Learn About Health Insurance

Demystifying

Health Insurance

With the advent of Obamacare, health insurance has gotten more standardized, but it’s still very complicated.

Since health care is expensive, it’s important to understand your coverage. By taking a few extra steps, you may be able to save money or at least get a plan that best fits your needs.

With the advent of Obamacare, health insurance has gotten more standardized, but it’s still very complicated.

Since health care is expensive, it’s important to understand your coverage. By taking a few extra steps, you may be able to save money or at least get a plan that best fits your needs.

Do I really have options?

If you get your health insurance through your employer, as many people do, your plan may be chosen for you. Or you may still have choices. Regardless, your plan is probably one of three types:

1. PPO (Preferred Provider Organization)
2. HMO (Health Maintenance Organization)
3. EPO (Exclusive Provider Organization) 

PPOs, or Preferred Provider Organizations, are flexible plans that let you pick your doctors.  You get preferable rates as long as you use doctors and hospitals within your network.  If you use someone out of network, you will pay significantly more.

As long as you are careful, PPOs can be a great choice.  But if you go for a procedure or a surgery, you have to be careful that everyone who helps you is in your network.  To protect against expensive surprises, you should request in writing to your doctor and facility that you only want to get service from in-network providers.  

HMOs, or Health Maintenance Organizations, are like one-stop shops. You just go to the HMO offices and they will select the doctor or hospital for you.  The HMO simplifies your end, since there’s alot less paperwork and decision-making required as with other plans.  You are protected from any surprise out of network charges, which can easily occur with PPOs.  The downside you don’t choose the doctor or hospital, the HMO does.

HMOs want to make getting everyday care easier to encourage you to come in sooner to prevent conditions from turning into something serious.

EPOs, or Exclusive Provider Organizations, are new for 2017.  With these plans, you can ONLY use doctors and hospitals within the EPO network.  So if you go outside the network for care you pay completely out of pocket.  The only time you can use an out of network provider is in emergency situations.

This type of plan provides some limits but may provide a savings.  It’s just important that you are careful to only use network providers at all times.

Am I committed for life?

No, you can change your plan at the next open enrollment period, which usually happens every year.  

Or in certain circumstances you can change sooner, if you’ve lost your existing insurance coverage, if you got married or if you had a baby.  

Let’s look at the costs you pay for healthcare.  

The premium is the charge you, or your employer, pays monthly to join a plan. However, that doesn’t mean your payments stop there. Most policies also have deductibles and copayments.

These are known as “out-of-pocket” costs.  These are also confusing; it’s important to understand what these are.

There’s two types of out-of-pocket costs.  The first is your deductible.

The deductible is the amount you have to pay before the insurance company makes any payments at all. There will be a yearly amount, anything from a small deductible (zero or $1,000) or a large one ($6,500).

It’s a trade off…if you pay a high premium every month, you can get a low deductible.  This may make sense if you need to use health care a lot.  For most of us, it’s better to save by using a higher deductible.  That way we save during years when we’re healthy and don’t see a doctor much.

Wait – isn’t a deductible the same as a copay?

Unfortunately not.  The second type of out of pocket cost is the copayment, which only kicks in after you’ve met your deductible for the year. This is usually a percentage. For example, your copayment may be 20%.

Fortunately, copayments only apply up to the “maximum out of pocket limits.” Once you have been wrung dry for the year paid your deductible and copayments for the year, which equal your maximum out-of-pocket limits, it no longer applies.

So the out of pocket maximum is really the most I will have to pay each year?

Yes!  Once you reach that maximum out of pocket level, the insurance company will pay everything else above it.

That is, as long as you stay within network and follow all the rules.

How about an example?  Let’s say you have an unfortunate fall after entering the local happy hour roller derby event.   

Your bills add up to $10,000. Let’s say your policy has a $1,000 deductible, 20% copayment, and a maximum out-of-pocket of $1,500.  

Because you haven’t spent any on your deductible yet, that is used up first toward that big bill ($1,000). Then you are responsible for a copayment on the balance ($9,000 x 20%=$1,800).  But remember, there’s a maximum out-of-pocket. So instead of having to spend that $1,800, your copayment is capped at $500 (since you’ve already spent $1,000 on your deductible). So your out of pocket maximum stays at $1,500 and the insurance company pays the rest.  Then, for the rest of the year, you’re done paying.  

Now it’s easy to think that high deductibles are bad and low deductibles are good. But really, from a money perspective, it’s the other way around.  

The higher your deductible and copayments, the lower your premiums, since you are taking on more of the risk. So you save every month.  Unless you have a chronic condition where you know you’ll spend more, you’re usually better off choosing the higher deductible plans, then shopping around for care (more later).

That way you can save most years, but have the coverage for the occasional year where you may have more needs.

What’s a Flexible Spending Account (FSA)?

FSAs are offered by many employers. These accounts allow you to divert part of your earnings into an account and use it to pay for medical or dependent-care expenses.

The big advantage of an FSA is that you wind up paying expenses such as policy premiums, deductibles, copayments, and qualified out-of-pocket expenses from pretax income. So you’ll save on taxes.

The downside to these plans is that there is an unfortunate “use it or lose it” provision attached. For most plans, you have one year to spend the amount in the account. If you don’t, you’ll lose the rest.

What’s a Health Savings Account (HSA)?

Health savings accounts sound similar to flexible spending accounts, but are totally different.

An HSA provides a unique savings tool that can be extremely valuable, especially for those who are healthy and only get medical care occasionally.

HSAs are tax-favored accounts that allow you to put aside a chunk of money for your out-of-pocket expenses, then have a high deductible plan to take over for those years when you need more care. The great thing about the HSA is that you get an immediate tax benefit, AND then your HSA account grows tax-free.

As long as you use it for medical expenses in the future, it becomes a tax free source of money for most medical, dental and visions expenses in the future.

Can anyone get an HSA?

To qualify for an HSA, you must be under age 65 and you must purchase a health policy with a high annual deductible. Policies that qualify will have “HSA” in their name. This policy must be your only health insurance.

Once the policy is in place, you can set up an HSA account and contribute up $3,400 per year (or $6,750 for a family), an amount that is adjusted periodically by the IRS. If you are age 55 or older by the end of the year, you may contribute an extra $1,000 each year as a “catch-up” contribution.

How do the taxes work?

Money you put into the account can be deducted on your tax return, whether you itemize deductions or not. Earnings in the account grow tax-free, just as in a 401(k) or IRA.

But unlike retirement plans, you can dip into an HSA at any age—tax-free—to pay for all medical ex­penses, including many charges that are not typically covered by health insurance, such as vision and eyeglasses, dental care, OTC drugs, acupuncture, chiropractors, therapy or counseling (which we all need after our premiums increase each year), long-term-care insurance premi­ums, and future Medigap premiums.

But what if I don’t spend it this year?

Unlike flexible spending accounts, HSAs allow unspent money to be rolled over from year to year. As long as you use it only for medical care, you will never pay tax on it, which is key.

So…the less you spend, the more your money stays invested tax-free, working for you.  

That’s why HSAs are a great tool.  They act as a retirement savings plan and the more you can shop around, the more your money will grow for the future.

After age 65, your HSA can even help fund other expenses.  Any money in the HSA may be withdrawn penalty-free for any purpose after that age, but earnings not used to pay medical bills will be taxed as regular income.

But for most of us, it becomes a retirement medical savings plan.  Since it can be used for medical expenses of family members, it has maximum flexibility for us. 

So, consider starting a Health Savings Account if you’re eligible for it.   Then, start watching your health care costs…see our Easy Steps for a quick plan!