Selecting among health insurance plan options—whether from a new employer, during open enrollment or after a qualifying life event, or from your state’s health insurance marketplace—can be stressful. The purpose of this article is to alleviate some of that stress by giving you a roadmap for how to approach the decision.
What do all these terms mean, anyway?
Before delving into factors to consider when navigating the labyrinth of health insurance options, here is a brief primer on some common terms you will encounter when dealing with health insurance.
Qualifying life event – certain events that allow you to change health plans outside of the annual open enrollment period. Examples typically include moving, loss of health coverage (for instance, by changing jobs), marriage, divorce, birth, death, or adoption.
Open enrollment – a period of time each year during which you can make changes to your health insurance plan for any reason.
Premium – the cost you pay for health insurance, typically on a monthly or per-paycheck basis.
Copay – a fixed amount you pay for a certain service.
Coinsurance – a fixed percentage you pay for a certain service, typically after the deductible (if any) has been met.
Deductible – a fixed amount you must pay before your insurance company becomes responsible; typically resets each plan year.
Out-of-pocket maximum – the maximum amount you will pay for health care services during a plan year; may not include certain expenses or out-of-network costs.
Network – providers and hospitals that have contracted with your insurance plan to offer services at specified rates.
Pre-existing condition – a health condition that existed prior to the date on which your new health coverage begins.
Point of service (“POS”) plan – a plan in which you pay less for using in-network providers; typically requires a referral from your primary care physician to see a specialist.
Preferred provider organization (“PPO”) plan – like a PPO plan, except no requirement for a referral to see a specialist.
High-deductible health plan (“HDHP”) – a plan with a higher deductible; usually offers lower premiums in exchange for you paying a larger share of the costs before health coverage kicks in. For 2023, a health plan with an annual deductible between $1,500 and $7,500 for self-only coverage, or $3,000 and $15,000 for family coverage, qualifies as a high-deductible health plan.
Health savings account (“HSA”) – an account where you can set aside money, pre-tax, to pay for qualified medical expenses; must be enrolled in a high-deductible health plan to contribute to an HSA. Contributions may be invested. For 2023, contributions are limited to $3,850 for those with self-only coverage and $7,750 for those with family coverage. Funds in an HSA do not expire.
Flexible spending account (“FSA”) – an account where you can set aside money, pre-tax, to pay for qualified medical expenses. Not available to HDHP participants. Unused funds at the end of a plan year expire and revert to the employer; some plans provide a grace period for spending FSA funds after the plan year concludes.
Click here for a good example of the interplay among deductible, coinsurance, and out-of-pocket maximums.
Which type of plan should I pick?
The biggest question folks typically face is whether to select a traditional plan (PPO or POS) versus a high-deductible health plan (HDHP).
High-deductible health plans are the only way to be able to contribute to a health savings account, so if you have your heart set on an HSA, then you must enroll in a HDHP. As the name suggests, though, that comes with a high deductible. If you do not have the available funds—whether in your HSA or a high-yield savings account—to cover the cost of this deductible, then do not choose a HDHP. After all, you could blow through the deductible in one accident or illness. But even if you could easily cover the deductible, a HDHP might be sub-optimal. These types of plans are typically only cost-efficient for those with either relatively low medical expenses (since you will not come close to the deductible, and realize savings through lower premiums and tax deductions for HSA contributions) or relatively high medical expenses (since after meeting the high deductible, your plan pays most or all of the remaining costs).
Most folks will end up selecting a traditional plan. Between the two, I prefer a PPO over a POS plan because you can self-refer if you need to see a specialist. POS plans are structured to require referrals because most conditions can be treated by your primary care physician, so the insurance plan does not want to pay the higher rates involved with specialists unnecessarily. But why go through the extra hoops when you know a specialist will need to weigh in on your health issue? For example, you do not need to see an ear, nose, and throat specialist for a common ear infection, but you will need to consult a urologist regarding kidney stones.
What features should I seek?
Once you decide what type of plan to choose, you will need to select from the available options of that type. Of course, if your employer offers only one choice for each type of plan, then that is the end of the process.
First and foremost, be sure your plan will meaningfully cover any services that you know you and your family will need. This includes having medical providers, hospitals, and pharmacies reasonably nearby. You should be able to find this from a document known as the summary of benefits and coverage (or “SBC”) for the plan.
Second, if you already have a relationship with certain medical providers (including hospitals and pharmacies), look for a plan that includes these providers in its network. This is the second-most important consideration because even if the new plan includes your doctor, that is useless if the plan does not cover services related to your condition.
If you receive medication for chronic conditions, you may be able to save money (and time!) by obtaining a 90-day supply rather than a 30-day supply each time you refill. Check with your health insurance plan, and then ask your prescribing physician if this is an option. You might even be able to have the medication shipped to you instead of visiting a pharmacy. And of course, as with any medication (chronic or acute), get the generic version if feasible.
Finally, a common but largely overlooked feature of many health plans these days is an advice line. Be sure your potential plan has one. This can be a great resource for quick questions about how you can self-treat at home or if you should seek medical attention. If you need medical attention, the advice line can tell you whether to see your primary care physician or a specialist (and if so what kind), or whether you should visit an urgent care clinic now instead of waiting for normal office hours.
If you have a life-threatening condition, visit the nearest emergency room immediately! Otherwise, seek medical attention at an urgent care clinic (if it cannot wait), your primary care physician, or an appropriate specialist. Unnecessary emergency room visits are expensive, time-consuming, and can prevent others from receiving critical care as fast they might otherwise. Some health plans will not pay for emergency room visits at all (or will, but at a lower rate) if the condition could have been appropriately treated in a different setting.
How do I compare costs?
Once you have identified the plans with adequate coverage, it is time to compare costs. When comparing costs, be sure to look at the total picture. Premiums are only one piece of the puzzle.
If you have a spouse, be sure to look at all the options for covering your entire family unit that are available to either of you. For instance, one spouse’s employer might have more expensive plans but pays a larger share of the family coverage. Or it may be more cost-effective for each spouse to have individual plans with their own employers. There can be many permutations of coverage options, particularly if children are in the mix!
There is no way to perfectly predict your medical expenses for the year, but give it your best shot. Consider how many times you—and by “you” I mean everyone that will be covered by the plan—typically need to seek medical intervention in a year based on your health status. Then add at least two times (one primary care physician visit and one urgent care visit) to account for the unknown, and perhaps more for multiple individuals. Add in any other expenses (prescriptions, etc.) that apply to your situation. Looking at the summary of benefits and coverage document, list out the costs for each of these and add them up. Next, add the total premiums you will pay for the year. Finally, subtract any tax savings you will realize by having premiums and either FSA or HSA contributions deducted from your paycheck. The net result is the total cost for each plan.
FSA and HSA contributions are not costs per se since those contributions are merely set aside to pay for expenses later.
When deciding how much to contribute to your FSA, be sure to consider the “use-it-or-lose-it” requirement. As a result, I recommend contributing somewhat less than your anticipated expenses. Losing a potential $100 in tax savings by reducing your FSA contributions, for instance, is a better result than losing $400 in unused contributions.
Unlike an FSA, an HSA is not “use-it-or-lose-it.” Because HSAs have myriad tax savings and thus occupy a high place in the order of operations for those on the FIRE path, contribute as much as you can. Then be sure to invest the contributions to realize its full potential!
In short, pick the type of plan you want, figure out which ones have the features you need, and then compare the overall costs. Following this methodical approach will help you select the right plan for you. And if you find that another plan works better for you, or your employer (or your spouse’s employer) decides to offer more options later, you can always switch plans during the next open enrollment.
Comments