How to Choose the Best Health Insurance Plan
Health insurance costs have skyrocketed in recent years. And if you’re like me, there are a number of plans to choose from during open enrollment season. There are high deductible health plans and low deductible health plans, none of which are optimal because they can all lead to significant out-of-pocket expenses.
Health insurance language can also be difficult to understand and you can certainly be misled to choose the wrong plan if you’re not careful.
This article will explain a number of health insurance terms and give a real-life example demonstrating why certain plans may be better for you. We will discuss high deductible health plans and low deductible health plans, the benefits of each, and advice on how to choose the right plan for you.
Important Terms
Premium
The premium is the amount of money you pay just to have your healthcare insurance plan, usually monthly, or twice monthly. Many times this is taken out of your income pre-tax as a deduction.
Deductible
This is the amount of money you pay for COVERED health care services before your insurance plan starts to pay. If your deductible is $1000, then you would pay the complete $1000 before getting any insurance benefits.
Copayment
This is a fixed amount you pay for certain healthcare services after your deductible has been met. For instance, you would only have to pay the copay amount, say $20, for those healthcare services in which your health insurance plan allows a copayment.
Coinsurance
Other services may require a coinsurance. This refers to the percentage cost of COVERED healthcare services you pay after your full deductible is paid. For instance, if your health plan pays 80% of the cost of COVERED healthcare services after your deductible has been met, you would pay 20% of the cost of those same services until you have met your out-of-pocket maximum. Most plans require the patient to cover 20-30% of the costs up to the out-of-pocket maximum.
Out-of-pocket Maximum (in-network and out-of-network)
Out-of-pocket maximum refers to the topmost amount you have to pay for covered healthcare services in a year. After you pay the out-of-pocket maximum through your deductible, copayments, and coinsurance, your health insurance pays 100% of the costs of COVERED benefits. It’s also important to remember that most insurance companies have in-network and out-of-network providers and the out-of-pocket maximum is often higher for out-of-network services.
In addition to this, the healthcare expenses for in-network and out-of-network costs are generally separate. In other words, if you spend $100 in-network, and $100 out-of-network, this is not equal to $200 toward your out-of-pocket maximum. Unfortunately, it is considered $100 toward your in-network out-of-pocket maximum and $100 toward your out-of-network out-of-pocket maximum, which are separate.
Covered services
As you can see above, COVERED is in capitals multiple times. This is because you need to be very careful to look at what healthcare services are actually covered in your plan. This is important!
For instance, let’s say you decide that you would like a plastic surgery procedure such as a facelift, and this is not a covered service. You may be ok paying outside of your insurance for this procedure. But if you have a complication related to this uncovered procedure, your insurance may not cover any procedures or care you require related to that complication.
There is a great deal to read to understand all of your covered benefits. If you don’t want to take the time to read, at least contact your insurance company before getting a procedure to make sure you know if it will be covered or not and the implications for anything that may occur downstream from the procedure.
Embedded and Non-Embedded
These terms are important and often get glossed over. Embedded deductibles refer to an individual deductible embedded within a family deductible. Usually the individual deductible is about half of the family deductible. So if the family deductible is $2000, then the individual would be $1000.
In embedded plans, individuals within a family only need to reach the individual deductible before health insurance will start paying. The major issue with embedded health plans is this; even if one family member reaches the family deductible, in this example $2000, at least one other family member would need to reach their individual deductible in order for insurance to cover all family members post deductible.
For example, in the scenario above, if family member A reaches $1000, the insurance plan will begin paying for that individual. Now let’s say family member A has spent $2000, the family deductible, on covered services through copayments and coinsurance. Family member B now requires healthcare. Family member B will still need to pay $1000 to reach the family deductible before insurance will begin to pay, because family member A’s healthcare expenses only covered $1000 of the $2000 family deductible.
The good news is that the year’s healthcare spending still caps off at the out-of-pocket maximum even if all healthcare expenses are from one family member.
What are the benefits of embedded plans? For individuals in a family requiring more covered healthcare services, those individuals will reach the deductible sooner so that insurance will start paying earlier. As you can see above, the disadvantage is that other family members will still need to pay full expenses up to the family deductible even though the total expenses from one individual may be higher than the family deductible itself.
Non-embedded or also called aggregate plans are more rare. They allow all expenses, even from one individual, to be counted toward the family deductible. This allows other family member’s healthcare services to be covered by insurance as soon as the family deductible is met by any or all family members.
Who should choose a low deductible health plan?
A low deductible health plan (LDHP) is just this, a low deductible. To be considered a low-deductible plan, the deductible must be $1350 or less for an individual, or $2700 or less for a family.
Unfortunately a low deductible plan doesn’t necessarily mean you pay less. Many low deductible plans are subsidized by higher premiums, sometimes much higher. Hopefully you’re lucky to be part of a company that offers low deductible plans with low premiums, but this is much less common in the United States today.
Low deductible health plans may be beneficial for you if:
#1 – Your premium is low or there is no premium at all (unusual these days but available with some employers). Then the decision is easy, choose the low deductible plan. If this is the case, then it is unlikely the employer will even be offering a HDHP.
#2 – You do not have the cash at hand to pay a large healthcare payment if necessary, such as a high deductible in a HDHP. Healthcare costs can be quite expensive. For a simple surgery like removal of a gallbladder or appendix, the bill could be very high. Some people don’t have this type of money handy to pay in one fell swoop. Paying a higher premium with a lower deductible can help those who are in this situation.
#3 – You would end up spending the same amount on healthcare services as you would the premium for a low deductible plan.
This often times includes pregnant patients, patients with chronic conditions, patients who may need an elective surgery such as a hip or knee replacement, or patients who have high prescription medication expenses.
Many low deductible healthcare plans have substantial premiums that ultimately come close to the cost you would pay to reach your out-of-pocket maximum in a high deductible plan. However, if your calculated healthcare expenses are close to or more than your yearly premium amount, you may want to consider a low deductible plan.
Worrying only about premiums rather than every bill from the services you require takes away the hassle of the high deductible plans. Healthcare expenses can then be more predictable with LDHPs when your major cost is a monthly premium.
Who should choose a high deductible health plan?
A high deductible health plan (HDHP) is a plan that has a deductible greater than $1350 for an individual and greater than $2700 for a family. There are plans now with deductibles as high as $6000-$10,000. That’s a hefty sum of money to pay before your insurance will even kick in.
The benefit of the HDHP is the low premium, though these premiums are creeping higher every year.
Remember that even though you need to pay the deductible before your insurance will start paying, you also need to meet your out-of-pocket expenses before insurance pays 100%. Fortunately, you will likely pay around 20-30% of the cost for services once you’ve met your deductible.
High deductible health plans may be beneficial for you if:
#1 – You and your family members are healthy and have low healthcare costs. There is some risk with this strategy, as you never know if you will need healthcare. A car accident, or a condition requiring surgery could arise, which can be quite expensive.
But for those that are young, have low risk jobs, and are relatively healthy, the risk may be worthwhile.
#2 – You want to save money in a health savings account (HSA). You can then use this money as an investment or to pay healthcare bills when they become necessary.
With a lower premium, you will have more money to put into an HSA. And some HDHPs place money in an HSA for you as part of the plan. For individuals in 2019, the yearly amount you can put in a HSA is $3,500 and for families it is $7,000.
There is also a tax advantage for putting money into an HSA. The money can then be used for healthcare expenses but can also be saved and invested as an extra retirement account, or as the White Coat Investor calls it, a stealth IRA. When you turn 65, you can withdraw this money to use in retirement. So it has an added benefit if your overall healthcare costs are low.
Example
Let’s look at two plans side by side and decide which one is best for you. This example comes from a real healthcare plan.
Based on the table, let’s first look at families that are high healthcare utilizers. For ease, let’s just say all of the care is in-network. And let’s assume that a family uses $15,000 yearly in covered healthcare services.
For the LDHP, the premiums are $900/month with a deductible of $1000. The total premium for the year adds up to $10,800. If taken pre-tax from your gross income, then there is some savings, let’s say 25%, so the actual amount is $8,100. Add $1000 for the deductible to equal $9,100. Then pay 10% of the remaining cost of $14,000 ($15,000 minus $1,000 deductible), which is $1,400. The total equals $10,500.
For the HDHP, the premiums are $220/month. Again, the yearly amount is $2,640 and after taxes are taken into account, this is around $1,980. The deductible is $6,000 so the total is now $7,980. Pay 30% of the remaining $9,000 ($15,000-$6,000 deductible) which is $2,700 and add this to the $7,980. This totals $10,680.
As you can see, the total costs in this scenario are very similar. Even if you take the maximum amount that you could spend in either plan, they are similar. For the LDHP, it is $14,100 and for the HDHP, it is $13,980. In fact, the HDHP beats the LDHP in this case, albeit by a very small amount.
The major difference is that in the LDHP you pay more for the premium, so this will be paid no matter what, while in the HDHP, you only pay higher amounts if you actually need healthcare.
There are plenty of other scenarios we could calculate but it is ultimately your current situation that will dictate the best plan. It is certainly beneficial to calculate your total predicted costs and then decide on your risk tolerance. High deductible plans can be more stressful if you budget spending less on healthcare in a given year, especially when you require unexpected care. But if you do not anticipate high healthcare expenditures, this plan may be best for you.
Other Benefits
There are other benefits that you should look for in your health insurance plans. One of these is whether preventive care, such as annual appointments for you or your kids with a primary care physician, are covered. Some plans will cover this at 100% even before the deductible is reached. Also look to see if telemedicine is covered as this can be a cheap alternative for minor medical issues, and a convenient option without even leaving the house. Finally, as stated above, some plans will put money into an HSA for you as part of the plan. This should be a consideration when evaluating the different options.
Conclusion
When choosing health insurance, you must determine which plan is best out of multiple plans that will still likely cost you a lot of money. It’s not like it once was unfortunately and healthcare now requires some significant upfront investment, instead of being given health insurance as a basic right (another topic for another article).
Remember that the total amount you pay over a year if you choose a low deductible plan or a high deductible plan could very well be similar. In fact, in some cases the high deductible plan may be cheaper. It’s important to calculate the potential total yearly cost to fully evaluate each plan you might choose.
Hopefully you are lucky and your employer offers a low-deductible plan WITH a low premium. Otherwise, we’re stuck with increasing healthcare costs until someone figures out a solution.
What type of healthcare plan do you have? Are there any other benefits to a LDHP or HDHP? Comment below.