Almost all financial decisions come with trade-offs, making decisions more art than science. This could not be truer than when it comes to selecting a health insurance plan. Choosing a health insurance plan is a decision that most of us revisit every year—and the struggle is real . . . every year. The health insurance trade-off is one between premiums and out-of-pocket expenses; in exchange for lower premiums comes higher deductibles and a larger share of costs for care. The ideal plan really depends on how much care you are going to need, making it challenging for anyone who doesn’t have a crystal ball. Although we are unable to create certainty where there isn’t any, we can help you think through the process and help you understand some key concepts when selecting your plan. Put a pin in this one to reference during open enrollment.
What Should I Know Before Selecting a Plan? To start, it is helpful to understand the type of experience you might expect with a given plan type. The two most common plan types are HMOs and PPOs (other, less common plan types include POSs and EPOs). Health maintenance organizations (HMOs) provide coverage only when care is received within their network (think Kaiser Permanente). Some plans require insureds to be seen by a primary care physician for treatment, before being seen by a specialist. Because HMO coverage is limited to a known network of providers who have accepted the insurance company’s negotiated rates, premiums tend to be lower than other plan types. Preferred provider organizations (PPOs) on the other hand, do not require members to seek care from in-network providers, but there is a financial incentive to do so, because benefits are greater in-network. Unlike HMOs, PPOs do not require a primary care physician referral before members are seen by a specialist. Because PPOs provide greater flexibility and provider access, premiums tend to be higher than their HMO counterparts.
How Do I Translate the Lingo? The health insurance industry is saddled with jargon that can be challenging to understand individually and harder to keep straight, collectively. Because selecting a plan is all about keeping expenses down, it’s important to understand costs that you might incur and how they work.
- Deductible: This is the amount you must pay (in addition to premiums) before insurance will kick in. It usually ranges between $500 and $5,000. Still, certain services might be fully or partially covered by your insurance company, even before your full deductible is met. It is important to know that copayments (see below) are generally not applied toward deductibles, and only amounts paid for eligible medical services and prescriptions count. If your insurance company doesn’t cover a particular treatment or drug, the amount you pay will not be applied toward your deductible. Also, understand that once your deductible is met, you will still be responsible for a portion of costs incurred by way of copayments and coinsurance, described here.
- Copayment: This is a flat fee that you pay for doctor visits and prescriptions. Copayment amounts might vary based on the nature of your visit (for example, primary care or specialist) and drug (for example, generic or brand name, pick-up or mail order). In most cases, copayments are not required for preventative care visits that are in-network.
- Coinsurance: This is your share of the allowed costs of a covered service and typically ranges between 10%-30%. Allowed amount is an important concept to remember so that you aren’t surprised by out-of-pocket costs. For example, if your plan allows for $500 per day for hospital visits, and your total cost after a four-day stay is $2,600, the allowed amount is only $2,000 ($500 x four days). If your coinsurance is 20%, you will be responsible for 20% of $2,000, or $400, plus the full $600 of disallowed charges.
- Out-of-pocket maximum: This is the maximum amount you could pay in a year and includes deductibles, coinsurance, and copays. Once your out-of-pocket maximum is met, your insurance company will cover 100% of all healthcare-related costs.
How Do I Choose? Now, for the hard part. Follow the below steps to help you think through the process.
- Make sure your doctor accepts the plan. Call the doctors you would like to continue working with and make sure they accept the plan you are considering.
- Make sure frequently used prescriptions are covered. Call the insurance providers to make sure that at least your most frequently used prescriptions are covered.
- Think through your healthcare needs. Review the care you incurred during the past year and consider any changes that you expect in the coming year. If you believe that your needs will stay the same and you didn’t meet your full deductible, perhaps you can consider a higher deductible plan in exchange for lower premiums. If you were close to or exceeded your deductible, you might consider a higher premium plan in exchange for a lower deductible. Remember that once you meet your deductible and the insurance company steps in, cost sharing comes into play. So, for lower deductible plans, it makes sense to seek a plan with lower coinsurance amounts (your share).
- Determine total cost and risk appetite. To determine how much of your dollars could be on the line, multiply your monthly premium amount by twelve and add it to your out-of-pocket maximum. This is how much you could pay, in total, in a given year. Depending on your appetite for risk, you might opt for a lower premium policy with a higher risk of coming out of pocket for extensive care or, you might take the more conservative approach, paying higher premiums, and transferring more of the risk to your insurer. If you are comfortable rolling the dice with a high-deductible plan, work with your benefits department on incorporating a health savings account (HSA) with your plan. In 2017, an HSA allows you to set aside $3,400 for an individual and $6,750 for a family plan on a pretax basis to cover out-of-pocket medical expenses.
Only in hindsight will you know if you chose the best plan. Still, regardless of the plan you choose, it will provide coverage to protect against catastrophic health insurance costs, which is really why you are insuring in the first place.