Pros and Cons of Catastrophic Health Insurance

Catastrophic health insurance plans—more formally known as High Deductible Health Plans (HDHPs)—were created as a way to lower overall medical costs by providing a lower monthly premium in exchange for a higher annual health insurance deductible. With catastrophic health insurance plans, you pay for almost all medical care until you reach the annual deductible amount. After that, traditional health insurance coverage begins.

About High Deductible Health Plans
Under a high deductible plan, you pay out-of-pocket for most medical bills until the total of your payments reaches the amount of your annual deductible. After that, the catastrophic health plan will cover most medical expenses, although you usually have to pay co-insurance until you reach your total out-of-pocket maximum amount. If your catastrophic health plan is eligible for a Health Savings Account (HSA), you can use the HSA funds to pay the deductible and out-of-pocket expenses. Even if you don't use an HSA, it's smart to set aside some money each month to pay for future medical expenses that you may incur. If you never need the money, it's a bonus.

For 2008, the IRS requires that people with tax-exempt HSAs have catastrophic health insurance plans with deductibles starting at $1,100 for an individual and $2,200 for a family. The total out-of-pocket maximum (which includes the deductible and co-payments) for these HSA-linked catastrophic health plans is $5,600 for singles, and $11,200 for families. The U.S. Department of the Treasury has more information on HSAs and high deductible health plan requirements for 2008 and 2009.

Many HDHPs have high lifetime maximum benefit payment limits (also known as "caps"), usually between $1 million and $5 million. Once you reach the cap, your health insurance company will not pay for any of your medical costs and your policy will be cancelled.

Where to Get Catastrophic Health Insurance
High deductible health insurance can usually be purchased either as an individual plan or as a group plan. Certain pre-existing conditions, such as diabetes and mental health disorders, might mean you can't qualify for an individual catastrophic health plan without prior qualifying group coverage, or at least that you can't get coverage for those pre-existing conditions. Group catastrophic health plans are subject to HIPAA regulations, meaning you can't be denied enrollment or coverage, but may have to wait for coverage of pre-existing conditions, depending on your prior health insurance coverage.

What Do High Deductible Health Plans Cover?
The type of coverage varies based on which high deductible health insurance plan you choose. Always read and understand the full policy and what it covers when comparing health insurance plans. Ask your agent or company to explain anything that seems unclear, and make sure you will get or can add coverage for medical conditions you might develop. In the past, catastrophic health plans did not cover things like routine care and prescriptions. Today, however, many high deductible health plans offer coverage for routine and non-catastrophic care. However, as a general rule, the more a plan covers, the higher the premium will be. Agreeing to pay more out of your own pocket shifts some of the risk away from the health insurance company on to you, resulting in a lower monthly premium. Be aware that the IRS currently specifies that if your high deductible health plan provides prescription benefits before you meet your annual deductible, your HDHP does not qualify for use with an HSA.

Catastrophic Health Insurance Considerations
The reason you pay generally lower premiums with a high deductible health plan is that the health insurance company knows you'll pay for a larger portion of your costs if you need medical care. You will have to pay out-of-pocket for the majority of medical costs you incur before reaching your annual deductible. If the sole reason you choose a catastrophic health plan is to save money, you'll need to carefully weigh the benefits against the risks. If you're truly worried about money, will you be able to pay medical expenses until you meet your deductible? For example, if your annual deductible is $4,000 and you have emergency surgery that costs $5,000, you are required to pay $4,000 of that out-of-pocket, assuming you have not yet paid any of your deductible. The remaining $1,000 would be paid by your health insurance. Ask yourself if a lower monthly payment is worth the risk of paying your deductible or a large portion of it all at once.

Should You Get a High Deductible Health Plan?
If you're sure you can cover the deductible and want to save money on the monthly premiums, a high deductible health plan may make sense. If you qualify for an HSA or other tax-exempt medical savings account and can contribute the deductible amount, you may have an easy way to pay your out-of-pocket medical costs while saving on premiums. Most people who consider catastrophic health insurance either are getting their own health insurance for the first time or are nearing retirement. The younger group tends to be less likely to incur medical expenses because they are young and healthy, while the older group tends to have enough money to pay for most medical care unless they experience a serious illness or emergency. Typically, high deductible health plans provide the most benefit to those who don't require frequent prescriptions or office visits.