Author: Nick Prigitano
It's that time of year again when many employees have a chance to change their benefits offered by their employer. Depending on the company, there may be a plethora of different benefits to choose from. One of the most common benefits offered, and one of the most important, is health insurance. But which policy is right for you? What do terms like deductible, coinsurance, or copay mean? Health insurance can be confusing, but we'll break down what all this means so that you can pick the policy that best fits your needs.
How much will I pay?
Just like almost anything in life, you get what you pay for. In the insurance world, what you pay is called the premium. Luckily for many employees their employer picks up some, or most, of the tab when it comes to the cost of insurance. However, most employees are required to pay a portion of the premium. When offered a few different health insurance options, generally the higher your premium, the more coverage and flexibility of care you will have. With better coverage, if you do get sick or injured, the insurance company will be paying more of the cost. To offset their costs for this additional coverage the premium will be higher for you.
HMO, PPO what does this alphabet soup mean?
In healthcare, flexibility can be a great thing. Being able to choose your doctor and medical provider is powerful. With an HMO you have less of a choice of who you can get medical service from. The cost of an HMO is typically lower. However, if you go outside the approved list of doctors, you may be footing the whole cost yourself! Also, with an HMO, in order to see a specialist you generally need to first get approval from your primary care physician. With an HMO you trade flexibility for a lower premium.
A PPO plan is better for people who desire flexibility. While the premium cost for a PPO plan is generally higher, you would have more flexibility in which doctors you choose to work with. Now, with that being said, many PPO plans have both "in network" and "out of network" providers. While you are free to see doctors that are either in or out of network, your out of pocket costs will differ between the two. With an in network provider your out of pocket expenses such as a copay, coinsurance, or deductible will generally be lower than someone out of network. This provides incentives for people to choose doctors who are in network, while still providing flexibility if you did want, or need, to see a professional outside of the plan.
What are my other costs besides the premium?
There are a few different ways that an insurance company can have an individual share the load of healthcare costs. Some of the most common are a deductible, copay, coinsurance, and max out of pocket.
A deductible is simply how much money you have to fork over before the insurance company will start paying anything. The higher the deductible, the more you will have to pay before the insurance company will cover anything. Once the deductible is reached the insurance company will begin to cover some of the health insurance costs, but not necessarily everything. The higher the deductible the lower the premium will usually be because you are expected to pay more yourself if you do need to use your insurance.
A copay is a way for an insurance company to cost share with you. You may find yourself paying a copay when you go to see your primary care physician. The insurance company may expect you to pay a sum of $20 or $50 to see your doctor, then they will cover the rest of the visit. Depending on whether they are a specialist or not, the copay may differ. This is in addition to any deductible.
Remember when we said that when you reach your deductible that the insurance company may not cover everything? This is where the coinsurance kicks in. As an example, let's say your deductible is $2,000 and the coinsurance is 20%. What this means is that you would be expected to pay for the first $2,000 of medical costs yourself without any assistance from the insurer. Once that hurdle is met, you would be expected to pay 20% of costs after that. So, if you needed to pay a $5,000 medical bill, you would first pay $2,000, then 20% of the next $3,000 ($600). On that $5,000 bill you would pay $2,600 and the insurance company would cover the remainder ($2,400). However, if in the same period you incurred another $1,000 of costs you would only be required to pay the coinsurance ($200) since the deductible had previously been met.
Max Out of Pocket:
Arguably the most important number is your max out of pocket. This is the maximum amount you are required to pay for medical costs during your coverage period. This includes your deductible, copay, and coinsurance. As an example, let's say your max out of pocket is $5,000. You paid $2,000 as your deductible, $500 for copay, and $2,500 for coinsurance to meet your $5,000 max out of pocket for the year. If you incurred another $1,000 of medical costs 100% would be covered by the insurer! However, this max out of pocket only applies during the coverage period, typically a calendar year. So, if you broke your leg on December 31st and incurred $100,000 of medical costs, with your max out of pocket at $5,000, you would only have to pay that amount for the expensive procedure. However, with a stroke of bad luck the next day, January 1st, you also break your arm. The costs of this is another $50,000. Since this is a new period you would once again have to meet the deductible before the insurance company would kick in, and then meet the max out of pocket before the insurance fully covered your expenses. Once you have met the max out of pocket for the next year, any additional costs incurred during that period would once again be covered by the insurer.
To the extent that you can choose when to receive health benefits (checkups, voluntary procedures), it is better to arrange those for a year when you have already met your deductible and max out of pocket.
Health Savings Accounts, or HSAs, are tax-free savings accounts you can use to fund your deductible if you are covered by certain high-deductible health plans. HSAs are complicated, but incredibly useful and tax efficient. In addition, since the accounts belong to you, you control them even if you leave your employer (the benefits are not lost at the end of the year, as they are with Flexible Savings Accounts). You benefit the most by ensuring that you and/or your employer maximize your yearly contributions to your HSA.
What coverage is right for me?
Paying for health insurance can be expensive but paying for care without it can cost much more. That's why we recommend that everyone have coverage. But, depending on your situation, some plans may be better than others. If you’re young and healthy it may make sense to enroll in a high deductible plan. If you do get sick or hurt you would be expected to pay more out of pocket, however, your premium costs will be lower. You would just want to be sure you have enough cash on hand to afford the higher out of pocket costs.
For families, especially with young children, it may make sense to have a PPO plan with lower deductible limits since you are more likely to use the coverage and actually meet the deductible amount. If you do have a spouse, it is also a best practice to compare coverage and costs between you and your spouse. Each employer will offer different plans and the costs and coverage can vary greatly employer to employer.
Another option may be to select the high-deductible health plan paired with an HSA, especially if your employer contributes substantially to the HSA.
For additional questions reach out to your financial advisor or insurance provider.