Choosing the right health insurance policy requires considering your options and weighing your own and your family's needs. Two of the most common options are the preferred provider organization (PPO) and the high-deductible health plan (HDHP). But you can't consider the HDHP without weighing the benefits of the Health Savings Account (HSA), which is available only to HDHP users.
- A PPO offers its users a network of doctors and hospitals to take care of their essential healthcare needs in exchange for a monthly premium plus deductibles and copays that vary with the plan you choose. Enrollees may use out-of-network providers for an additional fee.
- A high-deductible health plan (HDHP) makes the enrollee responsible for a deductible of at least $1,400 for individuals and $2,800 for families each year for 2022. The numbers rise to $1,500 and $3,000 for 2023. But enrollees can open a health savings account (HSA) to save and invest pretax dollars to cover medical expenses.
About 46% of U.S. employees use a PPO, while 28% had an HDHP with a savings option, according to the annual national Employer Health Benefits Survey conducted by the Kaiser Family Foundation. Not every employee gets a choice, as the employer can decide on the available options.
- HDHPs have high out-of-pocket expenses, such as deductibles and copays, which may not compensate for the reduced premiums depending on how high the user's health costs are.
- Opening an HSA to save for healthcare expenses is a benefit of an HDHP and allows people to use pretax dollars to pay for uncovered healthcare expenses. There is no tax on the principal or interest in these accounts, and they can roll over from year to year.
- PPOs may be a better bet for people who need expensive treatment for an ongoing health issue.
HDHP Plus HSA: Benefits and Limitations
An HDHP usually has a lower monthly premium and significantly higher deductibles and copays. In many cases, it makes you eligible to open an HSA at a bank or an investment firm.
You're saving pretax dollars—deducted from your paycheck—that can be used to cover deductibles, copays, and qualified items not usually covered by insurance.
For healthier, younger workers who do not expect much in the way of medical expenses, an HDHP can have many advantages. There are lower premiums and a chance to save pretax dollars to cover a wide range of expenses including acupuncture, ambulance services, blood sugar test kits and strips, chiropractic therapy, hearing aids and batteries, infertility treatments, X-ray fees, dental and vision exams, and even coinsurance fees.
If the dollars saved in an HSA are not needed, they can be rolled over from year to year. Because both the principal and the interest are tax-free, an HSA can be an effective investment account.
There’s a downside to an HDHP—at least the first $1,400 in expenses must come out of your own pocket, and that can discourage some from using medical care. A recent study found that people who had to spend $1,000 or more in deductibles were less likely to seek emergency room care for chest pain and were sicker when they did show up for care compared with patients in health insurance plans with an annual deductible of $500 or less.
PPOs: Benefits and Limitations
PPO policies must cover a federally-mandated list of essential health benefits, whether they are offered by an employer, bought directly from an insurer, or obtained through the federal HealthCare.gov database and its state offshoots.
These include outpatient and emergency services, hospitalization, maternity and newborn care, prevention and chronic disease management, and many other services.
Traditional health plans such as PPOs and health maintenance organizations (HMOs) have higher premiums than HDHPs. For example, in 2021, annual worker premiums for PPOs averaged $1,389 for an individual and $6,428 for a family. HDHPs averaged $1,242 for an individual and $5,129 for a family.
Worker premiums for HMO plans were somewhat lower than PPOs because HMOs generally limit care to doctors who work for or contract with the organization and the plans cover out-of-network care only in an emergency. HMO premiums are still higher than HDHPs.
Best Choice for You
While the upfront costs of a PPO might be higher, it can be worth it if you need significant medical care or have an unexpected accident or emergency. The PPO network of contracted doctors gives you a place to go for care and may encourage the development of a relationship with providers.
Knowing your care is mostly covered by insurance may encourage you to go earlier and more often to identify and take care of health problems before they worsen.
If you and your family are healthy and seldom use medical care, an HDHP with an HSA might save you money. It helps to be well organized financially so you can save for expensive items such as dental work or hearing aids while depositing sufficient dollars in the HSA to cover deductibles and unexpected expenses.
High-income people who are able to afford the deductible and can cover emergency bills may especially benefit from the tax advantages of an HSA. It's an additional tax-sheltered stream of money to put toward the future.
|HSA vs PPO|
|CATEGORIES||HDHP + HSA||PPO|
|Basics||The enrollee pays a deductible of at least $1,400 for individuals and $2,800 for families in 2022 and $1,500 or $3,000 in 2023. Enrollees are eligible for an HSA to save pretax dollars to pay for deductibles and other healthcare expenses.||Lower deductibles which vary among plans.
You pay less if you use participating providers.
No access to HSA.
|Eligibility||HDHP enrollees can save pretax dollars in an HSA. For 2022, individuals can contribute up to $3,650. The family limit is $7,300. The 2023 numbers rise to $3,850 and $7,750. People ages 55 and older can make $1,000 in catch-up contributions.||The enrollee may have the option of opening a Flexible Savings Account (FSA) to set aside money for uncovered health costs. The funds disappear if not used by year-end or shortly after.|
|Premiums||Monthly premiums for HDHPs are generally lower than for other health plans.||Higher premiums which vary on the deductible and other out-of-pocket costs.|
|Out-of-Pocket Limits||For 2022, the maximum out-of-pocket cost is $7,050 for an individual and $14,100 for a family. For 2023, the limits rise to $7,500 and $15,000.||The 2022 out-of-pocket limit is $8,700 for an individual and $17,400 for a family. The 2022 limits are $9,100 and $18,200.|
|Provider Network||None||Contracted health providers and hospitals|
|Benefits||An HSA helps fund uncovered medical expenses. These include acupuncture, ambulance services, blood sugar test kits and strips, chiropractic therapy, hearing aids and batteries, infertility treatments, X-ray fees, dental and vision exams and treatments, and coinsurance plan fees.||The PPO network guides enrollees to specific healthcare providers who must meet certain standards to be accepted into the network.|
|Limitations||Studies show that the high deductible in an HDHP can discourage enrollees from using medical care. Those who don’t sufficiently fund their HSAs can be caught short.||Coverage is limited to health and medical conditions and providers listed in the policy. It may not include dental, vision, and other services.|
Sources: Internal Revenue Service (IRS) and HealthCare.gov
What Is a PPO?
A preferred provider organization (PPO) is a private health insurance plan that provides its customers with a list of doctors and medical facilities that are available in its network. It covers out-of-network care for an extra fee.
The PPO is similar to an HMO (health maintenance organization) but is more flexible. You're not stuck with a limited choice of doctors.
A PPO user pays a monthly premium, plus a deductible for services that varies by plan. There may also be copays for specific services, such as a 20% copay for a doctor's visit, even after the deductible is exhausted. Your annual out-of-pocket expenses are capped by federal law.
What Is a HDHP?
A high-deductible health plan (HDHP) has a relatively low monthly premium but a relatively high deductible before the insurer picks up the bills.
The great advantage of an HDHP is its access to a Health Savings Account (HSA), which allows the individual to pay pre-tax money into a savings account that can either be spent on uncovered costs or saved for the distant future.
The HDHP may work best for a young, healthy, and lucky person who has no medical conditions that require regular care and extra money to save in an HSA. An individual or family that wants to avoid big bills at unexpected intervals might prefer a PPO.
HSA Vs. FSA: What's the Difference?
An HSA or Health Savings Account is said to have a triple tax advantage. The money paid in is "pre-tax" and is deducted from the person's gross income for the year. The money withdrawn is also tax-free as long as it is used for qualified medical expenses. The interest it earns from year to year is also tax-free when withdrawn for medical expenses.
The FSA, or Flexible Savings Account, is also a savings account for use only to pay for expenses not covered by health insurance, and it's also paid in pre-tax money. Only employees with company coverage are eligible to use them. The employees have to submit requests to their employers to use the money. The account balance, if unused, disappears at the end of the year or shortly after.
The Bottom Line
The HDHP keeps your monthly premium relatively low but keeps you on the hook for costs that might be substantial if you need regular treatment, come down with a sudden illness, or have an accident. It may be best for people who are healthy and lucky and have enough money set aside to handle unexpected medical expenses.
To that end, the HDHP may come with a Health Savings Account (HSA) that is solely open to people with HDHPs. This type of account has distinct tax advantages, and can even augment your retirement savings if your income is comfortable enough to allow you to pay in up to the limit every year (while paying that high deductible out of pocket).
The PPO will have a higher monthly premium but it may cover more of your family's routine and unexpected medical expenses. It can be the less stressful way to go if you don't want to worry about the cost of every doctor's visit and every medical test.
Internal Revenue Service. "Revenue Procedure 2020-32," Page 1.
Internal Revenue Service. “Rev. Proc. 2021-25."
Kaiser Family Foundation. "2021 Employer Health Benefits Survey: Plan Enrollment."
Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 3.
Centers for Medicare and Medicaid Services. "High Deductible Health Plan (HDHP)."
American Heart Association. "People With High-Deductible Health Plans Less Likely to Seek ER Treatment for Chest Pain."
Centers for Medicare and Medicaid Services. “Information on Essential Health Benefits (EHB) Benchmark Plans.”
Centers for Medicare and Medicaid Services. “Health Maintenance Organization (HMO).”
Kaiser Family Foundation. "2021 Employer Health Benefits Survey: Health Insurance Premiums and Worker Contributions."
Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 6.
HealthCare.gov. "Out-of-Pocket Maximum/Limit."