Health Care Cost Basics: What They Are and Ways to Save

Putting money aside for emergencies such as roof replacement or major car repairs is one of the old mantras of personal finance.

But today, until relatively recently, there is one major potential cost that was almost unthinkable. It is the payment of out-of-pocket medical expenses.

Why? This is because until the last decade or so, most employers’ medical plans covered most of their employees’ medical costs.

not anymore.

Due to soaring medical costs, many employers are passing many of these costs on to their employees. The monthly premium for traditional medical plans, which used to be fairly reasonable, can now cost more than $ 600 per month. And most of these plans have an annual deduction — the money you have to pay from your pocket for medical expenses before the plan can take over most of the costs.

Many companies now also offer a High Deduction Health Plan (HDHP), as most employees cannot afford these plans. How widespread are these plans? In 2019, 51% of all US employees registered with HDHP.

And for those who are not covered by work and have to buy their own health insurance, HDHP is generally the minimum premium for plans available in the state and affordable care insurance market. Provide.

But one day, perhaps a few years from now, and perhaps next week, injuries and major illnesses will need treatment. If you’re not financially ready, you may find a difficult way to figure out what “high deductions” really mean.

3 types of costs

Deductible

HDHP may state that there is a $ 4,000 annual deduction. This means that you need to spend $ 4,000 of your own money to pay for treatment before the plan begins to cover some of the costs. If you think you have to pay so much, think again. In 2018, the average cost of knee replacement was $ 35,000. $ 110,000 for spinal fusion. Are you thinking of having a child? All prenatal care, childbirth, and postnatal costs can cost more than $ 4,500.

As an HDHP participant, I personally experienced the painful costs of medical care. Last year, I was healthy for most of the year, but the cost of a single visit and follow-up appointment to an out-of-state emergency room ran out of all my $ 2,800 deductions.

Thankfully, according to a study conducted by eHealth, my average deduction was $ 4,364 for individual subscribers and $ 8,439 for family insurance subscribers in 2020. Was relatively rational.

However, the cost may not end even if the deduction limit is reached. Many HDHPs require that you continue to pay partial costs through out-of-pocket and joint insurance.

Self-pay

The out-of-pocket amount is a fixed amount to be paid at your own expense as medical expenses. The amount you pay depends on whether you have reached the deduction. For example, if the procedure costs $ 500 and you pay $ 20 for such a procedure, you will pay $ 20. that’s all If you have paid the maximum deduction amount. Otherwise, you will pay the full $ 500 from your pocket.

Joint insurance

If the deductions and out-of-pocket costs are not sufficient, co-insurance can add more to your medical tab. This is the percentage of eligible medical services that you may have to pay for, even if you have a deduction limit.

Let’s say your plan has a 25% joint insurance requirement. Even if you have already reached your deduction and have another procedure that costs $ 1,000, you still have to pay $ 250 from your pocket.

When will it end?

Fortunately, the IRS has set an annual cap on the total out-of-pocket medical costs of HDHP. In 2022, this limit will be $ 7,050 for individuals and $ 14,100 for families. Costs above that level are fully covered by HDHP.

However, keep in mind that these limits are reset every planned year.

Medical savings account for rescue

If this scenario has one silver backing, many employers offering HDHP will also offer a Health Savings Account (HSA).

HSA allows you to make a pre-tax contribution from your salary to your investment account. This allows you to withdraw your contributions and income tax-free and pay eligible medical expenses.

In addition to treatment, HSA can be used to pay for prescription and over-the-counter medicines, medical devices, dental expenses, physiotherapy, as well as acupuncture and aromatherapy. You can also use HSA to help pay long-term care insurance premiums.

In 2022, the maximum donation amount is $ 3,650 per person ($ 7,300 per family), with an additional $ 1,000 “catch-up” donation per person over the age of 55. Some employers make regular contributions to employee HSAs to offset some of these out-of-pocket costs.

Fully portable

The great thing about HSA is that you don’t have to make a withdrawal. For example, you can choose to pay your current medical expenses from your savings and reserve HSA money for your retirement medical expenses. (Please note that once you register for Medicare, you will not be able to donate to HSA.)

If you start a new job with an employer who has HDHP and HSA, you can transfer your assets from the old HSA to the new HSA. If you do not offer an HSA, you can move your assets from an old HSA to an HSA provided by a financial services company. Please note that if you do not register with your new employer’s HDHP (or do not have HDHP), you will not be able to make additional donations to HSA.

Having an HSA will help you get rid of any out-of-pocket medical costs incurred, but only if you contribute to it.

This can be difficult if you are retiring, trying to save for your child’s higher education or a new home. However, given that pre-tax contributions to HSAs have the same benefits of lowering taxable income as contributions to 401 (k) accounts, it is beneficial to contribute as much as possible to both accounts.

If you are lucky enough to get a tax refund, consider donating a portion of it to HSA. These donations are after tax but may be deductible. If you plan to do this, make sure that your total pre-tax and post-tax contributions do not exceed your annual limit.

Other ways to lower medical costs

This may sound like a tough affectionate situation, but the fewer families your plan covers, the lower your premiums and out-of-pocket costs can be. If your adult child is eligible for HDHP but works for a company that offers your own health plan, it may be time to encourage your child to experience the “joy” of managing their own health care costs. .. Either way, they’re too old to cover in your plan, so you’ll have to do it anyway (generally 26 years old, but more expensive in some states).

If both you and your spouse are using HDHP, compare the maximum monthly premiums, deductions, out-of-pocket, joint insurance, and out-of-pocket costs for each option. If you can use your current family doctor and specialist with both options, it is advisable to switch to a more affordable option for both.

You can also estimate the total cost of your area if you are considering doing so.

It’s a shame that people may need to add “future health care” to their list of savings goals, but this is a reality that many have to plan for. If you need help understanding how to balance these competing priorities, a qualified financial planner will ensure that maintaining good health does not have a significant negative impact on financial well-being. Guidance can be provided.