This is the first in a series of articles about insurance, which is a large expense that everyone has to deal with. Everyone meaning us Americans, as much of this doesn’t apply to other developed nations. In much poorer and less developed nations your safety is your friends and family; in other developed nations it’s provided by the government.
Health insurance is one of the most expensive kinds of insurance offered in the United States and it’s complicated. Let’s discuss.
Medicare, Medicaid, Private Insurance
If there is any confusion on how Medicare and Medicaid fit into these topics, let’s quickly define them in plain language and move on.
Medicaid is for poor people. The state governments provide it for those with incomes below a certain level . This level varies by state and family circumstance but generally runs from an income below a few thousand a year for a single adult to ~$40,000 a year for a family with children.
The federal government provides Medicare for people who can’t work anymore or who we don’t obligate to work anymore – the disabled and retirees. Once you hit 65, or a doctor certifies you as too disabled to earn an income, you can qualify for Medicare. In fact once you hit 65 you have to sign up. If you don’t, you’ll be charged penalties because they don’t want people to ignore healthcare until they get so sick that they will cost even more to treat. Because the federal government administers this program directly it’s details do not vary by state.
Most Americans will be dealing with private insurance for most of our lives. Your employer provides you with private insurance. If you care about historical reasons, the US has this strange system because of path dependency.
In the first half of the 20th century there wasn’t public healthcare anywhere. Then during WWII the US was a command economy – The government set all prices and wages. This created a stranger environment where there were more jobs than workers because of the millions of people becoming soldiers or other government employees yet the companies could not offer more money. To attract and keep employees in this environment companies did the only thing open to them – they offered indirect benefits. This included paying for healthcare. We kept this system after the war because no one realized how expansive things would get generations later. By contrast, Europe was a pile of smoking rubble after the war, and so when those countries started building their own modern healthcare systems the government had to be the payor
Back to the topic at hand. In America you are getting your health and dental insurance, as separate line items, through your employer. Part of the cost is taken out of your paycheck, and a larger part of the cost is paid for directly by the employer. As an employee you are usually presented with several options. These will vary by the exact coverage, as well as by dollar amounts such as premium, deductible, coinsurance, and copay.
Premium, deductible, coinsurance, copay
Let’s define these terms.
Your Premium is the monthly payment you make to have the insurance. Basically this is how insurance works: everyone is paying a little bit in all the time, and sometimes, when you need it, you can get a lot back out. The premium will vary with how much risk the seller thinks they are taking on you but generally goes up the older you are and the lower the deductible is.
A Deductible is the amount you will pay before insurance steps in. If you have a $2,000 annual deductible, only once you have spent $2,000 that year will insurance cover anything. This resets every year. Generally plans with higher deductibles have lower monthly premiums because there is less risk to the insurance company you’ll actually use up your deductible and bill them in any given year.
The Copay is essentially a small fee you pay for routine items such as a doctor’s visit. The exact interaction with the deductible will vary by plan, but for example you may always pay $50 for a GP visit even when insurance pays the rest, even after hitting the deductible.
Coinsurance is another form of splitting the cost with the insurance company, but this time on a percentage basis. This is most common with drugs. The patient may pay 20% of the cost and the insurance 80% for example.
A Maximum Out-Of-Pocket amount is a ceiling on how much you can pay in one year regardless of the deductible, copay, or coinsurance. Once you hit this you pay nothing. So, you may have hit your deductible and still be paying a copay or coinsurance on some items, but once you hit the OOP, you no longer pay copay or coinsurance.
How to choose
When deciding which insurance you want, you should sit down and read your employer’s options. Work on them until you understand three things about each one:
- What is covered – here you are particularly looking for things related to your circumstances, such as things young children might need if you are a new parent, or drug coverage if you have a chronic condition.
- Total annual premium cost – this is just the monthly cost times twelve.
- Possible costs paid by you – the maximum amount you might pay in a year with this plan (deductible and copay) and the likely amount you will need.
The likely amount of healthcare you will need depends on your life circumstances. Let’s consider that there are two plans available – a high-deductible and low-deductible plan, with the following deductibles for an individual and a family
- Low-deductible plan, single – $700
- Low-deductible plan, family – $1500
- High-deductible plan, single – $2000
- High-deductible plan, family – $5000
Your choice comes down to balancing the guaranteed cost of paying for the plan with the likelihood you will need enough healthcare to exceed your maximum. If you are in your 20’s, single, with no major health problems, and a pretty risk-free life (you don’t go sky-dive jousting on the reg), in any given year you are only likely to need an annual doctor’s visit and checkup. The chance you will get seriously sick or injured and max out the insurance that year is slim. Your best choice here is to get the high deductible plan, which is cheaper, and then make sure that your emergency fund has enough in it to cover your maximum OOP in the rare case you have a really bad year.
On the other hand, as you get older and especially as you start to have children, a transition point arrives. A pregnancy has a lot of standard visits to the doctor, as does early childhood. You might also have developed injuries or conditions that need regular care. In these cases you should try to do the math on how much it might cost you each year. If the total premium cost of the low deductible plan plus the OOP of that plan is less than the amount you could reasonably spend, you might want to pay the higher premiums in order to have a lower total cap on your healthcare spending in a year.
HSA vs HRA vs FSA
In recent years a few supplemental items have been created to help with the ever-raising cost of healthcare. The acronyms are pretty similar, but they are very different animals. Let’s look at what they are and when you should take advantage of them.
HSA. The Health Savings Account is a pre-tax account that you and/or the employer can contribute to. The maximum is $3,500 for individual coverage or $7,000 for family coverage. It is essentially the same as a traditional 401K, except that you can withdraw money at any time tax-free to pay for healthcare. In other words, if you use this money to pay for healthcare it is money that was never taxed. Any money you have left over in the account when you hit 65 can be withdrawn and taxed at that time just like a 401k or IRA.
You should always max this out if you have the chance and enough flexibility. Even if you don’t use it for years, it will just accumulate and be there when you need it later in life. You get to keep it even if you don’t work for that employer anymore. And if you don’t use it, it’s the same as a retirement account.
FSA. The Flex Spending Account is sometimes confused with the HSA, but is worse in every way. Like the HSA you and/or the employer can contribute pre-tax money to it, and the money can be used to pay for healthcare. But the big difference from the HSA is the carryover. At most, in some circumstances you can carry over $500 to the next year. Anything else is lost if you don’t use it. Like the low-deductible plans, that makes the FSA something you should use only in years you are certain you will spend the money you put into it that year. If you spend it, you saved the taxes. But if you are healthy and single, don’t bother with the FSA.
HRA. The health reimbursement account. Unlike the HSA and FSA, this was never your money. Employers can choose to set aside these accounts to help employees pay for their deductibles and premiums. If you employer offers an HRA, you should take full advantage, and you should subtract the yearly amount from the amount you might expect to pay for healthcare services when deciding whether or not you need to choose a low-deductible plan.
Of course, a big question in an employment-based system is what happens when you don’t have insurance through your employer. This circumstance can vary widely, from unemployment and poverty, to just being between jobs, to deliberately taking a year off or retiring early. I can’t go into exhaustive detail about your best choice, but I can introduce some of the options.
COBRA is the legislation that lets you continue using your employer’s healthcare plan for up to 18 months after you leave your work. It is meant to cover the gap. The only problem is, the employer is no longer paying part of it so you have to pay the full price. You will likely find out that if you were paying $150 a month, the employer was paying $500 a month. That means you would now have to pay $650 a month at exactly the same time as you don’t have a job.
The Affordable Care Act created health exchanges where people can buy healthcare privately. These plans must meet certain minimum coverage requirements. Unfortunately, these requirements raised the price of healthcare quite a lot, so getting coverage through an exchange will hurt.
A health share is something that a small but growing percentage of Americans use. Access and regulation will vary by state. A group of people shares the risk and costs, but the government doesn’t regulate it like insurance, and does not require health shares to cover all of the same things. This may include not covering preventative or routine care, or pre-existing conditions. There are also fewer rules governing how they can decide whether or not to pay your claim. In fact, it is classified as a voluntary program, with no enforceable legal requirement for you to pay them – or for them to pay you when you need it.
That all requires a lot of trust in the health share administration and it’s members, which is perhaps why this is focused in faith-based communities. It also means the plans can be stricter about requiring healthy and safe behavior – they might not pay if you weren’t wearing a helmet, for example.
This all also means that the costs are lower – a few hundred dollars a month for a family, instead of $1,500-2,000 or more. So the health share can be a good option for families needing to pay for their own care, but unable to afford traditional insurance.
The final caveat is the explicitly religious nature of the existing programs. They all require certification of religious belief, and in some cases, proof you’ve been attending church sufficiently. The most inclusive is Liberty which does not require you to be a Christian churchgoer, but essentially (under the wording) just a religious person believing in the god-given obligation to support health in your community.
Finally, there is of course Medicaid. If your income is low enough in your state, you can enroll in the state Medicaid program. Each state will come with it’s own rules and requirements, but this is a very cheap option for those who need it most.