Ever wondered why we need so many acronyms to talk about health plans? There are a lot of letters! But look at this way. It’s a lot easier to say PPO than Preferred Provider Organization. Or HDHP instead of High Deductible Health Plan. Shortening the names is a good start! But to know which one is right for you, what you really need is an explainer on HDHP vs. PPO.
What Is an HDHP?
An HDHP has a higher deductible than other plans—which may explain the name. But the higher deductible is just one side of the coin. An HDHP also features lower premiums. And those savings often make up for a higher out-of-pocket maximum.
HDHP Pros and Cons
HDHPs are becoming a pretty popular approach to health care. Among employers offering health benefits, the percentage who include an HDHP option has nearly doubled over the last decade, from 15% in 2010 to 28% today.1 If you look at the advantages, it’s easy to understand why:
- Lower premiums. With health care costs rising, it always feels good to punch that line item in the nose!
- Tax shelter. When you have an HDHP, you’re eligible to open a Health Savings Account (HSA). An HSA is a triple tax-free miracle that allows you to make tax-free contributions, accumulate tax-free growth, and pull out tax-free withdrawals to pay medical expenses.
- Employer match. If you have an HDHP as an employee benefit, you might be eligible for an employer match in an HSA. We usually recommend picking up any free money when it comes your way. (But if you’re following the Baby Steps, hold off on contributing until Baby Step 3.)
- Broader network of providers. With an HDHP, the list of providers in your network could be longer. And that would come in handy if you ever need health care while traveling.
Of course, this kind of plan does have a higher deductible. That means higher out-of-pocket costs. But there are also defined maximums in any HDHP. Depending on your circumstances, those higher numbers could be more than offset by the premium savings and the opportunity to save with an HSA.
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Once you meet your deductible for the year, an HDHP will typically cover most or all of your remaining medical expenses. But before jumping into one, think about your general health. Do you have a chronic condition or frequent doctor visits? This might not be your best option.
On the other hand, do you sometimes go years without hitting an annual deductible? If you’re relatively young and healthy and have the option of saving for medical expenses in an HSA, an HDHP could be a great fit for you.
What Is a PPO?
The PPO does not mean the Penny-Pincher Option—but that’s not to say you can’t use it to save money. PPO stands for Preferred Provider Organization plan, and with this plan type you’ll have the advantage of a lower deductible. But you’ll also pay more in monthly premiums. They’re also sometimes called traditional plans, because they’ve been around longer than HDHPs have. To see if this is the right plan for you, let’s talk about the pros and cons.
PPO Pros and Cons
First, the upside:
- Lower deductible. We all want to save money where we can. And having a lower deductible means that a PPO kicks in with help on medical expenses sooner, rather than later.
- Lower out-of-pocket maximum. The PPO typically has a lower maximum out-of-pocket cost than an HDHP. Although this feature can be a big help, it can also be a wash financially by the time you pay all of your premiums for the year.
The main downside of a PPO is that you’ll pay higher monthly premiums. And then there’s the “preferred provider” wrinkle. Both kinds of health plans have a network of providers you can work with to get the best rates. But in a PPO, the provider list is generally smaller than it is with an HDHP. To get the best rate on your care, you have to be sure you’re sticking to that list.
Going out of network to get skin treatment from your best friend Larry’s favorite dermatologist might seem like an obvious way to help your complexion. But it could also leave egg on your face when you’re on the hook for a high out-of-network bill.
Cost Difference Between HDHPs and PPOs
Depending on the specific plans available to you, the question of cost could shake out in three ways:
- You could save more with a PPO.
- You could save more with an HDHP.
- In some years or situations, the two could cost you about the same.
To understand how HDHP and PPO plans compare in general, let’s look at some examples.
Say you’re young and healthy. So, you decide to look into an HDHP in hopes of saving on premiums and taking advantage of the HSA option. The $150 monthly premium sounds like a great deal! Just be sure to pay attention to the $3,000 deductible you’ll have for individual coverage.
Or say you have an ongoing medical issue, or you anticipate making a lot of visits to the doctor’s office in the next year. Pricing a PPO, you find that your monthly premium will be $450. Yikes! That’s triple the HDHP amount! But on closer inspection, you notice your deductible will only be $900. So you’ll start to get help from the health plan much earlier in the year than you might with an HDHP.
So far it looks like an HDHP is going to be a little bit better deal if you’re relatively healthy and that a PPO is a better fit if you go to the doctor a lot. But even at those prices, the question of which one fits better for you is still up in the air. That’s because there’s no way to truly know what’s going to happen in any given year of medical coverage. The best approach is to compare what’s offered in each kind of plan and run some numbers based on what you’re used to spending for medical needs.
Here’s a chart to put the numbers in perspective:
Total cost before coinsurance
How Does an HSA Fit In?
As you can see, it’s possible for the plans to wind up pretty close to each other in cost. But even if the numbers are a wash, there’s an X factor with HDHPs that can’t be ignored. You have to consider the unique tax advantages you’ll have if you choose an HDHP and then enroll in an HSA as a way to help cover medical expenses.
The question of which plan to choose is often framed as HDHP vs. PPO, but it could be more helpful to talk about it in terms of HSA vs. PPO. After all, people don’t go for an HDHP because of their undying love for high deductibles. They do it for two main reasons:
- Because the lower premiums could result in lower annual medical costs out of pocket
- Because they can save up for medical costs in a completely tax-sheltered investment that’s super convenient and a supplementary retirement fund.
Basically, when you combine an HSA with an HDHP, you’re adding the power of investment to your efforts to cover medical expenses. Let’s count the ways:
- The money you put into an HSA goes in tax-free.
- If you choose, the funds can be invested. Any growth is also tax-free.
- When withdrawing money, your payments are also untaxed so long as they’re made toward qualified medical expenses.
- Unlike with Flexible Spending Accounts, the money in an HSA doesn’t expire annually—it rolls over every year for as long as you have the account. Meanwhile, your contributions and interest earnings could lead to some impressive savings!
- An HSA often includes an employer match on your contributions, making them similar to a 401k for medical expenses.
- Even if you opened the account as an employee benefit, you won’t lose access to it should you leave your job.
- If you still have funds in it when you turn 65, the laws around your HSA will change. From there, that money is no longer restricted to medical expenses—you’ll be able to use it as a supplement to retirement income!
Are you starting to see why we think more about HSA vs. PPO and less about HDHP vs. PPO? It’s because an HSA gives you so many advantages. A PPO is a great option for many people (especially for larger families or those who have high annual medical expenses on a regular basis). But with an HSA, many of those costs can be planned for or offset by the opportunity to take an employer match, invest, and roll funds over.
HDHP vs PPO: Which Is Right for You?
The shortest answer here is that it will depend on your circumstances. If you’d like to shop health insurance, you’ll want to work with a pro who knows the industry and will teach you everything you need to know to get the best coverage.
If you already have an HDHP and haven’t set up your Health Savings Account yet, we know exactly who can help. Open your HSA account today!