How to Compare Medical Plans: Total Yearly Cost, Not Just the Premium
Key points
The premium is one part of what a plan costs. Total yearly cost adds what you pay for care, up to the out-of-pocket maximum, and you compare two cases per plan: expected use, and the worst case.
Check access first: confirm that your doctors and prescriptions are covered under each plan.
The two numbers that decide the math are the out-of-pocket maximum and the employer's contribution to your HSA (health savings account), which you can use only if you are eligible. The contribution can flip the result from the lower-deductible plan to the HDHP (high-deductible health plan), so run the numbers with and without it.
Test whether you could pay the full deductible, and ideally the full out-of-pocket maximum, without borrowing or skipping other bills.
Run the numbers first, chase the tax benefit second. This post is a way to think about the choice, not a recommendation of either plan.
Open enrollment is the yearly window when you can choose or change your employer health plan. Your open enrollment portal shows two plans. One has a premium of $250 a month, the other $325. The cheaper premium is tempting, but the premium is only one part of what a plan costs. This post is for employees choosing between two plans, including readers who are new to the US system. By the end, you can compare medical plans on total yearly cost.
This post covers US federal rules for calendar year 2027 and assumes an employer-sponsored health plan. If you are self-employed or buy your own coverage, the employer HSA contribution below doesn't apply, but the rest of the comparison still does. Rules in other countries, and in some states, differ. All amounts are in US dollars. The companion post, HDHP vs PPO: How to Think About Choosing Your Health Plan, covers what those two labels mean and the rules for HSA eligibility.
Terms used in this post
Premium: what you pay each month to have the plan.
Deductible: what you pay for care each year before the plan starts to share the cost.
Coinsurance and copay: coinsurance is the share you pay after the deductible, for example 20%. A copay is a fixed fee for a visit or a prescription, for example $20 (HealthCare.gov).
Out-of-pocket maximum: the most you pay in a year for covered, in-network care. It does not include premiums (HealthCare.gov).
In-network: a doctor or hospital that has a contract with your plan.
HDHP and HSA: an HDHP is a plan with a high deductible, defined by rules from the IRS (Internal Revenue Service, the US tax agency). It is the plan type that lets you contribute to an HSA, a tax-advantaged account for medical costs.
Check Access Before Cost
Before any math, confirm two things for each plan. Your doctors must be in the network, and your prescriptions must be covered. A plan that does not cover them needs a different comparison that adds out-of-network and uncovered-drug costs. Prescriptions deserve a closer look: apart from preventive medicines such as insulin (IRS Notice 2019-45), an HDHP generally can't pay for most drugs before the deductible, while a lower-deductible plan can charge a flat copay from the first fill. Each plan's Summary of Benefits and Coverage, a standard summary of what the plan covers and costs, has the details.
Your Expected Use Changes the Result
Expected use is the total of the medical bills you expect in a year, such as ongoing prescriptions or a planned procedure. Start with last year's explanation of benefits statements, which your insurer sends after it processes each claim, and add care you already know you need. A single unexpected event can change a year, which is why you also run the worst case.
How to Compare Medical Plans by Total Yearly Cost
What you pay across the year is:
premiums + what you pay for care (up to the out-of-pocket maximum)
Then, on the HDHP side only:
− employer HSA contribution
Run it for two cases per plan: expected use, and the worst case, where you reach the out-of-pocket maximum. Two inputs matter most: each plan's out-of-pocket maximum, which sets the worst case, and the employer's HSA contribution, which can flip the result. In my experience, most of the people I talk to compare premiums and expected payments, but they don't look at the out-of-pocket maximum, which caps what they pay for covered, in-network care.
This year I created a comparison tool for the two plans my employer offers. It works as a calculator and a simulator, so I can see how different scenarios play out. I always felt, intuitively, that the HDHP was better for my family, and I enjoyed seeing my HSA balance invested and growing year over year. But after I built the calculator, I saw how much money I had actually saved each year. That was true for my plans and my family, and yours may differ. I also build similar comparisons for the people I work with. You can try the PPO vs HDHP calculator below, or follow the steps at the end of this post to build your own.
Example, part 1: the plans on their own
The tables below are for illustration only and don't represent any specific plans. Both plans are invented: self-only, which means covering you alone, in-network, with 20% coinsurance after the deductible. Expected use is $4,000 in medical bills for the year, counted at the prices your plan has agreed with in-network providers.
HDHP | Lower-deductible plan | |
Annual premium | $3,000 ($250 a month) | $3,900 ($325 a month) |
Deductible | $2,000 | $500 |
Out-of-pocket maximum | $4,500 | $3,500 |
Expected use: care costs | $2,400 | $1,200 |
Expected use: care + premium | $5,400 | $5,100 |
Worst case: care costs | $4,500 | $3,500 |
Worst case: care + premium | $7,500 | $7,400 |
Illustration only. Invented numbers.
On their own, the lower-deductible plan is cheaper in both cases: by $300 at expected use and by $100 in the worst case.
Here is how the care costs are worked out. On the HDHP, you pay the first $2,000, which is the deductible, then 20% of the remaining $2,000, which is $400, for $2,400 in total. On the lower-deductible plan, you pay the first $500, then 20% of the remaining $3,500, which is $700, for $1,200 in total. In the worst case, you pay each plan's out-of-pocket maximum: $4,500 and $3,500.
Example, part 2: the employer's HSA contribution
Assume the employer puts $500 into the HSA, and the HSA pays part of the HDHP's care costs. Subtract that $500 from the HDHP side.
Expected use | Worst case | |
HDHP: care + premium | $5,400 | $7,500 |
Minus employer HSA contribution | −$500 | −$500 |
HDHP after the employer contribution | $4,900 | $7,000 |
Lower-deductible plan: care + premium | $5,100 | $7,400 |
Lower total | HDHP, by $200 | HDHP, by $400 |
Illustration only. Invented numbers.
The employer's $500 is larger than both gaps, so it flips the result. Before it, the lower-deductible plan was cheaper by $300 at expected use and $100 in the worst case. After it, the HDHP is cheaper by $200 and $400. Without the contribution, the lower-deductible plan would win in this example. With different premiums, deductibles, or employer contributions, either plan can win, so use your own numbers.
In real life, several of these costs come out of your pay before federal tax, so they reduce your federal taxable income. They are your share of the employer's health insurance premium, if your employer offers a cafeteria plan, an employer program for paying benefits before tax (IRS); money you put into an HSA through payroll; and money you put into a health FSA (flexible spending account, an employer account for medical costs) (IRS). The employer's own HSA contribution is also not taxed as federal income to you (IRS). This example leaves taxes out to keep the comparison simple. State taxes vary. California and some other states tax HSA contributions, including the employer's, as state income, and a California taxpayer adds them back on the state return, according to the state tax agency (FTB bill analysis, 2022).
The example also leaves out family coverage, copays, prescription tiers, and out-of-network costs.
The Cash Test
A lower total on paper only helps if you can pay the bills when they arrive. This test is reasoning, not an IRS rule. With an HDHP, you pay the full deductible before the plan starts to share the cost of most care. As the name says, that deductible is high, so you need that cash available. Have enough money to pay the full deductible at least, and ideally the full out-of-pocket maximum, so a covered, in-network medical bill can't throw off your finances. Run this test on both plans. A lower-deductible plan can have a higher out-of-pocket maximum (lower in the example above, but check yours) and, typically, higher premiums, which limit how much cash you can save in the first place.
An HSA can pay only what is in the account when the bill arrives, so an early bill can exceed the balance. The money already in your HSA counts toward the test, up to that balance.
How to Think About It
In my plans, the HDHP comes out ahead whether expenses are low or high. If expenses are very low, the HDHP saves on premiums, and the employer's HSA contribution is free money on top. If expenses are high, the HDHP's out-of-pocket maximum is lower in my plans, so my worst case is lower too. The one case where the HDHP loses is when the PPO covers a certain amount of outpatient care or specialty prescriptions without a deductible. So with an employer contribution, and no care or prescriptions the PPO covers better, the HDHP wins most of the time for me.
Two if/then considerations:
If you expect a lot of care, compare each plan's premium plus out-of-pocket maximum. The lower-deductible plan can win if that total is lower, even after the HSA benefits.
If you could not pay the full deductible without borrowing, a lower-deductible plan may ease the short-term cash flow problem. But if it costs more over the year, it is the worse decision overall. In my view, total cost of ownership, meaning what the plan costs you in total across the year, is the better way to think about it.
Run the numbers first, chase the tax benefit second.
To build your own comparison, work through these steps for each plan:
From the plan summary, copy the premium, deductible, coinsurance, and out-of-pocket maximum, and multiply the monthly premium by 12. Also find out whether your employer contributes to the HSA, and how much. Ask whether it arrives in January or with each paycheck.
Estimate your care costs: you pay the deductible first, then the coinsurance share of the rest, up to the out-of-pocket maximum.
Add the premium to your care costs for the expected-use total, and to the out-of-pocket maximum for the worst-case total. Try a middle bill level too. If one plan wins at the low end, in the middle, and in the worst case, it wins.
On the HDHP, subtract the full employer HSA contribution, even if you spend less than that on care, because what you don't spend stays in your HSA as your money. Run the comparison with it and without it.
Run the cash test on the full deductible and on the worst case.
Summary
Compare total yearly cost at expected use and in the worst case, after you confirm that your doctors and prescriptions are covered. The out-of-pocket maximum and the employer's HSA contribution decide the math. The cash test shows whether you can afford each plan's worst case, not which plan costs less.
FAQs
Why is the premium not enough to compare two plans? The premium is only what you pay to have the plan. You also pay for care, up to the out-of-pocket maximum.
What is the worst case? The year you reach the out-of-pocket maximum, when the worst-case total is the premium plus that maximum.
How do I estimate expected use? Start with last year's explanation of benefits statements, then add care you already know you need.
Does an HSA always make the HDHP cheaper? No. It helps only if you are eligible for the HSA, and the HDHP can still be harder to afford in cash.
Can an HDHP cost less even with high medical costs? It can, if its premium plus out-of-pocket maximum is lower, or if your employer contributes to the HSA. Compare each plan's premium plus out-of-pocket maximum.
Does the out-of-pocket maximum cap my worst-case year? Not completely. Premiums sit outside it, and an HDHP's IRS limit counts in-network costs only (IRS).
Transparency Note: I'm the human behind the keyboard — the ideas, stories, and decisions here are mine. I collaborate with AI throughout the writing process: brainstorming, drafting, smoothing out grammar and flow, assisting with research, and creating the visuals you see throughout my posts.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. I am an AFC® (Accredited Financial Counselor) Candidate, not a Certified Financial Planner (CFP®), Certified Public Accountant (CPA), tax advisor, attorney, or Investment Adviser Representative (IAR). The content herein is not intended to be a substitute for investment, tax, or legal advice from a licensed professional. Always seek the advice of a qualified professional with any questions you may have regarding your individual financial situation. Rules vary by country, state, and individual situation. The opinions expressed are my own and do not represent the views of my current or former employer.
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