Health insurance is one of those things that most people find way more complicated than necessary. If you can’t keep deductibles, premiums, out-of-pocket maxes and co-pays straight, you’re not alone. A lot of people just randomly pick an insurance option and hope for the best.
Premiums are your monthly payment just for being covered by a health plan. Your premium is fixed for the entire year or term of the insurance policy. You’ll pay the same premium each moth if you don’t go to the doctor at all, go a few times, or rack up hundreds of thousands in medical bills. The lower the premium, the more you’ll pay in the event of medical service.
The deductible is the amount in medical bills that you must pay out of pocket before your health benefits even begin to kick in. Deductibles trip a lot of people up since they don’t work the same way as car insurance deductibles. With car insurance, your deductible resets for each accident. Your health insurance deductible, however continues to accumulate throughout the year. Things get really confusing, however, because most plans are now required to completely cover preventable care regardless of whether you’ve hit your deductible yet.
Health deductibles differ from car insurance deductibles in another way too. Even after your health insurance deductible has been reached, you’ll likely still be on the hook for a portion of your medical bills. Your portion at this point is either known as co-pays, if you’re responsible for a fixed portion of each bill, or co-insurance, if you’re responsible for a percentage of each bill.
The out-of-pocket max is (finally) pretty self explanatory- simply the maximum you’ll be responsible for over the course of the year, not including premiums. Since it’s wise to plan for the worst case scenario, the out-of-pocket max is also the most important factor in the health plan (other than the premium). If you are comfortable with your out-of-pocket max, you can almost ignore the co-pay, co-insurance, and deductible. Those are just different paths to getting to the out-of-pocket max
As with other types of insurance, the more you self insure, the lower your premium will be. In this case this would mean opting for a higher out-of-pocket max and deductible.
Three Kinds of Plans
There are three basic types of plans that you’ll likely have to decide between- Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and High Deductible Health Plans.
Health Maintenance Organizations
PPOs and HMOs are your more traditional plans and incorporate all the concepts we discussed above (deductible, out-of-pocket max, co-pays, and co insurance). The biggest difference between PPOs and HMOs is your flexibility in choosing doctors and specialists. HMOs usually confine you to a smaller network of doctors, and requires a referral for every specialist visit. If you see a doctor outside of the network, you’re on the hook for the entire bill. The trade-off is lower premiums.
Preferred Provider Organizations
PPOs still have a network of doctors, but will still cover a portion of your bill if you go out of network. You’ll still be on the hook for a larger portion, often double, of the bill than if you had stayed in network. Some specialist visits also don’t require a referral under a PPO. Of course, the flip side of this is higher monthly premiums.
High Deductible Health Plans
As the name implies, HDHPs come with higher than normal deductibles (and out-of-pocket maxes). The trade-off, of course, is lower premiums.
Many HDHPs also aim to provide a simpler alternative to traditional plans by eliminating deductibles, co-pays and co-insurance. While these will still list a deductible, it will be the same amount as the out-of-pocket max. What this means is that you pay 100% of your bills until you meet the deductible/out-of-pocket max, after which the plan pays 100% of any further bills for the year. The health insurance will still pay for all routine preventative care regardless of whether the deductible has been met or not.
As an added bonus, being covered by HDHPs allows you to sign up for a Health Savings Account (HSA). Similar to retirement accounts, your contributions to HSAs are not taxed. If your employer allows it, you can have your contributions taken right out of your paycheck. Since approximately 20-30% of your paycheck is taxed, this means a $400 contribution to your HSA will only reduce your net paycheck by about $300. Unlike a retirement account, however, you can use the money in your HSA right away, as long as it is used on medical bills or other health care.
If you’re familiar with Flex Plans, you may be wondering how HSAs are any different. Flex Plans were a “use it or lose it” plan. If there was a remainder balance in the account at the end of the year, it got wiped out and your account started back at 0 the next year. HSAs work like a normal savings account. Your balance carries forward year after year. Better yet, if you leave your HDHP, you get to keep your HSA and continue to use it, although you won’t be able to contribute any more to it.
In addition to the tax benefits of an HSA, the account can also serve as part of your emergency fund. This is especially effective if your employer allows you to have your HSA contributions deducted from your paycheck, since this automates your emergency savings. Of course you don’t want to use your HSA as your only emergency fund, since you won’t be able to use the money to fix your furnace or flat tire.
What Type of Insurance Should I Choose?
Deciding what health insurance plan to sign up for depends a lot on your personal circumstances. If you are someone who rarely goes to the doctor, a High Deductible Health Plan will likely be the clear choice because of the lower premiums. However, even though you don’t anticipate seeking medical care, I’d still recommend taking advantage of your HSA. At least contribute your savings in premiums over the traditional plan. If you can afford to contribute more, do, so that you can build up a fund for when you need it. Once you’ve built your HSA at least to your yearly out-of-pocket max, you can back off a little bit.
If you do find yourself seeking medical care more often, the choice isn’t quite as clear. However, don’t automatically assume that a traditional plan will be better for you. Even in worst-case scenarios, when you are in an out of the hospital every other week, a HDHP may still end up costing you less than a traditional plan. The easiest way to compare how the two plans would perform in worst case scenarios is to simply add the yearly premium to the total out-of-pocket max of each option. Pick the one with the lowest total.
If you do typically seek medical care more often, you should strive to at least contribute your out of-pocket-max amount to your HSA each year. This way you won’t be stuck paying off medical bills for years to come.
Where Do I Get Health Insurance, and How Much Will it Cost?
Depending on your situation, you may have several options for insurance. There’s no ‘best’ option- each option has pros and cons in different circumstances.
Employment Provided Health Insurance
Finding a job with medical benefits is good. Finding a job with great medical benefits is worth it’s weight in gold. The health insurance options your employer offers and the amount you’ll be required to pay varies by a lot from employer to employer. If your employer pays for 100% of your premiums, that’s essentially anywhere from $5,000 to $20,000 tax free income per year, depending on the levels of coverage provided. What your employer doesn’t cover for premiums will be taken directly out of your paycheck and can easily reduce your paycheck by $200/month.
Your Parent’s Health Insurance
Thanks to the Affordable Care Act (Obamacare), you can stay on your parent’s health insurance until you turn 26. So if you’re fresh out of high school or college and can’t find a job that offers health insurance, this is a viable option for the time being (assuming your parents have health insurance).
While not technically insurance, there are a few groups that facilitate medical bill sharing among members. The basic concept is the same as insurance- each month members pay a set ‘share’ (premium) that gets pooled together and pays for members’ bills. A few key differences- although to my knowledge there has never been an issue with bills not being covered, the co-op is not required by law to disburse payments to members in need, since it is not technically insurance. Rather the whole thing functions on reputation and trust. Also, these groups typically require members to abide by certain moral standards. So they won’t pay for bills that arise from drunk driving, smoking, excessive drinking, drugs, etc.
Although healthcare sharing is not technically insurance, members of qualified healthcare sharing programs are granted an exception from the Obamacare mandate, so you will not get hit by tax penalties. The five groups that are exempt are Christian Healthcare Ministries, Liberty HealthShare, Medi-Share, Altrua and Samaritan Ministries.
For younger adults, healthcare sharing will generally cost between $100 and $250 per month depending on your out of pocket responsibility.
Government Subsidized Healthcare
Love it or hate it, Obamacare has insured millions of Americans and still remains an option. Your premiums and coverage are based largely on your income and can range anywhere from $0 to over $400/month for basic plans. To get an actual quote, visit Healthcare.gov.
On the Obamacare exchanges, you are technically shopping for insurance from private insurance providers. However, only certain providers have chosen to compete on the exchange. If you don’t qualify for premium subsidies or otherwise don’t want to shop on the exchanges, you can shop for insurance on the private market. Similar to shopping for car insurance, this involves seeking out insurance agents and quoting premiums. Often the same agents that sell car and life insurance will sell health insurance.
Bringing It All Together
Although health insurance is something you hope you don’t really use, it’s something that is worth having. Once you figure out what your options are, decide how much coverage and what kind of coverage to buy based on how much you would be willing to pay out of pocket. Remember, typically the more you are willing to pay out of pocket, the cheaper it all will be in the long term.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.