For Your Benefit

ONE OF MY SONS has to choose health insurance for the year ahead—and his employer provided a 95-page pamphlet. Let’s face it: If you need that amount of information to make a choice, something is wrong.

The pamphlet describes three medical options, plus dental options and vision coverage. Two options get you an employer health savings account contribution—or it is a health reimbursement account? There are three levels of deductibles and coinsurance and, of course, premiums. The premiums for the same option vary by four levels of salary, and by whether the employee and spouse smoke. If they participate in wellness activities and tests, premiums are modestly reduced.

My son turned to me for help. I spent almost my entire career working in employee benefits, but it took me several hours to figure it all out. As I was reading the pamphlet, it reminded me of a mutual fund prospectus, with all the caveats and legal boilerplate. And as with a fund prospectus, I suspect few people will read it.

Unfortunately, making decisions about health care coverage is complicated and getting more so. It’s about money—lots of money—but our choices are often driven by emotion.

In my opinion, many people have an unrealistic fear of health care costs, perhaps because they don’t realize that the risk of large expenses is modest. Half the population accounts for just 3% of annual health care spending, equal to $276 per head, and their out-of-pocket costs are about $20 a year. Meanwhile, people age 65 and older account for 36% of all health care spending.

How do you make a sensible choice? The key decision that people must make is balancing premiums against potential out-of-pocket costs. This applies regardless of where you get your insurance. Paying a higher premium doesn’t mean better coverage or a better financial deal. Premiums are a fixed expense—if you opt for coverage with high premiums you know you’ll have high health care costs for the year—while out-of-pocket costs are variable, but they shouldn’t exceed a plan’s out-of-pocket limit. Here are six questions to ask:

• How much can you afford to pay in out-of-pocket costs? That’ll be partly driven by the size of your emergency fund—and it’ll perhaps prompt you to add to it.
• If you have coverage through your employer, are premiums paid on a pretax basis? If so, you can afford to pay more, with less impact on your net pay.
• Is there a health savings account (HSA) available? This is the best way to handle out-of-pocket costs, but it means opting for a high-deductible health plan.
• Does your employer contribute toward a health reimbursement account (HRA)? The account helps pay out-of-pocket costs, including services not covered by your insurer.
• Can you contribute to a flexible spending account (FSA)? While an HRA is funded by employers, an FSA is usually funded by employees.
• Does an employed spouse have other coverage available? Your employer may apply a surcharge if you enroll a spouse who has coverage available through his or her employer. On the other hand, if you coordinate benefits from two employers, you could end up with very low or zero out-of-pocket costs, but are the additional premiums worth it?

The alphabet soup of health benefits is daunting, rules are many and complicated, and I venture to say few workers can or will attempt to figure it all out. In my experience, once people select a health plan, most fail to reevaluate the choice when annual enrollment rolls around—which is a good way to lose money.

Selecting health care coverage is as difficult as selecting 401(k) investments, and perhaps more frightening to most people. And just as with the 401(k), employers are prone to offer too many choices, prompting many workers to make a random selection so they can be done with it. Want to make a smarter choice this year? Keep eight things in mind.

1. Know your tolerance for out-of-pocket costs.
2. Balance the additional premiums that may lower out-of-pocket costs with the likely size of those costs. I’m counseling some retirees who were willing to pay $20 more each month in Medigap premiums, or $240 per year, to save $198 by eliminating the Medicare Part B deductible.
3. A higher premium doesn’t automatically mean a better plan.
4. Assess your risk by reviewing your past few years of health care spending. In the absence of a chronic condition, what is your actual monetary risk?
5. Leverage every possible tax-favored tool available—HSA, FSA and so on—just like you would with retirement savings.
6. Manage your prescription costs by using generic medication, mail order pharmacies and your plan’s designated formulary drugs. Learn about the prescription copays for the various tiers offered in your plan.
7. Read the literature you receive. There may be changes to your coverage for next year—and there will almost certainly be higher premiums.
8. Don’t assume the coverage you have now is the best for the year ahead.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include A Seat at the Slots, Want $870,000 and Taking Credit. Follow Dick on Twitter @QuinnsComments.

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