HDHP vs. PPO

[Frenchy1011]

Hey all,

 

I saw another thread on this and have been thinking of very similar things to the poster. I have a slightly different situation, and am just starting out (1st attending year) and so far am not great with numbers and so on, and was wondering if somebody could help me out boiling down the numbers on whether my HDHP vs PPO is the best way to go. I am defaulting to the PPO for now, but I know that the HDHP is usually the way to go. The main reason I need help with the numbers is that my wife is very hesitant to jump into the HDHP as she does not work and this is the only health insurance for our family. We have a 2.5 year old and 2 month old currently, and do see quite a few potential costs in the future. Anyway, I will detail my info below. Would love any feedback. Thanks so much!!

 

Current Income/Tax-Deferral:

$175,000 yearly salary

Maxing out 403(b) with $18,000 pre-tax

Maxing out 457(b) with $18,000 pre-tax

 

PPO (For Family):

-$2,348.04 yearly premium ($195.67 monthly)

-$3,000 Deductible

-$9,000 Out Of Pocket Limit

-Preventive Services covered 100%

-$25/$50 copay

 

HDHP (For Family):

-$1,675.92 yearly premium ($139.66 monthly)

-$5,200 Deductible

-$10,400 Out of Pocket Limit

-Preventive Services covered 100%

-All visits 20% after Deductible

-Employer contributes $1000 yearly

 

Medications are the same for both plans (35%, $10-$100 for generic ; 35%, $40-$120 for formulary name brand ; %50, $60-$150 for non-formulary name brand).

 

Again, thanks so much for all the help!!

[tex]

I work through some of the math here: https://www.whitecoatinvestor.com/forums/topic/hsa-or-double-insurance-coverage/#post-11832

[jfoxcpacfp]

tex wrote:

I work through some of the math here: https://www.whitecoatinvestor.com/forums/topic/hsa-or-double-insurance-coverage/#post-11832

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@tex, that was a classic post. Hope you don't mind that I made your link clickable since for some reason it wasn't coming through that way.

[jz]

Your calculations should include the $6,750 / family deduction.  If your tax bracket is at 28%, you'd save  (1-.28)* $6,750= $4,860 in taxes.  That acknowledged,  I'm with your wife. While your babies are young, take the PPO with low copays.   You are young and have many years to stockpile an HSA account.

[DMFA]

K, so you start $1,672 ahead by choosing the HDHP (PPO premium, minus HDHP premium, minus employer contrib).

$175,000 income minus $36,000 pretax retirement, 4 exemptions $16,200 and std deduction $12,700 equals $110,100 of taxable income, so 25% bracket.  A full HSA contribution pf $6,750 gives you back $1,688 on your tax bill...you're now $3,360 ahead with the HDHP.  Subtract $250 if that employer contribution is directly to the HSA, not to you, since you can't deduct it if so.

It's hard to figure out exactly how much you'd benefit from either past that, and it's possible you could come out ahead with the PPO if you were only using services which would require only the copay instead of having to meet your deductible under the HDHP before the 80% coinsurance kicks in.  Worst case for the HDHP is if you end up with $16,800-$37,000 in bills which would have been covered under the PPO, in which case you'd lose the tax/premium of advantage of the HDHP while still being under the OOP max...

...but should end up in a situation in which you would hit the OOP max under either plan, the HDHP would end up superior since your savings on the tax deduction and premiums ($3,360) are greater than the difference in OOP max ($1,400).

Again, none of these year-by-by year cost calculations account for the overall health of your family or the fact that you have an additional $6,750 of at least double, and possibly triple, tax-advantaged investment space (deductible, tax-free growth, possibly tax-free withdrawal if for healthcare).  So if the math is close, and in your case it seems so, then the data *seems* to favor the HDHP.

[DMFA]

jz wrote:

Your calculations should include the $6,750 / family deduction.  If your tax bracket is at 28%, you’d save  (1-.28)* $6,750= $4,860 in taxes.  That acknowledged,  I’m with your wife. While your babies are young, take the PPO with low copays.   You are young and have many years to stockpile an HSA account.

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Your math is backwards.  Don't subtract the deduction from 1 when determining how much it reduces the tax bill.  A deduction at 28% does not give you back 72%, it gives you back 28%.  The deduction in the 28% bracket would be 0.28 * 6750 = $1,890.  However, because of his reductions of income (36k in salary reduction, 16.2k in exemptions, 12.6k standard deduction) he is down into the 25% bracket.

[jz]

agree, DMFA.   I inverted the fraction.  My bad.

[Frenchy1011]

So let me work through some of this. If I can get a math check on this I would greatly appreciate it!!

 

DMFA wrote:

K, so you start $1,672 ahead by choosing the HDHP (PPO premium, minus HDHP premium, minus employer contrib).

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I think I would just come out $672 ahead, since the $1000 contribution would be placed on the HSA and (if all goes well) that money will be left alone in there? Not sure if that makes sense but I don't think I would add this to my calculations.

DMFA wrote:

A full HSA contribution pf $6,750 gives you back $1,688 on your tax bill

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I would only contribute $5,750 to the HSA since my employer contributes $1000, so I think I would only gain $$1,437.50 on my taxes.

 

Here is the math that I tried to do. Again, please let me know if I messed up.

 

-PPO Plan: $175,000 minus $36,000 retirement, 4 exemptions $16,200, standard deduction $12,700 so taxable income at $110,100, so tax bill comes out to $19,002.50

-HDHP: $175,000 minus $36,000 retirement, 4 exemptions $16,200, standard deduction $12,700, $5,750 HSA, so taxable income at $104,350, so tax bill comes out to $17,565.

So I would pay $1,437.50 less in taxes

 

Bad Year:

PPO: $2,348.04 (premium) + $9000 OOP + $19,002.50 (taxes) = $30,350.54

HDHP: $1,675.92 (premium) + $10,400 OOP + $17,565 (taxes) = $29,640.92

 

Good "Healthy" Year:

PPO: $2,348.04 (premium) + $19,002.50 (taxes) = $21,350.54

HDHP: $1,675.92 (premium) + $17,565 (taxes) = $19,240.92

 

All of this is based on filling up the HSA with $5,750 yearly. So I guess total monthly contributions would be:

PPO: $195.67 (premium) + $1,583.54 (taxes) = $1,779.21

HDHP: $139.66 (premium) + $479.16 (HSA Contribution) + $1,463.75 (taxes) = $2,082.57

So the HDHP will cost be a net of $303.36 monthly, or $3,640.32 yearly, but I will essentially have $6,750 yearly in my HSA account for that.

 

Does this make sense???

 

[DMFA]

Frenchy1011 wrote:

Here is the math that I tried to do. Again, please let me know if I messed up.   -PPO Plan: $175,000 minus $36,000 retirement, 4 exemptions $16,200, standard deduction $12,700 so taxable income at $110,100, so tax bill comes out to $19,002.50 -HDHP: $175,000 minus $36,000 retirement, 4 exemptions $16,200, standard deduction $12,700, $5,750 HSA, so taxable income at $104,350, so tax bill comes out to $17,565. So I would pay $1,437.50 less in taxes   Bad Year: PPO: $2,348.04 (premium) + $9000 OOP + $19,002.50 (taxes) = $30,350.54 HDHP: $1,675.92 (premium) + $10,400 OOP + $17,565 (taxes) = $29,640.92   Good “Healthy” Year: PPO: $2,348.04 (premium) + $19,002.50 (taxes) = $21,350.54 HDHP: $1,675.92 (premium) + $17,565 (taxes) = $19,240.92   All of this is based on filling up the HSA with $5,750 yearly. So I guess total monthly contributions would be: PPO: $195.67 (premium) + $1,583.54 (taxes) = $1,779.21 HDHP: $139.66 (premium) + $479.16 (HSA Contribution) + $1,463.75 (taxes) = $2,082.57 So the HDHP will cost be a net of $303.36 monthly, or $3,640.32 yearly, but I will essentially have $6,750 yearly in my HSA account for that.   Does this make sense???

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More or less, yeah.  Pretty close.  There are some moving parts that don't fit very well into a forecast, just the extremes, and it doesn't account for the benefits of having the super-tax-advantaged investment account or what's covered by PPO copay that would be a $ cost from the HDHP, but it's about as much as one can really attempt to calculate.

[Frenchy1011]

DMFA wrote:

More or less, yeah. Pretty close. There are some moving parts that don’t fit very well into a forecast, just the extremes, and it doesn’t account for the benefits of having the super-tax-advantaged investment account or what’s covered by PPO copay that would be a $ cost from the HDHP, but it’s about as much as one can really attempt to calculate.

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Perfect. Thanks so much for the help! I really appreciate it.

[Frenchy1011]

DMFA wrote:

4 exemptions $16,200

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As an aside, if I am married filing jointly, my wife doesn't work, and I have two dependent children, wouldn't my allowances be 5 not 4? 1 for myself, 1 for married and non-working spouse, 1 for spouse, 2 for dependents?

[spiritrider]

Frenchy1011 wrote:

So let me work through some of this. If I can get a math check on this I would greatly appreciate it!!

I think I would just come out $672 ahead, since the $1000 contribution would be placed on the HSA and (if all goes well) that money will be left alone in there? Not sure if that makes sense but I don’t think I would add this to my calculations.

I would only contribute $5,750 to the HSA since my employer contributes $1000, so I think I would only gain $$1,437.50 on my taxes.

 

 

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Whether you take distributions of the HSA employer contribution or not is irrelevant, you still received the benefit of it. You are just using it for likely tax-free earnings an even greater benefit. Not only that, but the employer contribution is also pre-tax and pre-FICA so you have to treat the full $6,750 as such to determine the tax savings.

So the total HDHP starting benefit is; premium savings ($672.12) + employer contribution ($1,000) + federal income tax savings ($6,750 * 0.25 = $1,687.50) + state income tax savings ($6,750 * TBD = ) + FICA tax savings ($6,750 * 0.0145 = 97.88) = $3,457.50 + state income tax savings.

Your math is way off. You didn't mention if there was a PPO co-insurance after your deductible is met. Assuming none, just co-pays.

Net expense difference on $5,200 accounting for above:

PPO $0: - $3,000 deductible - $250 co=pays = ($3,250)

HDHP $3,457.50 - $5,200 deductible = ($1,742.50)

 

Net expense defference on $10,400 accounting for above:

PPO $0: - $3,000 deductible - $500 co=pays = ($3,500)

HDHP $3,457.50 - $5,200 deductible - (10,400 - $5,200 = $5,200 * 0.20 = $1,040)= ($2,782.5)

 

So even accounting for hitting the max out-of-pocket on the HDHP, not counting any state income tax savings or any PPO co-insurance you are always better off with the HDHP/HSA and maximum contributions.

Now pay all expenses out of pocket and you are getting additional likely tax-free investment space for retirement medical expenses.

[Frenchy1011]

spiritrider wrote:

You didn’t mention if there was a PPO co-insurance after your deductible is met. Assuming none, just co-pays.

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Yes there is 20% after deductible

spiritrider wrote:

So even accounting for hitting the max out-of-pocket on the HDHP, not counting any state income tax savings or any PPO co-insurance you are always better off with the HDHP/HSA and maximum contributions. Now pay all expenses out of pocket and you are getting additional likely tax-free investment space for retirement medical expenses.

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Thanks for this response and info. The math can be quite confusing for me, as I'm still learning all this stuff. Sounds like after all is boiled down, I'm making out better with the HDHP every time. This is what I had anticipated, but nice to see numbers associated with it. Also, good to show the wife

[Rotish]

Something to add to OP,

Only very basic medications are covered by most HDHPs before the deductible is met. The co pays you listed most likely only apply after you've reached your deductible.

one recurring prescription could meet your deductible by itself, basically nullifying your hsa