Health Insurance: What the Heck Am I Paying For?May 30, 2023
“I don’t understand; I have health insurance, so why am I getting a medical bill?”
I’ve had a few clients recently ask me and my team about navigating medical costs, and wanted to break down some common terms in this week’s blog.
Health insurance is not everyone’s favorite topic, I get it, but it’s important to understand the basics of what you’re paying for. It’s not as simple as “pay a fee, get a service;” there are a number of different costs associated with your insurance and it’s important to understand how they work together.
Even if you don’t pay for your health insurance, or get a portion covered by your employer, understanding the language used, what’s covered under your plan, and how much you will be expected to pay can help you make informed, empowered decisions regarding your healthcare.
HEALTH CARE PLANS: TERMS TO KNOW
Marketplace: Health insurance shopping and enrollment website. In some states, the marketplace is run by the federal government, and in some, it’s run by the state government. By using your local state Marketplace site, you can compare plans and figure out if you are eligible for lower premiums or a tax credit. You would use the Marketplace to find a health care plan if one was not provided by your employer, or if you are self-employed.
Medicaid: insurance program providing free or low-cost healthcare. Federal law requires mandatory coverage of a few groups, and individual states can determine whether to expand eligibility.
High deductible health plan (HDHP): a health insurance plan with a high deductible. The 2023 minimum annual deductible for a self-only HDHP is $1,500 and $3,000 for family HDHP coverage. Generally, HDHPs have lower monthly premiums.
Low deductible health plan (LDHP): a health insurance plan with a low deductible. An LDHP will have a yearly deductible of less than $1,500 for self-only and less than $3,000 for families. Generally, LDHPs have higher premiums.
HSA (Health Savings Account): a type of savings account that allows you to put money away (pre-tax) to use for qualified medical expenses (medical, dental, vision care as well as prescriptions). You do not pay tax on contributions, earnings, or withdrawals when used for qualified medical expenses, and contributions lower your yearly taxable income.
You must have a high-deductible health plan in order to open and use a HSA. Some insurance companies offer an HSA, and you can also open one up yourself at certain financial institutions.
There is a limit to how much you can contribute to an HSA per year; $3,850 for self-only coverage and $7,750 for family coverage in 2023 (this limit will go up in 2024). Any unused contributions to your HSA can be rolled over and used in the next calendar year. Funds in this account can also be invested.
**Note: If you take funds out of this account for non-qualified medical expenses before the age of 65, you will pay income tax and incur a 20% penalty. After the age of 65, the 20% penalty goes away and you only pay income tax on non-qualified distributions.
FSA (Flexible Spending Account): a health savings account set up by employers for employees. You cannot have an FSA unless offered by your employer. With an FSA, you put a portion of your earnings into this account to be used for medical expenses. Essentially, you are reimbursed from this account for qualifying expenses. Employers can also contribute to employees' FSAs, and this money can be used for your own medical expenses as well as your spouse and dependents. You can also be reimbursed for your yearly deductible from your FSA.
The contributions to an FSA lower your taxable income, and funds withdrawn to pay for medical expenses also aren’t taxed. There is a limit to contributions each year; for 2023 the max is $3,050.
Unlike an HSA, the funds in an FSA expire at the end of the plan year; aka, you gotta use it or lose it. Some employers will offer a grace period of a few months to use the money after the plan year or allow you to roll over up to $610 to use in the next plan year.
Preferred Provider Organization (PPO): a type of health plan that offers a network of providers to the insured. These providers are contracted with the insurance company to provide care at a certain rate to the insured party (aka, you!). If you go out of your health plan network for care, costs may be higher, but you have the freedom to receive care from providers in and out of network. You are not required to choose a primary care provider, and you do not need to have a referral to see a specialist. Premiums, copays, and coinsurance tend to be higher with PPO plans.
Health Maintenance Organization (HMO): a type of health plan that offers a network of providers to the insured. Similar to a PPO, these providers are contracted with the insurance company to provide care at a certain rate to the insured party. However, an HMO plan will NOT cover any out-of-network care except in the case of an emergency. With an HMO, you are required to find a primary care provider, and when you need a specialist, you see your PCP and they then provide referrals to providers within the HMO’s network. You need a referral from your PCP to see a specialist with an HMO health plan. Premiums, copays, and coinsurance tend to be lower with HMO plans.
WHAT YOU’LL PAY:
Deductible: the amount YOU pay for covered services and/or medications before your insurance plan begins to share in those costs. If you have a $1500 deductible, you must pay $1500 out of pocket before your plan will contribute any amount toward your care.
Premium: a monthly bill paid to your health insurance company. This payment keeps your coverage active and can help cover the costs of preventative services in your plan. These payments do NOT count toward your deductible.
Copay: a flat fee you pay each time you go to a doctor. You may also have copays for prescriptions. Copay amounts will typically be listed on your health insurance plan card. Generally, copays do NOT count toward your yearly deductible but always double-check with your provider if you are unsure.
Co-Insurance: the percentage of cost YOU will pay for covered services AFTER you’ve met your deductible.
For example: your plan’s allowable amount for an office visit is $50 (fyi the allowable amount is the most a plan will pay for a covered service).
If your co-insurance is 10% and you’ve already met your deductible, you would pay $5 for that visit. If your co-insurance is 20% and you’ve met your deductible, you would pay $10 for that visit.
If you hadn’t yet met your deductible, you would be responsible for the entire $50 cost.
Out-of-pocket maximum: the most you would pay out of pocket for covered, in-network services in a plan year. After you spend this amount, your insurance plan will cover 100% of future costs. This limit does NOT include your premiums, any out-of-network providers or care, or services that your insurance plan doesn’t cover.
The limit is subject to change year to year but cannot exceed that set amount; in 2023, the out-of-pocket limit for a Marketplace plan can’t be more than $9,100 for an individual and $18,200 for a family.
To qualify for an HSA, the maximum out-of-pocket limit for self-only is $7,500 and $15,000 for families.
Out-of-pocket expenses/cost: any costs for medical expenses that are not reimbursed by your insurance. This includes your deductible, copays, coinsurance, and out-of-network care.
When you are considering what health insurance plan to get (if you don’t qualify for Medicaid or Medicare), you’ll want to consider the potential total cost of your healthcare; not just your monthly premium. Sometimes, the plan with the lowest premium might not be the cheapest once you take into account the other costs you’ll have throughout the year.
When you are choosing a health care plan and the financial implications, consider:
- The monthly premium
- The yearly deductible
- Estimated out-of-pocket costs
- Would you have access to an HSA or FSA?
- What are your healthcare needs? For example, will you need to see a specialist often? Do you have a chronic medical condition that needs consistent care?
Usually, you can compare a few different plans through your state’s Marketplace either with a virtual comparison or by speaking directly with a broker for support.
You don’t need to be a health insurance expert, but having a basic understanding of what your plan covers and what you will be financially responsible for may save you money in the long run.
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