This Sunday, November 1st, starts Open Enrollment season for most health insurance plans. This year open enrollment is a big deal because the Affordable Care Act (ACA) personal fines for not having proper health insurance coverage in 2016 will increase over 100% from 2015! However, picking a specific health insurance plan is not as simple as shopping on the Internet for the best price. Integrating the cost of your health insurance plan into your financial plan is as important as understanding your retirement costs and plans.
In order to understand the financial impact of a health insurance plan you must first have a strong grasp of common terms used in health insurance plans.
Monthly Premium – This cost is what you pay monthly regardless of whether you use any health insurance benefits or not. It is usually a fixed payment to the insurance company for the benefit of being enrolled in their health plan. Making this monthly payment ensures you are enrolled in a health insurance plan. Not making the payments can result in being dropped by the insurer and subsequently fined by the IRS under ACA.
Deductible – This cost is the amount you pay out-of-pocket each year BEFORE the plan pays anything. This cost is on top of your Monthly Premium and is incurred when you use any type of medical service. If your deductible is $5,000, then the health plan insurance will not pay for any expenses until you have personally paid at least $5,000 in medical payments. Your deductible payments DO NOT include your Monthly Premium.
Out-of-Pocket Maximum (a.k.a. Catastrophic Cap) – This is the maximum amount of money you will have to personally pay in one year for covered health care services. This means that if you get into a major accident or have prolonged hospitalization, the most you will pay, regardless of the total hospital bill, is the Out-of-Pocket Maximum. Again, your out-of-pocket payments DO NOT include your Monthly Premium.
Copayment/Coinsurance – This is the amount of a medical bill you will be required to pay AFTER you have paid for your full deductible amount. A typical Copayment/Coinsurance cost for an emergency room visit is $250-$500. However, you are required to have paid the full deductible amount before you have to pay the copayment/coinsurance cost. Meaning, if your deductible is $5,000, you have to pay $5,000 in medical costs, before you will be required to pay the Copayment/Coinsurance cost.
The difference between the two monthly premium payments is $295 a month or $3,540 per year. However, the cost of the deductible and the Copayment/Coinsurance make Health Insurance Plan 2 more expensive, when used, even though the monthly premium cost is less.
By looking at this example, you can see that financial planning is necessary to calculate how different health insurance plans may affect your budget and emergency savings. A 2013 study done by NerdWallet Health found that medical bills are the number one cause of bankruptcies in the U.S. and affect nearly 2 million Americans annually.
Simply choosing the cheapest monthly plan may not be the least expensive. For example, the ACA website shows that a plan in Loudoun County, Virginia for a family of five can cost as low as $567 per month. However, that “low cost plan” comes with a $12,900 deductible. There is no copayment charge after the $12,900 deductible has been met. But, if you choose that plan you need to have $12,900 in savings or extra monthly income to cover the cost of health care each year.
Simply choosing a health insurance plan without considering the impact it will have on your monthly budget or understanding the deductible amount or the copayment, is not smart financial planning. According to a Consumer Expenditure Survey, healthcare costs take up roughly 6% of the average American family’s budget. Taking the time to sit-down and do a simple “what-if” analysis (like the one above) for the health insurance plans you are considering will help you understand the underlying impact on your personal finances.
Jonathon Rowles Captain, USMC (Ret.)
Disclaimer: (have to do it) – This blog should not be considered financial, investment, legal or tax advice. Consult your licensed financial professional, tax advisor or legal counsel. This blog is for educational purposes only.