Unplanned health expenses can wreak havoc on anyone’s budget. In fact, medical debt is one of the top reasons that individuals declare bankruptcy. Health expenses - particularly health insurance - can cause even the most meticulous budgeters to throw their hands up in frustration and confusion.
As stewards of the Lord’s resources, it is our responsibility to be attentive to this portion of our finances. Here are three ways to take better control of your health expenses:
1. Understand the fundamental health insurance terms
Those with employer-sponsored health insurance have a few options to pick from when open enrollment occurs or starting a new job. This usually involves a series of acronyms that we don’t quite understand, with monthly costs, percentages, and terms associated with each of them. This is overwhelming, but having a grasp on the basic definitions can go a long way in picking the plan that best fits your health needs.
Premium. Your premium is the amount of money you see coming out of each paycheck for your health insurance. This is the basic charge associated with being enrolled in a specific health insurance plan.
Deductible. The deductible is the amount of money that you spend towards health before your health insurance begins to kick in. If you know you will utilize health services frequently, saving for the amount of your deductible will ensure that you will be able to cover a large portion of your out-of-pocket expenses for the year.
Co-pay. A co-pay is a fixed amount you pay for a covered service at the time of care and will be outlined in your health insurance explanation of benefits. An example of this is paying $75 when you see a specialty care provider. The co-pay is not counted towards your deductible and is used by insurance companies to reduce unnecessary health utilization.
Co-insurance. Co-insurance is a percentage portion of the health expenses that you are responsible for paying after you have paid your full deductible. For example, after you have met your deductible an insurance company may agree to pay 80% of all health expenses, while you pay 20% until you have reached your out-of-pocket maximum.
Out-of-pocket maximum. Your out-of-pocket maximum is the most you will personally pay before your insurance covers 100% of the remaining expenses for your benefit year (usually January-December). The out-of-pocket maximum includes the deductible and any co-pays you have made. This is an important figure and should be saved as part of your emergency fund. A hypothetical situation may look like this:
You have a deductible of $1,500 and out-of-pocket maximum of $2,500. You need to get shoulder surgery. Your co-pay for the office visit is $25. A surgery is scheduled and costs $7,000. You pay $1,500 to meet your deductible for the year. After that point, your co-insurance period pays 80% of the remaining balance ($4,400) and you are responsible for 20% ($1,100). You are set to pay $2,625, but have exceeded your out-of-pocket maximum of $2,500, and will not be responsible for the remaining $125 of your co-insurance. Any other health-related expenses for this benefit year, including co-pays, will be the responsibility of the insurance company.
Knowledge of these terms will serve as the building blocks for understanding how to select the best health insurance plan for your needs.
2. Pick the plan that best fits your life situation
Now that the basic terms are covered, picking a plan that fits your needs is next. Here are some of the most common ones:
High-Deductible Health Plan (HDHP) paired with a Health Savings Account (HSA). A HDHP has a high deductible, meaning you pay more out of pocket for health expenses, but have a much lower monthly premium. This plan is great for individuals who do not have any health conditions and do not utilize their health insurance often. The HSA, often associated with a HDHP, allows you to contribute pre-tax income to an account that can be used to pay for approved health-related expenses, often including co-pays, prescriptions, dental care and more. As an additional plus, many employers contribute bi-annually to this account. Even further, this account also serves as a tax-advantaged retirement account. The HDHP + HSA combination can be a way to save money on health insurance and build wealth.
Preferred Provider Organization (PPO). A PPO plan allows for you to see a moderate range of doctors, hospitals and other health services. PPOs have a higher monthly premium, but lower deductibles, compared to HDHPs. For those with more frequent health encounters or underlying conditions, this plan offers more comprehensive coverage and will “kick-in” sooner due to the lower deductible.
Health Maintenance Organization (HMO). An HMO plan is similar to a PPO, but more stringent on the range of available doctors and services. HMO plans typically have a “narrow network” of providers allowed for your care, but generally have lower premiums than a PPO. Another difference in an HMO vs. PPO is the need to see your primary care doctor as a “gatekeeper” in order to get referred to a specialized doctor. Point of Service (POS) plans are similar to HMO plans, but allow you to see out-of-network providers at a higher cost.
This is not an exhaustive list of all options, but should help give you an idea of the main principles behind the primary plans available on the market.
3. Budget for health expenses
An important part of being wise stewards of our finances is being prepared for health-related expenses—both those that are expected and unexpected. If you know major health expenses are headed your way via a newborn or planned surgery, start by adding a “health” line to your monthly budget to begin saving for your estimated out-of-pocket costs. This way, when you receive that hospital bill, you have the funds easily accessible in cash to make the payment. It’s a lot easier to save smaller amounts over several months instead of trying to find a way to pay a large bill right away.
As life is uncertain, especially when it comes to our health, a smart way to face uncertainty is to make sure you have a health emergency fund that at least covers your out-of-pocket maximum incorporated into your normal emergency fund. For instance, if your normal emergency fund includes 3-6 months of expenses, make sure your “3-6 months of expenses” includes those day-to-day expenses (e.g., mortgage, utilities), as well as the out-of-pocket maximum for you and your family.
A little bit of planning can go a long way towards avoiding a cycle of payment plans, medical debt, and surprise bills for a health-impacted event.