companies you’re considering.
Either way, remember both HDHPs and PPOs cover 100% of preventive services when provided in-network. These include the following.
- Alcohol misuse screening and counseling
- Blood pressure screening
- HIV screening
- Immunization vaccines
HSA vs. PPO: The Takeaway
HDHPs typically benefit healthier consumers who don’t expect much medical attention for the year. Advantages include low premiums and the option of opening an HSA to save for medical procedures that encompass those not covered by your medical insurance. A PPO, especially one with a low deductible, may suit those who expect frequent doctor visits and prescriptions due to something like a chronic condition.
Tips on Reviewing Health Insurance Plans
- When considering how to pick a health insurance plan, keep your individual medical needs in mind. Then, compare what those medical services will cost under the plans you’re looking at.
- Pay close attention to the cost of copayments, coinsurance and deductibles. But don’t worry about the medical jargon. We’ve broken down the 10 health insurance terms you need to know in plain English.
- An HSA isn’t the only type of savings account you can open with a healthcare insurance plan. You might be interested in an FSA, which doesn’t require you to also have an HDHP. So consider HSA vs FSA before you make a decision.
- As with making any important decision involving your money, it may help to have some guidance. To give you some pointers, we developed our SmartAsset financial advisor matching tool. It connects you with up to three financial advisors in your area. You can view their profiles and credentials before deciding whether to work with one. Several specialize in areas like helping families save for healthcare costs.
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