HSA Plans vs. Copay Plans: What’s the Difference?
As health savings accounts have become quite popular, many people ask, “What is the difference between a traditional insurance plan and an HSA-based Copay plan?” Both plans offer valuable insurance coverage to protect you from high-cost medical expenses, yet there are a few key differences. So let’s examine their fundamental distinctions, trade-offs, and cost over time.
In a traditional “copayment plan,” you and your employer pay a monthly premium to cover the cost of your health insurance. Then when you go to the doctor or fill a prescription, you pay a fixed cost called a “copayment,” and the insurance company usually covers the rest. Copay plans also have a deductible. Once you’ve met your deductible, you’ll also have a cost-sharing coinsurance phase between you and your provider on high-cost medical expenses before you reach your out-of-pocket maximum. Once you’ve reached your out-of-pocket maximum, insurance will generally cover the balance. And most preventive services are generally covered 100%. Just check with your plan for those details.
A typical copayment plan looks like this:
- 25$ copay for an office visit
- $ 10 copay for generic prescription drugs
- Dollar 50 copay for brand name prescription drugs
Your deductible could range from $ 500 to $ 2,000, but for this example, let’s use $ 500 for the deductible.
- 80% coinsurance (you pay 20%)
- $ 3,000 Out-of-Pocket Maximum
To put in a number, let’s say you and your employer pay $ 6,000 a year or $ 500 a month for this plan. Please note that this number will vary based on several factors.
Now let’s talk about HSA-based plans.
With an HSA-based plan, you often pay a lower premium in exchange for a higher deductible. The key difference is that an HSA-based plan has two parts: Insurance PLUS a health savings account. Your HSA is a tax-free personal health savings account that can be used to pay for eligible medical expenses. Use of your HSA funds may also count toward your deductible and coinsurance amounts. And remember, like any other insurance plan, you pay nothing for preventive care like annual checkups.
Similar to a copayment plan, in an HSA-based plan, you would still have a deductible, coinsurance, and out-of-pocket maximum. Since your deductible is higher in an HSA-based plan, you and your employer will save money …. let’s say by switching to a $ 1,500 deductible, you and your employer now pay $ 5,000 a year instead of the $ 6,000 a year in the co-payment plan. If that $ 1,000 is deposited into your HSA,
your HSA plan might look like this:
- $ 1,000 annual tax-free contribution to your HSA
- $ 1,500 deductible
- 80% coinsurance
- $ 3,000 Out-of-Pocket Maximum
- $ 400 monthly premium
Let’s consider an example of how these plans work in parallel.
Suppose you are changing a light bulb and it takes a nasty fall. It happens, and no one plans to have a painful broken wrist! After a trip to the ER, surgery, and maybe some physical therapy, she’s feeling a little better.
But now he has a medical bill of $ 10,000 to cover the services.
In a traditional copayment plan with a $ 500 deductible, you pay a copayment for the emergency room (for example, $ 100), then you must pay $ 500 to meet your deductible. Finally, you will have to pay your share of the coinsurance, which is 20% of the remaining $ 9,500 or $ 1,900. Then the insurance company would pay the rest. In this example, your out-of-pocket cost for this accident would be $ 2,500.
On the other hand, uh… doll… consider an HSA-based plan with a $ 1,500 deductible. That means you have to pay $ 1,500 out of pocket before your insurance goes live.
Yes, $ 1,500 is a lot of money, but this is where having a health savings account will help cover the cost of your medical expenses and help you meet your deductible. Remember that you and your employer saved $ 1,000 a year by opting for the HSA-based plan. If this money is deposited into your HSA, you have $ 1,000 a year to pay for medical expenses.
So now you have $ 1,000 to help you meet your deductible and you need $ 500 to meet your deductible. Like the copay plan, you still have coinsurance, so you will have to pay 20% of the remaining $ 8,500 or $ 1,700 or a total of $ 2,200 ($ 500 to meet your deductible that was not in your HSA, plus the $ 1,700 .)
So when you compare the copay plan to the HSA-based plan in this example, in the copay plan, your out-of-pocket costs would be $ 2,500, but in the HSA-based plan, your out-of-pocket costs were $ 2,200.
Remember, your HSA is health savings account that you can contribute to and use for tax-free medical expenses, and these funds are yours even if you change jobs. Your HSA expense can be applied toward your deductible and coinsurance if those expenses are covered by the plan, which in this case, is a broken wrist! Your HSA can help you pay for qualified medical expenses, like glasses and dental work, but remember that these expenses will not apply to your deductible.
With a traditional copayment or an HSA-based plan, your worst-case scenario of reaching your out-of-pocket maximum could be very similar. The great advantage of an HSA-based plan is that:
- you paid less money for your health insurance each month,
- that saving is your money, and
- Anything you don’t spend accumulates year after year and is there when you need it.
It is a truly compelling and revolutionary concept.
