PICKING A HEALTH plan used to be easy. Not anymore. Today, whether you receive coverage through your employer, buy insurance on your own or are covered by Medicare, you likely face a slew of choices.
Problem is, just as too many investment options in a 401(k) plan can paralyze employees, the same happens with health care. Indeed, a third of employees say they either don’t understand or know nothing about their health care coverage, according to one survey. My experience tells me one third is optimistic.
Choosing a health plan for 2020? If I could offer only one suggestion, it would be this: Make your choice using a holistic approach. That means considering premiums, potential out-of-pocket costs, family health status and tax advantages when choosing a health plan. Don’t be swayed by unrealistic expectations of high medical bills or presume that higher premiums mean better coverage for you. In particular:
- Don’t assume the plan you have now will be best for you in the future. Plans change. Circumstances change.
- Read all the materials available.
- If your employer offers meetings about your benefits, try to attend, ask questions and bring your spouse if possible.
- Check directly with your doctors regarding their plan participation for the following year. Be specific. Don’t ask if they take Blue Cross. Instead, ask about your specific plan.
- Review the “explanation of benefits” statements you’ve received from the insurance company over the past two or three years. Add up the total allowed charges, so you get a handle on your total out-of-pocket cost. Would you have come close to meeting the deductibles on any of the plans you’re currently being offered?
Done all that that? It’s time to make your decision. Keep these eight points in mind:
- The lower the premium, the higher the possible out-of-pocket cost.
- The lower the premium, typically the less flexibility you’ll have in picking medical providers. That means smaller networks of doctors and possibly no coverage if you go out of network. Think HMOs or similar arrangements. Such plans work well for many people. Medicare Part C—also called Medicare Advantage—includes these types of plans.
- What you pay in premiums every 12 months is a fixed expense—and doesn’t vary with health care expenses and claims. To make a cost-effective decision, you need to consider both premiums and probable out-of-pocket costs.
- Many employers allow employee premiums to be paid on a pretax basis. If your premium is $200 a month and you’re in the 22% tax bracket, your real cost is $156. You also won’t pay Social Security payroll taxes on that $200. When comparing the total cost of various plans, keep this tax break in mind.
- If a plan doesn’t cover out-of-network doctors, make sure you’re comfortable with that restriction—and that your spouse is, too. If a plan covers out-of-network providers, find out what the lower reimbursement rate would be. Be warned: If you use an out-of-network provider, that expense will typically not count toward your out-of-pocket maximum.
- Most people overestimate their likely health care spending. Scary, catastrophic events can loom large in our minds. But in the absence of a chronic medical condition, the odds are your spending will be modest. In fact, half of families consume almost no health care, accounting for a mere 6% of total U.S. health care spending.
- Don’t automatically reject a high-deductible health plan. Take a close look at how much you’d save in premiums. Compare those premium savings with the difference in deductibles between the high-deductible plan and the other plans on offer. Also factor in the potential benefits from funding a health savings account (HSA).
- Make use of all the tax-advantaged accounts on offer. These might include not only an HSA, but also a health reimbursement account (HRA) and a flexible spending account (FSA). Note that all of these plans must be used for qualified medical expenses as defined by the tax code.
An HRA is funded by employers and can accumulate from one year to the next. Withdrawals are tax-free. An HRA does not go with an employee upon termination of employment, though the account’s remaining balance is sometimes given to retirees.
An HSA can be employer- and employee-funded. It must be coupled with a high-deductible plan. Accumulated funds can be invested for growth and belong to the employee. You don’t need coverage through an employer to open an HSA. Funds roll over year after year and can even be carried into retirement. Withdrawals are tax-free if used for qualified medical expenses. Contributions are tax-deductible.
An FSA is generally funded by employees out of pretax income, but an employer can also contribute. Qualified withdrawals are tax-free. At the end of the year, unused funds are generally forfeited. But significant forfeitures are rare, because likely expenses are easy to estimate, especially deductibles, dental care and routine vision care. Be prudent in the sum you elect and limit the amount to probable expenses in the year ahead.
The bottom line: Pay attention to all the information available to you. Think about how likely your family is to use health care. Determine the amount you could handle in out-of-pocket costs over the next year. Use this insight to lower your premiums. Don’t buy more insurance than you realistically need. And, finally, leverage every possible tax break.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Straight Talk, Mercedes and Me and Leaves Me Cold. Follow Dick on Twitter @QuinnsComments.
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