Understanding 'Catastrophic' Health Insurance

Because of the shape of the economy and the increasing costs of healthcare, there are many individuals and employers who are turning to High Deductible Healthcare Plans, also known as HDHPs or ‘catastrophic’ health insurance plans. Essentially, consumers who choose them will receive lower than average premiums with extremely high deductibles.

How it Works

Catastrophic health insurance plans aren’t like others in that most people actually end up paying for the majority of their healthcare-related expenses – including their prescription medications – out of pocket. Some of these have deductibles of $5000 or higher, meaning that even ER and urgent care visits won’t be covered until that deductible has been met. Even once the consumer has paid the $5000 out of pocket, only things like preventative care will be covered up to 100% under these plans. However, the healthcare reform laws that went into effect in 2014 now require insurance companies to pay for 100% of preventative care even before the deductible has been met.

Is It a Good Choice?

A catastrophic health care plan isn’t the best choice for everyone, though. People who are generally healthy may be able to get away with it since they’ll probably pay very little out of pocket. However, in the event that something terrible was to happen (such as a heart attack, stroke, cancer, etc.) then everything will be covered to an extent once the deductible has been met. This is how the policy got its name: it’s designed to provide ample coverage, but only in the event of a health-related catastrophe.

Choosing a Plan

While many people believe that these plans will only cover things like emergency room visits and hospital stays associated with sudden injuries or illnesses, this isn’t always the case. Many will pay for all healthcare related expenses once the deductible has been met, including any prescription medications or devices that may be part of a treatment plan. Individuals will likely have some co-pays associated with things that aren’t considered preventative, but these are generally 20% or less – much like other types of plans that are out there.

HSA Compatibility

An HSA, or a Healthcare Savings Account, was made possible by federal law back in 2004 and allows Americans to set aside a certain portion of their pre-taxed income to be used for healthcare expenses both now and in the future. In order for to be eligible for an HSA with a catastrophic health insurance plan, the deductible must be at least $1200 for an individual or $2400 for a family. Similarly, out of pocket maximums cannot exceed $5950 for an individual or $11,000 for a family. People who are younger than 55 can contribute as much as $3050 per year as an individual or $6150 as a family annually to an HSA; people who are 55 or older can contribute an additional $1000 per year individually.

Despite health care reform, it is anticipated that the catastrophic health insurance plans will continue to be popular among Americans. Some 10 million are currently insured under HDHPs, and that number is expected to climb as people purchase plans to avoid being penalized.