How to Choose a Health Insurance Plan
Now that you’ve learned about what is covered by health insurance from last week’s post, I’ll help you choose a health insurance plan. As part of the process, I’ll tell you some ways to lower your net cost of healthcare and provide you with a spreadsheet to compare your total cost. This spreadsheet can help inform your buying decision whether you are reviewing the options provided by your employer or comparing alternatives available to you from insurers or an agent.
You’ll want to optimize your buying decisions across all of your employee benefits, so don’t forgot to look at the full gamut of benefits offered by your employer as you make your decision.
Funding of Medical Expenses
Many employers pay for a portion of the premium charged for health insurance. However, almost none cover the total cost, so your out-of-pocket costs include the remainder of the premium, along with any costs up to the deductible and your coinsurance.
Amount of premium you need to pay
Whether you have your own health insurance plan or one through your employer, you are likely to have to pay some or all of the premium. Premium is often charged on a per-paycheck or per-month basis. The following factors may affect how much premium you pay:
- Which plan you choose.
- Who is covered ─ just you, your partner or your whole family.
If you buy health insurance through your employer, your contribution to premium may also vary depending on your salary. I had one employer that charged employees higher premiums as their salaries increased. Some employers also have an additional charge if your partner is eligible to be covered by another plan, but you choose to have him or her insured on your plan.
HSA vs HRA vs FSA
There are three types of savings accounts to which one or both of you and your employer can contribute, on a pre-tax basis, to finance medical expenses. That is, the amount that you contribute to any of these three accounts reduces your income. You also do not pay taxes on the money when you withdraw it to pay medical expenses. I am not sufficiently familiar with state tax laws to know whether any states tax contributions to these accounts. The three accounts are a Health Reimbursement Arrangement, a Flexible Spending Account and a Health Savings Account.
Health Reimbursement Arrangement (HRA)
Only employers can contributed to an HRA, but they do so on your behalf. The employer also determines what types of expenses can be paid from account. Lastly, the employer decides whether any funds you don’t use in one year can be rolled over to following year or whether they are returned to the employer at the end of the year.
Flexible Spending Account (FSA)
Both you and your employer can put money in an FSA, though it is very uncommon for employers to make contributions. The IRS determines the types of medical expenses you can cover from an FSA. My experience is that the rules are quite broad. In 2018, the maximum contribution was $2,650. The drawback of a Flexible Spending Account is that you generally cannot roll over any funds that you don’t use in the year you contributed the money, though your employer is allowed to give you a grace period of either 2.5 months or $500. Therefore, you will want to think about how much you expect to spend on out-of-pocket medical costs as you are determining your contribution. Many people end up with money left in their FSA as the year ends. Keep in mind you can use your FSA for dental visits, prescription eye glasses and the like, so you might want to spend money on those types of costs if you have extra money in December.
Health Savings Account (HSA)
Both you and your employer can contribute to an HSA. As with an FSA, the IRS determines the types of medical expenses you can cover from an HSA. My experience is that most expenses can be paid from an HSA. Only people who choose high-deductible plans (those with per person deductibles of at least $1,350 or family deductibles of at least $2,700 for 2018) are allowed to fund an HSA. For 2018, you can contribute up to $3,450 for individual coverage per person or $7,000 for couples and families, plus $1,000 if you are over 55. The funds in an HSA remain in your account from one year to the next and can also be invested tax-free. As such, if you buy a high-deductible plan, an HSA is a very tax-efficient way to save money for current and future medical expenses.
Some employers will make contributions to Flexible Spending or Health Savings Accounts. In some cases, the amount of the contribution depends on whether you or your partner complete certain actions that are intended to make you more aware of your health, such as a health assessment (a bunch of questions about your lifestyle) or a medical screening (the one I had included a blood test, blood pressure test and the like).
How to choose
The goal in choosing a health plan is to find the one that is most cost effective for you. Most importantly, you’ll want to remember that the one with the lowest premium or the lowest deductible might not be the best one for you. I found that the high-deductible plans were sometimes often the least expensive for our situation than low-deductible plans, but that may not be the case for you.
Probably most importantly, you need to think about whether the network will cover most or all of the providers you are likely to see and the types of services you might need are covered by the plan. If most or all of your providers are in an HMO offering, it might be the best option for you because HMOs often have lower premium charges than PPOs (though not always). If you know you are like me and want the flexibility to see whatever provider you want whenever you can, and assuming the cost isn’t prohibitive, you might want to select a PPO or indemnity option.
Caps on Specific Services
Also, some plans have caps on the maximum amount they will pay for some services, such as physical therapy. You’ll want to look at each plan to see if any services you think you might use are capped, in which case you’ll prefer plans with higher or no caps on these services.
Once you have narrowed your choices based on the network characteristics and covered services, you’ll want to start thinking about which will have the lowest cost for you. Because you don’t know at the beginning of the year how much your medical expenses will be or how many family members will have large expenses in any one year, it is impossible to know in advance that you’ve made the RIGHT choice. However, you can make an informed choice by using the spreadsheet I’ve created for this purpose. My colleagues always said they knew that I would be the one to make a spreadsheet which I did every year!
The attached spreadsheet has three visible tabs – one each for inputs about the medical expense scenarios, for inputs about your plan options and the outputs showing your estimated out-of-pocket expenses for each combination of scenario and plan. For those of you interested in the nuts and bolts, there are hidden tabs with the calculations.
You’ll want to test several scenarios, even if you are the only person on your plan, but even more importantly if there is more than one person on your plan. As you design your scenarios, I first suggest thinking about your medical expenses over the past few years. Do you have any chronic conditions that lead to predictable medical expenses or does your family tend to not have many medical expenses in most years? You’ll want to have one scenario with what is a low amount of expenses for your family. You’ll then want to create other scenarios in which one or two people get really sick. I use $25,000 as the cost of being “really sick,” but you’d be surprised how quickly you can spend $25,000 on medical services so don’t be afraid to use a bigger number.
Once you have created your scenarios, you can put them on the Scenarios tab. Each Scenario will go in a different column. I’ve given you space for 6 different scenarios, though I usually only tested 4 scenarios (low cost, one person gets “really sick,” two people get “really sick” and two people have moderate expenses). If you want to name the scenarios, you can replace the numbers in Row 1 with labels. They will carry over to the outputs tab. I’ve also given you space for 6 people in your family, one in each of Rows 3 through 8 of the spreadsheet. If there aren’t that many people on your plan, just leave the rest of the rows blank.
The information about up to six plans that meet your minimum criteria (e.g., HMO vs PPO vs indemnity) can be entered on the Plans tab. If you have a partner and both of you are eligible for both of your employers’ plans, you can use plan options from both employers in the same comparison – just use some columns for your employer’s plans and some for your partner’s employer’s plans. Coordination of benefits if you buy coverage for an individual from more than one employer is very complicated, so I have not tried to address it in the spreadsheet or in this post.
As with the scenarios, you can change the plan numbers in Row 1 to any name you want and they will appear on the comparison tab. Filling in the rest of this tab could be a little tricky, as you’ll need to make some estimates that are a bit challenging and match the terms that define each plan with the rows in the spreadsheet.
The first input, in Row 3, relates to how the in-network and out-of-network deductibles interact. As I mentioned earlier, you may need to ask someone from your human resources department or, if you are buying insurance in the individual market, your insurance agent how these two deductibles work. For any plan for which the costs you pay as part of the in-network deductible are added to your out-of-network costs in determining the amount you have to pay as part of the out-of-network deductible, select “Combined” in this row. If the out-of-network deductible applies separately from the in-network deductible, select “Separate.”
An estimate of the percentage of the medical expenses you think are likely to be considered in network by each plan goes in Row 5. For each plan, you’ll want to look to see if the providers you’ll want to use in the next year are in the network and figure out roughly what percentage of your medical costs are likely to be in the network. In reality, this percentage will likely vary from one scenario to the next and possibly from one family member to the next, but the number of inputs grows very quickly if I use that level of detail. I suspect you’ll find making one estimate challenging enough. If you have an indemnity plan, you can put 100% in this field.
Remember, this exercise is just to provide you with insights about the different plans, so very rough estimates of these values are helpful and precise estimates are unnecessary.
Other Plan Provisions
Rows 7 through 19 are the inputs for the plan features discussed above. The documents or links provided by your health insurer or employer should contain all of this information. If you have a strict HMO that pays for only in-network costs, you’ll want to put 100% as the out-of-network coinsurance, $0 as the out-of-network deductibles and a very large number, such as $1 million for the out-of-network out-of-pocket maxima.
In Row 22, enter the amount of premium that you will pay each time you pay the bill or the amount of premium that will be taken out of your paycheck each pay period. In Row 23, enter the number of payments per year. For example, if you get paid twice a month, you’ll put 24 in this row; every other week, 26, or if you make monthly premium payments directly to the insurer, 12. Row 24 allows you to enter any amounts that your employer will contribute to an HRA, FSA or HSA. Row 24 should be the total annual amount, not the amount per paycheck.
Each column of the Comparison tab corresponds to one of the plans that you entered on the Plans tab. The rows correspond to the scenarios you created on the Scenarios tab. If you named one or both of your plans or scenarios, you should be able to see the labels on the Comparison tab.
The values in the table represent your approximate total out-of-pocket cost for each plan under each scenario, considering all of the deductibles, coinsurance, maxima, mix of services you’ve entered, premium and employer contributions. I’ve formatted the columns so the total cost amounts are color coded. The most expensive plan for each scenario has red shading, while the least expensive plan for each scenario has green shading.
Now comes the tough part! Unless you have not selected a wide enough range of scenarios or the relative premiums for the plans are not consistent, no one plan will be green (lowest cost) or red (highest cost) across all scenarios. You can start by eliminating any plans for which most or all of the scenarios are red or yellow. You’ll then want to look at the remaining plans and see in which scenarios they are more expensive and which they are less. You can use this information to inform your choice of plan, possibly by picking a plan that is lower cost when medical costs are lower (in which case you are betting you will continue to be healthy next year) or picking a plan that is lower cost when medical costs are higher to protect your down-side risk. I’ll discuss risk and reward in a future post, but the trade-off between the two is always a personal preference.
Many thanks to Laura Kenney and Jingyi Huang for their help with this post.