If open enrollment hasn’t started for you, it will be starting soon for you. For most Americans, choosing health insurance is something that comes with little thought. Studies show that Americans spend about 15 minutes choosing health insurance every year. Most of their health insurance decision is based on two major points:
The monthly cost of the insurance
Whether their friends/family/co-workers have that insurance.
It is completely understandable that people do that – health insurance is very complex. But it’s all the more reason why you should learn about it! If I were to tell you that something you are going to do is going to cost you upwards of $5,000, would you spend 15 minutes deciding on it based solely on price and whether your friends/family/co-workers use it? You would be insane if you did that – yet we do just that with our health insurance. As a matter of fact, it can lead to a cycle of endless medical debt as we highlighted before. Here is the right way to choose health insurance in 6 easy steps to decreasing your risk of high medical bills.
Before we begin, we should have a bit of an introduction to different health insurance terms:
Premium: what you have to pay each month
Out of pocket costs: Any additional costs you have to pay in addition to your premium
Deductible: a type of out of pocket cost that you must pay before your insurance starts paying
Coinsurance: a type of out of pocket cost that you must pay after your deductible (usually a percentage)
Co-pay: a type of out of pocket cost that you must pay when you visit your doctor
Coverage: What your insurance covers. This can speak to the type of procedures and/or how much you pay for your insurance.
Health Savings Account (HSA): This is a health spending account that is usually paired with a high deductible health plan. For more information check out our previous post on HSAs.
Step 1: How healthy are you?
How healthy you help determine the type of insurance that you are looking at. An easy way to determine this is how often you use medical care, the type of medical care you use, and how many prescriptions you use. Insurance agents use other different formulas, but I have found these two tables below the most helpful. I break it down below:
Notice that both of these tables do not take into account health issues. The reason is simple, the purpose of health insurance is to prevent you from a catastrophic financial situation – not keep you healthy. For instance, if you have a clunker of a car what determines your car insurance only helps if you go to a repair shop. However, if you don’t get your clunker fixed, it won’t cost you additional money. Similarly, if you have multiple bad conditions but never go see your doctor, it won’t cost you very much (I don’t recommend doing this). On the other end of the spectrum, if you are in excellent health (no chronic issues, no medication), but go to the doctor all the time, you will have a high medical bill.
Step 2: What is your work status and does
your job offer health insurance?
Work status plays a large role in what your health insurance situation is. These are all generalizations, while you may not fall under this exact situation know that many people in your situation do:
Step 3a: Possible Government Help – Healthcare.gov
You are likely here because you’re one of those FIRE kids and retired early, work at a small to mid-size business, or make below the 400% Federal Poverty Level (FPL). Go to Healthcare.gov to look into the different options for yourself.
If you work full time for a company with more than 50 people then your work should offer you health insurance. However, for people who work in a company in the 50-200 range, take note of the premium and how much coverage the health insurance offers. Then go on to Healthcare.gov and explore the different options available to you. Generally, even at mid-sized companies, your health insurance offered is going to be better than what is offered on Healthcare.gov. However, there are enough people who do work at mid-sized companies that have poor health insurance coverage that Healthcare.gov is worth a check.
Possible Government Help – Medicaid or Medicare
You are here because you likely qualify for Medicaid or Medicare. Make sure you get on the Healthcare.gov website and enter your income information (and age if you’re over 65). You will be prompted to fill out applications for Medicare and/or Medicaid. For people who qualify for Medicare, keep reading. If you have Medicaid – you are all set!
Step 4: Determine Maximum Out Of Pocket Spending
Determine how much you are able to spend on healthcare each year. For a barometer of how much you should budget on healthcare, the amount the average American spent about 8-14% of their household income on healthcare. Based on that, determine what the maximum out of pocket costs of each insurance you are reviewing. For all insurances with an out of pocket maximum higher than 14% of your after taxes salary, you should take out those health insurance choices. In some cases, depending on your salary, that will make most any type of insurance unaffordable for you. You will need to think about looking into supplemental insurance or insurance that helps pay for out of pocket costs.
Step 5: Prioritizing Health Insurance Choices
For people who are in an excellent health situation and don’t use medical care very often, any insurance will do. However, it is the people who are in the fair to poor ranges or use medical care very often that must not enroll into certain types of insurance. How to go about deciding this? Regardless of whether you’re on Healthcare.gov or shopping your employer’s insurance options. When reviewing health insurance, your priorities should be as follows:
Your deductible – How much are you willing to spend before your insurance starts kicking in. This should not be significantly higher than what you are willing to pay. This definitely should not be more than 10% of your emergency savings.
Your maximum out of pocket costs – This should not be more than 14% of your total after taxes salary
Your coverage – Review the paperwork to determine if your particular health illnesses are covered. For people who have more rare and chronic conditions, make sure to do this step or call your prospective health insurer to see if they cover your condition.
Your premium – Is the monthly premium affordable? If it isn’t you may need to consider going back to step 3b and seeing if you are eligible for government help.
For instance, if you are only capable of saving $3,000 per year, an insurance with a deductible of $2,000 and maximum out of pocket cost of $5,000 isn’t your best bet – especially if your health condition is poor. In that case, it might be worth to spend the extra $50 a month for substantially more coverage and possibly lower deductibles and maximum out of pocket costs.
Why is the premium the lowest priority?
Your premium is a rather small factor when you
need to use your health insurance. Whether your insurance covers what you need,
your deductible and maximum out of pocket costs are long-term cost factors
that will have a larger impact on you. Remember, health insurance isn’t designed to keep you
healthy, but to keep you from a catastrophic financial situation.
For those who are considering HSAs
This exercise is especially important for people
who are considering HSAs. As highlighted before, your yearly contribution for
an HSA is usually less than the out of pocket maximum. The only major
advantages gained from an HSA is a discount on your medical procedure and
possible long-term savings. Once you go through your savings, an HSA is a
detriment to your financial health. Make sure you are able to cover yourself
outside of your yearly contribution up to your out of pocket maximum.
Step 6: Fill Out the Paperwork
Fill out the paperwork/online forms and pay your premiums. Then voila! There you have it, those are the 6 easy steps that you should take when choosing health insurance. These steps are only here to guide you. It won’t keep you out of medical debt, but it will surely decrease the chances that you will go into it.
The material and information contained on this website is for general information purposes only. You should not rely upon the material or information as a basis for making any business, legal, or any other decision. While we endeavor to keep the information up to date and correct, Why You’re Broke makes no representations or warranties of any kind, expressed or implied about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information in the above post. Any reliance you place on such material is therefore strictly at your own risk. Prior to making any health insurance decision, make sure you consult a health insurance expert before making any changes.
About the author: Matt listened to financial experts for years, but never quite had the same success that was promised. He realized the difference between the experts and most Americans is most of us don’t come from money. Instead, he had to learn the hard way to stay out of debt and not live paycheck to paycheck. Why You’re Broke was started because it gives a platform for financial solutions for the working people. Striving for financial stability is a minimum, a greater financial future for everyone is what Matt strives for. You can email him at firstname.lastname@example.org.