Understanding the language in a healthcare plan can be confusing. As medical costs have increased in America, insurance companies are shifting the financial burden onto consumers in the form of higher deductibles, decreased coverage, and coinsurance clauses which many Americans do not fully understand or even know to look for. The goal of this article is to provide some clarity into the nomenclature and “ins and outs” of our complicated healthcare system.
Health Insurance Premiums
A health insurance premium is the monthly payment made to an insurance company for the insurance policy. Premiums are paid whether or not the insured actually has any medical expenses. This monthly premium keeps your insurance coverage active. If you are covered through work, your employer may pay part or all of your monthly premium.
Health Insurance Deductibles
A deductible is the amount of medical costs that the insured must pay before the insurance company steps in to help. Typically, deductibles represent an annual maximum that resets each year. For example, if an individual has a $1,500 deductible and a $2,000 medical bill, the insured must pay 100% of the $1,500 deductible before the insurance company will help pay the remaining $500. The following year they will have to pay the deductible of $1,500 again before the insurance coverage kicks in.
Coinsurance is the percentage of the cost of the medical service that the insured must pay even after their deductible has been met. Coinsurance percentages can range from 75% to 90%, and the insured is liable for the remaining percentage. In reference to the example above, if the insured had an 80/20 coinsurance agreement, after the insured has paid 100% of the $1,500 deductible they would be responsible for 20% of the remaining $500, or an additional $150. This may not seem like much, but if you were to need a $20,000 surgery, 20% of $18,500 would be an additional $3,700 on top of the $1,500 deductible. Currently, almost 40% of Americans cannot afford a $400 emergency expense.
Copays are fixed amounts paid each time a medical service is received. Each service can have a different copay amount and copays do not count toward the annual deductible. For example, in one day you could incur a copay for your doctor’s visit, a copay for the blood tests performed, and a copay for the prescription needed. You can find your copays on your plan’s Summary of Benefits.
Out-of-pocket Maximum (OOPM)
The OOPM refers to the maximum amount of spending an individual is liable for in connection with the covered healthcare services received in a given year. Once this limit is reached, insurance will pay 100% of all remaining covered costs for the rest of the plan year. The OOPM includes copayments, deductibles, and coinsurance but does not include your monthly premiums, out-of-network care, or anything else you spend that your plan doesn’t cover. The OOPM may vary by plan, but there is a set maximum each year. In 2022, the OOPM for a traditional plan can’t exceed $8,700 for an individual or $17,400 for a family. For high deductible health plans, the OOPMs are $7,050 for an individual and $14,100 for a family.
HMOs vs PPOs
In order to reduce costs, insurance companies make arrangements with hospitals, medical providers, or groups of doctors to form “networks” that offer reduced fees to covered individuals. HMO plans have restrictive networks and plan participants must pay out of pocket for services provided by providers that are out-of-network. HMO’s typically require approval from your primary care physician to see a specialist. In exchange for the restricted list of doctors and/or hospitals in your plan, HMOs generally have lower fees and often do not impose deductibles on plan members, although copays may still be required. It is possible that you could be admitted into a hospital that has some doctors that could be in-network and some that could be out-of-network. It is extremely important that you request to only receive care from professionals who are in your network.
PPOs offer fewer restrictions on healthcare “outside the network”. There is often no prior authorization required to see a specialist. On the other hand, in exchange for the larger network, PPOs often have higher copays and deductibles. While you are able to receive care from professionals outside of the network, providers inside the network offer much lower fees.
For people who value the ability to see a variety of specialists or who travel and want the flexibility of receiving care in a variety of locations, a PPO is likely the best option. For those who spend most of their time working and living in one area and do not typically visit specialists out-of-network, an HMO may be better suited to their needs.
HSAs and FSAs
An HSA, or Health Savings Account, is available for those with a high-deductible health insurance plan. In 2022, a high deductible plan is defined by the IRS as a plan with a deductible of at least $1,400 for an individual or $2,800 for a family. HSA contributions may reduce your federal taxable income similar to IRA contributions. When the funds are used for qualified medical expenses, no taxes are ever owed. The money rolls-over each year if unused and some HSAs even have investment options to help your account grow over time.
HSAs are owned by the individual so you can take them with you from job to job. If funds are not spent on qualified medical expenses prior to the age of 65, there is a 20% penalty and additionally the funds will be subject to regular income tax. If used for ineligible expenses after the age of 65, there will no longer be a penalty but the funds will still be taxed as ordinary income. The maximum contribution for HSAs in 2022 is $3,650 for an individual or $7,300 for a family.
FSAs, or Flexible Spending Accounts, are “use it or lose it” accounts owned by the employer. Not all employers provide this type of account, but if they do, the employee-elected contribution amount is deducted from each paycheck pre-tax, and is therefore not included on your tax return. If the money contributed is not used each year, it returns to the employer. Similar to HSAs, the funds are not considered taxable income when used for qualified medical expenses. Typically an employer will provide an FSA card which is similar to a debit card. If funds are spent on non-medical expenses, there is no penalty with the IRS, but employers may require you to pay the funds back with penalty.
Whatever amount is earmarked for your FSA throughout the year will be available at the beginning of the year. If you quit your job before spending the funds, they will be lost to the employer. However, if the funds are spent prior to leaving the company, employees do not have to pay the employer for the difference between what was spent and what was contributed. For example, if you elected to contribute $100/month to your FSA for a total of $1,200 per year, in January you spent $1,000, and in February you quit, you would not owe your company the $800 you had not yet contributed to the FSA account but spent.
For those with a high deductible plan who do not currently have regular medical spending and like the idea of saving over time, the HSA may be the best option. For those who understand their medical spending and are ineligible for an HSA, the FSA may be a best option.
What type of plan is best for you?
High deductible plans typically have a lower out-of-pocket maximum, and will allow you to save and invest long-term using an HSA. For those who do not expect to have high medical costs, a high deductible plan is typically the most cost-effective coverage due to the lower monthly premiums. Additionally, for those with conditions that require a large amount of spending, a high deductible plan may be beneficial due to the lower OOPM in combination with a tax-advantaged HSA account. For those who visit the doctor regularly, an HMO plan with better coverage and lower copays may be the most cost-effective option.
What can you do to save more?
Make sure when you are selecting a healthcare plan that you understand the premiums, deductibles, coinsurance, and copays required by the plan. The lower the monthly premium, the more likely that the expenses related to the other factors will be higher and that the size of the network will be smaller. If you meet the deductible for your plan in a given year, get any and all other medical needs taken care of in that same year.
You are your own best advocate!
1. When you are making an appointment always ask “Are you in my network?” and document the name and date of the individual who answered you.
2. When going for testing always ask, “Is this facility in my network?” and document the name and date of the individual who answered you.
3. When given a prescription, always ask “Is this covered under my plan AND is there a cheaper option?”
4. When in an emergency (try to) always say, “I only want in-network care!” and write on all documentation that you only want in-network care. You can also make a sign that says “I only want in-network care” so that in the event you are sleeping or incapacitated, you make sure to receive in-network care. Maintain copies of all paperwork.
If you have questions, call your advisor at American Money Management whenever you are considering a change to your health insurance. We can help you think through which plan option may be best for you.