When making employee benefits elections during open enrollment, choosing which health insurance option you’re going to go with over the next year seems to be something that almost everyone guesses at. Some people opt to choose the plan with the lowest deductible, some choose the option with the lowest premiums, and some choose whatever is in the middle. The problem with choosing your health insurance plan this way is that no real thought around how your and/or your family’s health situation is taken into consideration. With just a little education, I’m sure we can all figure out which plan might be most appropriate for our own personal situations.
There’s a lot of lingo and acronyms thrown around when it comes to health insurance: premium, deductible, co-insurance, HMO, PPO, EPO, HDHP, HSA, etc. These terms can become confusing and overwhelming for those weighing their health insurance options. Let’s find out what they really mean.
The Basics
Let’s start with the basic terms that you need to know to help you decide which health insurance plan is right for you.
- Premium – This is how much you pay to have health insurance in place. Essentially, you can think of this as the “bill” or “fee”.
Premiums for employer-sponsored health insurance plans are deducted from your pay on a pre-tax basis. This means that the employer takes the premium amount from your pay and gives it to your health insurance provider before you receive your paycheck and you don’t have to pay taxes on the premium amount.
- Deductible – A deductible is the amount of money that your health insurance plan requires you to spend on health care before the insurance will kick-in and start paying expenses for you.
Before you meet your deductible, you may be responsible for all of the medical expenses you incur. (An exception is that many health insurance plans offer free preventive services that they will cover before you meet your deductible.) Once the deductible is met, you’ll only be responsible for copayments/coinsurance. Plans with lower premiums typically will have higher deductibles while plans with higher premiums will have lower deductibles.
Read more about deductibles here.
- Copayments & Coinsurance – These are payments that you have to make each time you receive medical care after you hit your deductible, until you reach your out-of-pocket maximum.
A copayment is a fixed dollar amount that you pay for a service while coinsurance is a % of the cost of the service that you have to pay. Plans with lower premiums typically will have higher copayments/coinsurance while plans with higher premiums will have lower copayments/coinsurance.
Read more about copayments here.
Read more about coinsurance here.
- Out-of-Pocket Maximum – As the name indicates, this is the most amount of money you’d have to spend for eligible health care services in a year.
The out-of-pocket maximum includes amounts that you spend on your deductible and copayments or coinsurance, but doesn’t include your premiums. Once you reach your out-of-pocket maximum limit for the year, insurance will pay 100% of covered medical expenses. Plans with lower premiums typically will have higher out-of-pocket maximums while plans with higher premiums will have lower out-of-pocket maximums.
Read more about out-of-pocket maximums here.
It’s important to take all of these costs into consideration when choosing a health insurance plan. If you only consider the premiums that you’ll be paying, then you’re ignoring crucial information and potentially a significant amount of other out-of-pocket expenses that you could be faced with having to pay for.
Types Of Health Insurance Plans
Now that we know the basics, let’s explore the different types of health insurance plans that may be offered to you through your employee benefits.
Health Maintenance Organization (HMO)
- HMOs limit you to receiving care from physicians that are contracted with them – this is commonly referred to as the “network”.
- HMOs can provide cheaper premiums than some other types of health insurance (such as PPOs) since they direct patients towards in-network physicians for an agreed upon amount.
- Typically, you must choose a primary care physician and first consult with them before being able to see a specialist.
- Without a referral to a specialist from your primary care physician, you’ll have to pay all costs out-of-pocket.
- If you receive care (other than emergency care) from an out-of-network physician, then you’ll have to pay out of pocket for those services.
Exclusive Provider Organization (EPO)
- EPOs limit you to receiving care from physicians that are within the plan’s network (except for emergency services). Otherwise, they won’t pay for the care.
- Similar to an HMO but may provide a different network.
- May not require that you have a primary care physician.
- Doesn’t require referrals from your primary care physician to see a specialist.
- May provide a larger service area than an HMO.
Preferred Provider Organization (PPO)
- PPOs provide a “network” of health care providers for participants to use.
- You’ll usually pay significantly more if you want to use a provider who is out-of-network, but you can do so.
- Services are provided to participants with reduced rates as negotiated by the insurer with the health care providers.
- Premiums can be higher than other plans due to the high costs of administration and large network.
- May be more flexible than an HMO due to large network of providers and flexibility.
High Deductible Health Plan (HDHP)
- A HDHP is a health insurance plan with a high deductible. The deductible is the amount that you have to pay before insurance kicks in.
- In 2019, the minimum deductible that a plan can have for self-only coverage to be considered an HDHP is $1,350 and double that at $2,700 for family plans.
- The maximum out-of-pocket expenses for HDHPs in 2019 is $6,750 for individuals and $13,500 for families.
- Keep this in mind when considering this type of plan. You need to have enough cash on hand to pay for these out-of-pocket expenses in case something happens.
- HDHPs are eligible to be paired with a Health Savings Account (HSA). (Other plans that have deductibles high enough to be considered “high deductible” plans may not necessarily be HSA-eligible unless specifically noted).
- The 2019 HSA contribution limit for individuals is $3,500 for self-only coverage and $7,000 for those with family coverage.
Health Savings Account (HSA)
- The HSA offers you the option to pay for medical expenses pre-tax today or to save and invest for future expenses.
- If you have a High Deductible Health Plan, then you can contribute money to a HSA pre-tax to help pay for medical expenses. You contribute money to the account through payroll, incur medical expenses, and then submit your receipt for reimbursement from the account.
- This is the most tax-advantaged account available today since your contributions go in pre-FICA tax as well as pre-Federal tax and come out tax-free as long as you reimburse yourself for qualified medical expenses.
- Since the IRS currently has not set a look-back period for when you can reimburse yourself for medical expenses from the account, there is a strategy that can be used to invest in an HSA for retirement that you can read about here.
- Many employers contribute to their employees’ HSAs. This additional benefit should be factored into your health insurance plan decision.
Why Use Employer-Provided Health Insurance?
Now that you understand all of the jargon around health insurance and the different plans that may be available to you, let’s take a look at a few of the reasons why you should use one of the health insurance plans that your employer offers. Why not just save the money that you have to spend on premiums instead of paying for health insurance? There are a few pretty good reasons.
Catastrophic Expenses
You have insurance in place to help protect you against catastrophes that could ruin your financial life. Insurance is meant to help pay for unfortunate events with high costs that you otherwise wouldn’t be able to pay for. Health care costs can be extremely expensive and can wreak havoc on your personal finances without the proper measures in place. Most people don’t have the means to pay for all of the costs of an extended hospital stay or other significant medical event and that’s why health insurance is important.
Affordable
Health insurance offered to you by your employer is most likely going to be the cheapest health insurance that you can find with the best benefits for the cost. The costs (premiums, deductibles, copayments/coinsurance, and out-of-pocket maximum) are typically significantly lower under employer-provided health insurance plans than those plans that you can find on the marketplace because your employer pays part of the premium for you and is using an insurance company that has negotiated the service costs with health care providers.
Tax Savings
Additionally, as mentioned above, the premiums that you pay through your employer’s plan are paid pre-tax, which is a huge benefit to employees. You don’t get this benefit if you pick up a health insurance plan from the marketplace.
The downside? If you change jobs, then you’ll lose your coverage and have to pick up different insurance at your new job and your current doctors may not be in the new plan’s network.
Which Plan Is Right For You?
It’s impossible to know what the exact right insurance plan will be for you over the upcoming year unless you have a crystal ball and can tell the future, but we can guesstimate. To determine what health insurance plan we should choose, we have to estimate how much medical care we’ll need (or how much each person who will be covered under the plan will need). To do this, we can consider how much medical care each person typically uses in a year as well as consider any medical expenses that we know each person will incur over the upcoming year.
Most of the time, I think that people tend to choose the option with the lowest premium because they think that will be the lowest out-of-pocket cost to them. However this may not necessarily be true.
Generally, it may be better to choose the health insurance plan with the lower premiums (think HDHP) if you’re healthy and don’t expect many health care costs. Why? If you have $0 in medical costs over the year, then the only health care expenses that you’ll have to pay are the premiums and you don’t have to worry about the higher deductible. Why not just skip the health insurance altogether? You’ll want to have the coverage in place in case of an accident or serious health event that could wipe out your personal finances.
On the other hand, if you have ongoing medical problems and/or expect many health care costs over the upcoming year, then it may be more prudent to choose the plan with the higher premiums (think PPO or HMO) so that you have a lower deductible and insurance pays for more of your costs.
If you’re a nerd like me, then you can create a spreadsheet to help you figure out what plan is the best for you in terms of cost at different levels of health care spending over the course of a year. If you’re more normal than me, then you’re in luck because many employee benefits websites take you through a process to determine the amount of health care expenses you may be anticipating over the upcoming year and which plan may be the most cost effective for you given that information. As always, these recommendations should be taken with a grain of salt considering they can’t predict exactly the amount of medical care you and/or your family will need.
Understand The Medical Coverage
While we’ve explored the financial side of different employer-provided health insurance plans, we haven’t even touched the medical side of things. Of course, it’s extremely important to understand what services and treatments your health insurance plan covers before making a decision. Additionally, you may want to make sure that your medical care providers are in the network if you expect to see them regularly and that your prescription drugs are covered. Both could prove to be extremely costly otherwise.
Guide to Employee Benefits Open Enrollment 2019
This is part 2 of a series where I’m providing general education on many of the employee benefits elections that you’ll be faced with during the 2019 employee benefits open enrollment season. Find the previous posts here:
