As several of our clients work at the University of Washington, we wanted to provide a resource for how we analyze the various health insurance options within the greater context of a well-crafted financial plan. The University of Washington has several robust health insurance options. The right plan often comes down to your specific financial plan, emergency fund, and goals.
Our Framework:
We view all insurance as a plan for worst-case scenarios. Given this, our formula to evaluate health plans is looking at your worst-case scenario cost:
Annual Premiums + Out-of-Pocket Maximum - Premium Tax Benefits*
*Premiums paid are excluded from gross income and equate to tax savings.
For example, assuming someone is in the 24% marginal tax bracket, the UMP (Uniform Medical Plan) Classic's Worst-Case Scenario is $3,131 ($1,488 annual premiums + $2,000 out-of-pocket maximum - $357 tax benefits). From a planning perspective, this means worst-case scenario for medical costs, you would expect to spend a little over $3,000.
What about deductibles? We usually place less emphasis on deductibles, especially if our clients have an adequate emergency fund. A deductible likely won't ruin your financal plan, whereas a high-cost worst-case scenario could.
A lower deductible could make a difference emotionally. If a lower deductible encourages you to have annual checkups and see your doctor more frequently, then the higher premium is likely a worthwhile tradeoff.
It's also important to remember that the worst-case scenario cost rises if any dependents are on your plan. For example, let's assume an entire family is on the UMP Classic Plan. The worst-case scenario cost increases to about $7,100.
Adding a Health Savings Plan:
The University of Washington has a high-deductible plan that is Health Savings Account (HSA) eligible. This plan comes in two forms depending on your preferred network, UMP CDHP or the Kaiser WA CDHP.
If we had an HSA, the formula for worst-case scenario changes to the following:
Annual Premiums + Out-of-Pocket Maximum - Premium Tax Benefits - HSA tax reduction - Employer HSA contribution*
*HSA contributions are excluded from gross income and excluded from FICA tax if funded through payroll.
By enrolling in the HSA plan, the State of WA contributes $700/year for an individual and $1,400 for a family plan.
To illustrate, let's assume an individual enrolls in the UMP CHDP plan and fully funds their HSA. For 2024, maximum HSA contributions are $4,150 for an individual and $8,300 for a family. Employer contributions of $700 for an individual and $1,400 for a family reduce this HSA contribution.
Assuming a 24% marginal tax bracket, the worst-case scenario cost is around $2,800 for an individual and around $5,700 for a family. This is almost $1,400 lower than the UMP Classic for a family, and both of these are lower than any other deductible plan.
Advanced HSA Planning:
Different from a Flexible Spending Account (FSA), an HSA is not a use-it-or-lose-it account. You retain ownership of the funds and account your entire life. An HSA can even be used as a tool for retirement planning.
Once the funds are in the HSA, there are no taxes on interest, dividends, or investment growth. When it is time to take money out, you pay no income taxes if it is used for eligible medical expenses. For many of our clients, we invest the HSA balance similarly to their other long-term investment portfolios, e.g. (IRAs, joint investment accounts, 403b, etc.).
If a family contributes the maximum allowed to an HSA for over 20 years and we assume average market growth, the HSA balance may be close to $500,000. This could be a nice account to cushion retirement health care expenses, long-term care, or even general living expenses in retirement.
The IRS also has no statute of limitations for reimbursing yourself. For example, a medical procedure that you paid $4,000 for in 2024 could be used to take $4,000 out of your HSA later on in life with no taxes.
What Is the Best Option?
Like all strategies in financial planning, there is no one-size-fits-all approach.
For our clients, we recommend a mix of HDHP/HSA plans and lower-deductible options. In some cases, we may change this mix periodically, depending on what we're planning and anticipating in the next year related to career changes, lifestyle, family changes, and more.
It is important to note that healthcare inflation generally outpaces general inflation. The long-term average for healthcare costs is around 5% per year, while general inflation is closer to 3%. Given this, a plan needs to be in place to cover future healthcare and long-term costs. If you are not contributing to an HSA, it's prudent to review your overall wealth accumulation plan to ensure you have enough to cover healthcare and potential long-term costs in retirement.
Have further questions or want to review your employee benefits and health plan, feel free to schedule a free consultation.
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