The health care system can be really confusing — and the costs associated with your health care can be even more confusing. In this week’s post, I want to help you understand some key health insurance terms as well as how different elements work together to pay for some of your health care expenses.
Prior to my husband’s car accident last spring, we rarely used our health insurance. Over the first three years of our marriage, we collectively spent about $1,500 out of our own pocket (if that) on health care — including an ER visit. Since the accident, I’ve become more well-versed in the health care system and seen in action how our insurance has stepped in to cover much of our costs. I can’t say I find the system as a whole any less complicated, but knowing the basic terminology and processes has been invaluable as we’ve sorted through the bills.
First, let’s review some key terms:
· Premium: The amount that you (and potentially your employer) pay to your health insurance company, on a monthly or quarterly basis, for your coverage.
· Deductible: The amount you must pay for services before your health insurance covers a greater portion of your bills. Note that before you reach your deductible of, say, $2000, your insurance may only cover preventive services.
· Copayment: The flat amount of money you pay for a covered service, such as $30 for a non-routine doctor visit or $10 for a generic prescription. You don’t generally have copays for medical services until after you’ve met your deductible, since until that point you may be responsible for the full cost.
· Coinsurance: Instead of a flat amount, you owe a percentage for a covered service. For instance, you might owe 20% coinsurance for a hospital visit while your health insurance pays the other 80%. Like copays, coinsurance generally doesn’t kick in until after your deductible is met. It’s unusual, but still possible that you may owe both a copay and coinsurance on one transaction.
· Out-of-Pocket Maximum: The most you could have to pay for your health care in one calendar year, not including your premium, before your insurance covers 100% of the bill for in-network services.
· Low Deductible Health Plan: Often thought of as a “traditional” health plan. These plans generally carry a lower deductible (less than $1,350 for an individual or $2,700 for a family). You’ll shoulder less of the cost when you incur a medical expense, but you’ll likely have higher monthly premiums.
· Flexible Spending Account (FSA): Essentially a savings account that you can use only for qualified medical expenses. You determine the amount you want to contribute out of your paycheck, and it is put into that account on a pretax basis. You can use this account to pay for expenses like insurance copayments, deductibles, qualified prescription drugs, and more. You generally have to use all of the money in your FSA during a calendar year, or you will forfeit that money.
· High Deductible Health Plan: These plans carry a higher deductible (at least $1,350 for an individual or $2,700 for a family in 2019). This means that you’ll often shoulder more of the cost when you incur a medical expense, but are likely to have lower monthly premiums.
· Heath Savings Account (HSA): Like its FSA counterpart, a way for people with high deductible health plans to save for and pay for qualified medical expenses tax-free. The key differences: HSA money rolls over from one year to the next, and it can travel with you from employer to employer. Find out more about HSAs and FSAs in this nerdwallet article.
Now that you have a sense of the key terms, let’s see how they work together. Here are two examples:
Sam pays a premium of $50/month for her health insurance on top of what her employer contributes. She chooses a high-deductible health plan because she has minimal health care costs and wants to use her HSA as a vehicle to save up for future health care expenses like having a baby. Her employer puts in $100 per month into her HSA and she matches that contribution. After an unexpected shoulder injury and emergency room visit, she meets her deductible. She pays for these services using money from her own pocket as well as money from her HSA. Since she met her deductible, she will pay 20% coinsurance for covered, in-network services for the rest of the calendar year until she reaches her out-of-pocket limit.
Ryan pays a premium of $100/month for his health insurance on top of what his employer contributes. He chooses a low-deductible health plan since he will likely incur more health care costs due to a chronic illness. He contributes $50/month to an FSA because he knows he will have a $20 copay for a monthly prescription. After a series of non-routine doctor visits and an x-ray, he hits his deductible of $1,000. He uses his FSA to help him cover these costs. He now pays 20% coinsurance for covered, in-network services for the rest of the calendar year until he reaches his out-of-pocket limit. After a few days in the hospital and many tests due to a flare-up of his chronic illness, he reaches his out-of-pocket limit of $3,000. For the remainder of the year, he will owe nothing out of his pocket for covered, in-network services.
Though you can’t always predict how or when you will need to use health care, knowing how key pieces of your health coverage work can give you peace of mind. Here are a few quick tips that can help:
1. Get to Know Your Numbers: Before my husband’s accident, I couldn’t have told you exactly how much our deductible or out-of-pocket maximum was because we had never come close to hitting those numbers. Now I know them well. If you haven’t taken a look at your health care benefits in a while, reviewing these numbers today can help you plan for the future and make sure you are armed with critical knowledge just in case the unexpected arises.
2. Take Advantage of Savings Vehicles (FSA or HSA): These accounts are there to help you save money — don’t miss out! Once you know your numbers, you’ll want to take a look at your past few years’ expenses and do a little math. If you have an FSA and plan to incur costs in this calendar year, it’s a great way to save for them. Just make sure to be conservative so you don’t lose money at the end of the year. If you have an HSA, you have a lot of flexibility. This can be a great way to save up for health care costs you might incur down the road.
3. Evaluate Your Plan Options Carefully: Unless you switch jobs mid-year, you probably can’t make any changes right now. Before open enrollment for benefits comes around in the fall, take some time to evaluate how you currently use health care as well as identify medical expenses that might come up in the future. Too often people just go with the plan they know or the one most similar to what they had before, but that doesn’t mean it’s the best plan for them.
Have other health care related questions you’d like me to cover in the future? Contact me.