A person who pays their monthly premiums and never has to use the plan might feel they are not getting the most out of their insurance, whereas a person who makes constant use of the plan derives a great amount of value from the policy. This is the unique thing about insurance — it “pays” or rewards an individual for being sick. The all too common mindset is that if I spend X dollars on my premiums, I wish to derive Y dollars in value on medical services, where Y > X. But Y is strongly and positively correlated with being unhealthy, leading to the seemingly paradoxical situation where people complain about not getting the most out of their benefits, i.e. people complain about not being sick.
There are costs and adverse effects in being unhealthy (worse job performance, lower energy levels, lower quality of life); this is the reason why people strive to be healthy. So on the one end, we wish to get the most out of our medical plan, and yet we want to be and stay healthy. Why pay the exorbitant and ever-increasing premiums for a plan one should strive NOT to use? Enter the concept of a high-deductible health plan.
A deductible is usually a dollar amount D associated with the medical plan, wherein the first D dollars’ worth of medical services come completely out of the member’s pocket. This amount must be satisfied before any benefits from the insurance company are given. It becomes quite clear what the purpose and function of a deductible is: to lower utilization. When the first dollars come out of the individual’s pocket, one is forced to think twice before deciding whether or not something warrants a visit to the doctor’s office. Given two plans, all things equal except for one has a deductible, the other does not, the one with a deductible will have lower premiums as the financial burden or the expected financial liability for the insurance company is far less.
Health insurance as a way to manage risk can be cost-effective. Much in the same way an individual with a car worth $1,000 might opt for the cheapest auto insurance plan covering only liability (damage dealt to others) as it makes little financial sense to pay heftier premiums to cover damages to or theft of a $1,000 car, the same principle of optimization can be applied to health insurance.
As an individual, you have a relatively good idea (certainly better than the insurance company) as to what your health is. Previous years’ medical expenses can provide a rough indication of what your medical expenses might be in the next year. This is information you can use in choosing the correct health plan for your needs.
A high-deductible health plan in the year 2015 is defined by the IRS (why the IRS provides the definition will be explained in a later article) Section 223 (c) (2) (A) to be a “health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductible, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage.”
These high-deductible health plans are far less expensive premium-wise than their lower deductible counterparts as the initial costs incurred are the responsibility of the member. The safety-net feature, a stop-loss via an out-of-pocket maximum is intact so that the risky management aspect of insurance remains. A simple model to calculate effective costs between plans is:
Total Annual Costs = Annual Premium + Annual Expense not paid for by insurance company.
As a general trend, if the annual premium goes down, there will be greater responsibility on the part of the individual; so that the annual expense not paid for by the insurance company is expected to go up. By evaluating your situation, you can compare the variety of plans available to minimize costs.
The underlying principle is that a HDHP benefits those who have very low expenses or have very high expenses.
For a person who has high expenses, they do not care about the deductible. The two factors they will look at are the out-of-pocket maximum threshold and the premiums. Often HDHPs have similar out-of-pocket maximum levels as traditional plans, so that in conjunction with the lower premiums, a person with high expenses, might save more opting for a HDHP as opposed to a traditional plan.
For low expected expenses incurred, it makes no sense to get a more generous health insurance plan by paying higher premiums. By paying lower premiums, the individual saves more money, yet retains the stop-loss feature in case of the unlikely high expense.
By having an incentive to drive costs down by striving for healthier living, HDHPs are often a viable way to contain costs.

Charles is a Bay Area native despite a four year hiatus at Princeton University.