How Health Insurance Works

Health insurance is a type of coverage that offsets the cost of surgical and other medical expenses you may incur. Medical bills can be pricey. The average cost of a heart bypass surgery is more than $78,000. Over 2 million people are negatively affected by medical bankruptcies. Two-thirds of bankruptcy filers state that medical-related debt is the reason that they filed. It’s so important to select the right health insurance plan for your needs. Choosing the wrong plan could be disastrous for your financial, emotional, physical and mental health. How do you know it’s the wrong plan? You could be paying too much in premiums before your injury or drowning in your bills afterward.

What Are Health Insurance Costs?

You may be familiar with the health care premium that is paid each month. However, this is not the only health insurance costs that can be charged.

Common health care expenses:

• Premium: the fee paid to continue your health insurance coverage. It is usually paid per month.
• Co-pay: a flat rate cost for obtaining specific services in healthcare. It may apply to walk-in clinics, doctor’s visits, emergency room, and urgent care visits, or prescriptions. Co-pays can vary from plan to plan.
• Deductible: the expected amount in medical costs to be paid annually before your insurance plan begins covering most of your expenses. Like co-pays, deductibles vary from plan to plan.
• Coinsurance: the part of your medical costs that you are responsible for once the deductible is met. Even after reaching your deductible, your health insurance may not pay 100% of the costs. You are responsible for the leftover amount.
• Out-of-pocket maximum: the most you will spend per year before your health insurance plan covers 100% of the remaining cost.

Types of Health Insurance

There are several types of health insurance available. The table below shows the most commonly known types. The differences between plans affect your choice of doctors and your out-of-pocket costs.

Plan Type	In-network only?	Referrals required for specialists and procedures	Snapshot
HMO Health Maintenance Organization	Yes, unless it’s an emergency	Generally, yes	Out-of-pocket costs are lower. Primary care doctors coordinate care. Less flexibility in choosing providers.
PPO Preferred Provider Organization	No, but out-of-network care is more expensive than in-network	No	Larger number of options for providers. No referrals required. Higher out-of-pocket costs.
EPO Exclusive Provider Organization	Yes, unless it’s an emergency	No	Out-of-pocket costs are lower. No referrals required. Less flexibility in choosing providers.
POS Point of Service Plan	No, but out-of-network care is more expensive than in-network	Yes	Larger number of options for providers. Referrals required.

To compare the plans, consider your family’s medical needs. Carefully review the types of treatment you’ve received, how frequent they are, and how much they’ve cost. Identify trends in your medical history to make an informed choice.

For plans which require referrals (HMO and POS plans), you have to visit a primary care physician prior to seeing a specialist or booking a procedure. Many people prefer other plans due to this simple obstacle. Yet, some people choose HMOs despite the restrictions because it’s the least expensive option.

A POS or HMO can be the best choice provided you’re okay with your primary care doctor selecting your specialists. You’ll do less work because the medical administrative staff coordinates visits and manages medical records. If you go out-of-network, you should get a referral from your primary care physician to lower out-of-pocket costs.

Prefer to select your own specialists? Then you should get an EPO or a PPO. EPOs have lower costs as long as the chosen provider is in-network. If you live in a large metropolitan area, this may be easy to do. However, if you live in a place with fewer medical options, you may want to consider a PPO. This option is better if you must search out-of-network for a provider.

What about an HDHP with a Health Savings Account?

A high-deductible health plan (HDHP) is a health insurance plan where your medical expenses have high minimum deductibles. This is usually offset by lower premiums. Many HDHPs come with a health savings account (HSA), which has two key benefits. The first is obvious: it helps you cushion against medical expenses. HSAs also reduce your taxable income, since contributions are usually made before income taxes are assessed on your salary. Unfortunately, not everyone is able to sign up for a plan with an HSA. Even if you qualify, there are legitimate reasons for not getting an HSA.

Qualifying for an HSA

Patients that are enrolled in an HDHP (per the government’s definition) usually qualify for an HSA. HDHP plans that meet the requirements for an HSA are tagged as “HSA-eligible”. Each year, the IRS redefines the guidelines around HDHPs, including the minimum deductible and maximum out-of-pocket costs. The most current information is available on healthcare.gov.

How an HSA Works

If your employer does not offer an HSA with your HDHP, you can open one on your own. Just make sure that the HDHP plan meets the requirements for an HSA.

You can direct part of your income to your HSA each year. (The amount must not exceed the maximum limits set by the government.) For an HSA through your employer, you may enroll in automatic salary deductions through your office payroll.

To pay for your medical expenses, you will be provided with a debit card or checks. These instruments are linked to your HSA balance and can be used to pay for eligible medical costs. Eligible costs include co-pays, deductibles, co-insurance, and other medical expenses that may or may not be covered by your plan. Your HSA cannot be used to pay for your premiums.

At the end of the year, your HSA balance will roll over into the next year. This will continue until you’re 65 years old and enrolled in Medicare. After age 65 you cannot make new contributions to your HSA, but you can continue using the money in the account. The money must still be used for qualified medical expenses, or else income taxes will be applied to the withdrawals. Additional penalties can apply for using the funds inappropriately.

HSAs Have 3 Tax Advantages

One of the reasons people love HSAs is due to the tax benefits. There are three key advantages.

• HSA contributions may be either tax-deductible or pre-tax deductions. This depends on if the account was opened independently by you or through your employer, respectively.
• Gains on the account are tax-free.
• Withdrawals on eligible expenses are tax-free.

Your HSA contributions are subtracted from your total income, lowering your tax burden. For example, someone making $60,000, and investing $5,000 in their HSA will be taxed upon $55,000 instead of $60,000.

Investment Potential for HSAs

There are different types of accounts you can use as your HSA. The simplest one is a savings or checking account. You may also use mutual funds, bonds, or other investment options. A visit to your bank or investment broker can help you choose the best account(s) for your goals. Look for investment options with low fees.

Choosing Health Insurance: A Basic How-to Guide

• Consider what options are available from your workplace. Your employer-paid insurance may be limited, but the costs of premiums may be shared between you and your company, saving you money.
• If your workplace doesn’t have a health insurance plan, look into getting one on your own.
• Compare the different types of plans and see what’s available to you. Make the decision of what is best for your family (including you), and whether you want a plan that is HSA-eligible.
• Plans that exclude your doctor or other local doctors that are in-network should be eliminated. In-network options are cheaper because insurers negotiate lower rates for them than out-of-network options.
• Decide if you want higher out-of-pocket costs with lower premiums or higher premiums with more coverage.
• Your selected plan should cover the regular and necessary care that you will need, including prescriptions and specialists.

Conclusion

Despite approaching deadlines, don’t be in too much of a hurry to choose your health insurance plan. It is better to understand as much as you can about types and costs associated with each option. Only then can you make the best choice for you and your family.