For Your Benefit Richard Quinn | November 3, 2020
ONE OF MY SONS has to choose health insurance for the year ahead—and his employer provided a 95-page pamphlet. Let’s face it: If you need that amount of information to make a choice, something is wrong. The pamphlet describes three medical options, plus dental options and vision coverage. Two options get you an employer health savings account contribution—or it is a health reimbursement account? There are three levels of deductibles and coinsurance and, of course, premiums. The premiums for the same option vary by four levels of salary, and by whether the employee and spouse smoke. If they participate in wellness activities and tests, premiums are modestly reduced.
My son turned to me for help. I spent almost my entire career working in employee benefits, but it took me several hours to figure it all out. As I was reading the pamphlet, it reminded me of a mutual fund prospectus, with all the caveats and legal boilerplate. And as with a fund prospectus, I suspect few people will read it.
Unfortunately, making decisions about health care coverage is complicated and getting more so. It’s about money—lots of money—but our choices are often driven by emotion. In my opinion, many people have an unrealistic fear of health care costs, perhaps because they don’t realize that the risk of large expenses is modest.
Half the population accounts for just 3% of annual health care spending, equal to $276 per head, and their out-of-pocket costs are about $20 a year. Meanwhile, people age 65 and older account for 36% of all health care spending. How do you make a sensible choice?
The key decision that people must make is balancing premiums against potential out-of-pocket costs. This applies regardless of where you get your insurance. Paying a higher premium doesn’t mean better coverage or a better financial deal. Premiums are a fixed expense—if you opt for coverage with high premiums you know you’ll have high health care costs for the year—while out-of-pocket costs are variable, but they shouldn’t exceed a plan’s out-of-pocket limit.
Here are six questions to ask:
How much can you afford to pay in out-of-pocket costs? That’ll be partly driven by the size of your emergency fund—and it’ll perhaps prompt you to add to it.
If you have coverage through your employer, are premiums paid on a pretax basis? If so, you can afford to pay more, with less impact on your net pay.
Is there a health savings account (HSA) available? This is the best way to handle out-of-pocket costs, but it means opting for a high-deductible health plan.
Does your employer contribute toward a health reimbursement account (HRA)? The account helps pay out-of-pocket costs, including services not covered by your insurer.
Can you contribute to a flexible spending account (FSA)? While an HRA is funded by employers, an FSA is usually funded by employees.
Does an employed spouse have other coverage available? Your employer may apply a surcharge if you enroll a spouse who has coverage available through his or her employer. On the other hand, if you coordinate benefits from two employers, you could end up with very low or zero out-of-pocket costs, but are the additional premiums worth it?
READ ALL MY TIPS AT THE LINK BELOW
Source: For Your Benefit – HumbleDollar