Health insurance is designed to help us avoid, at a reasonable cost, financial catastrophes caused by an unexpected and expensive medical event. Nearly everyone should expect one or more of these events in their future.
The deductible is an important feature of many insurance plans. This is the amount of money the insured person must pay out-of-pocket for covered services before the insurer will pay anything. Deductibles are meant to minimize costs for the insurer, but they can work in the insured’s favor, too. The deductible is not be confused with the out-of-pocket maximum, which is often a higher amount. The out-of-pocket maximum is the most that a person is required to pay during the policy period (usually one year), before the plan pays 100% of covered benefits. This includes the deductible, but not the monthly premium.
The Affordable Care Act requires major medical plans to share costs. For individuals who buy their insurance in the federal or state marketplace, the 2015 out-of-pocket maximum is $6,600 for an individual and $13,200 for a family (in 2016, the limits will be $6,850 and $13,700, respectively). The deductible can be any amount up to those figures. (For more, see How Obamacare Affected The Insurance Industry.)
Open enrollment for 2016 starts Nov. 1, 2015 and lasts until Jan.31, 2016. The advice below about how to compare health insurance plans can also help you choose an non-ACA plan from your employer
2016’s Better Family Deductibles
Currently, families who share a health plan with a deductible are required to meet the family deductible before the insurer pays any claim, even if just one member of the family incurs all of the costs. This is called an aggregate deductible, and it penalizes people for buying family coverage rather than individual because of the potential to double an individual’s deductible.
Starting in 2016, most plans will convert to embedded deductibles; that is, each person need only meet the individual deductible. “This will mean big savings for a lot of families,” says Steve Downey, owner of JS Downey Insurance agency in San Diego, Calif. As each person meets the individual deductible, benefits kick in even if the family deductible has not yet been met.The new rule affects non-grandfathered self-funded and large group plans. Ask your agent if the rule applies to your plan.
Understanding Plan Differences
Under the Affordable Care Act, most health plans have options that range from a very high deductible combined with a low monthly premium to a low or zero deductible at a higher monthly cost. Plans with a low or zero deductible and a high premium fall under the Gold or Platinum categories. High-deductible plans are Bronze, and the Silver category falls somewhere in the middle.
In essence, all of these health insurance plans mitigate the risk of financial catastrophe. Even with the cheapest insurance plan, a person cannot be held responsible for more than $6,600 per year for covered healthcare expenses. Although that amount of debt can lead to financial difficulties for many consumers, it is a far cry from the five- and six-figure medical bills that are notorious for bankrupting Americans who experience unexpected health emergencies. (For more, see Healthcare Premiums Keep Rising, But Salaries Aren’t.)
Bronze, Silver, Gold or Platinum?
Despite the fancy metal names, deductibles and monthly price tags are not the best determinants of whether a plan is appropriate. The plan that has the most expensive monthly premium may not be the best plan for everyone. A true measure of cost-effectiveness is the individual’s expectation for healthcare spending.
“Health insurance is designed to cover large and frequent losses,” explains Downey. The vast majority of policyholders make few or no claims. A small minority require a large payout. Consequently, the insurance company prices its plans so that small, comparatively insignificant costs are borne by the consumer. They do this in two ways: one is to charge high monthly premiums; the other is to impose a high deductible.
Let’s look at the total annual cost for a few different health plans in California via CoveredCA.com. For comparison, we’ll look at an individual plan and assume the insured has had a catastrophic medical event that maxes out her coverage benefits for the year, has an income of $45,000 a year, otherwise has low medical and moderate prescription-drug usage. Total cost represents 12 months of premiums, plus the maximum out-of-pocket expenses. Federal tax credits and low-income discounts are not shown.
Source: Covered California
In this example, the lowest overall cost is associated with a Bronze plan, which saves the consumer nearly $2,000 compared with the Gold plan. Interestingly, the Platinum plan with the highest premium is comparable in overall cost to the Bronze plans.
In fact, Gold and Platinum plans are not, by definition, superior to Bronze or Silver plans. They simply shift the spending from the deductible to the monthly premium. It might feel like they deliver more bang for the buck – for example, when the consumer pays only $10 for an office visit or $5 for a prescription – but in truth, the actual price has already been paid. “The Gold and Platinum plans are designed to feel more valuable,” explains Downey, “because high-deductible plans are not as profitable for the insurers.”
If you get insurance from your employer instead of buying it on the Health Insurance Marketplace, use the same analytic techniques to compare the offerings you get from your company's plan.
Invest Healthcare Funds in a Health Savings Account
A health savings account, or HSA, is pre-tax money that is set aside for use on future qualified medical expenses. Participants must enroll in a high-deductible plan to be eligible to contribute to an HSA. A high deductible is $1,300 or more for an individual and $2,600 for a family. Those with a qualifying health plan can contribute up to $3,350 in 2015, or $6,650 for a family, plus an additional $1,000 in catch-up contributions from taxpayers aged 55 and older.
As an HSA is made up of untaxed funds, it is akin to a discount equal to your tax rate, whatever it is, on your healthcare. For instance, a person in the 25% tax bracket who pays for expenses with after-tax dollars will spend $837.50 in federal taxes in addition to $3,350 on healthcare. Anyone with a qualifying high deductible plan should open an HSA.
Most importantly, an HSA account is yours to keep. It does not need to be funded and used in the same year. A healthy 30-year old can choose a high-deductible plan now and fund the HSA, reduce his tax bill this year and grow the account for decades (see Why to Not Use Your HSA for Current Medical Bills). If this consumer later switches to a low-deductible health plan, that’s fine, too. He just can’t contribute to the HSA during the years he participates in a non-qualifying health plan. (For more, see Fighting The High Costs Of Healthcare.)
The Bottom Line
The first step in making the best financial health insurance choice is to make an intelligent, practical prediction of your usage over the next year, and then use that best-guess to set your desired deductible. If you are generally healthy and rarely visit a doctor, there is no need to seek a low deductible because chances are that you won’t pay much (or anything) above and beyond the monthly premiums. The insurance will only protect you against losses exceeding the out-of-pocket maximum, and the rest stays in your pocket. A low-deductible plan forces the consumer to prepay for services he might not use, and the premiums cannot be recovered.
If you do expect to seek treatment for one or more medical conditions, the next step is to compare networks, providers, locations and any limitations to determine which plan best fits your demands.
Specific needs determine the final numbers. Whatever you think your usage will be, look at the available plan options and add up the monthly premiums, plus the cost of doctor visits, prescriptions and other anticipated services. Exchange customers can make a side-by-side comparison of plans and price on Healthcare.gov or their state exchange website. Agents are excellent resources for consumers with questions; in most states, they can use BenefitCompare.com to break down actual totals, dollar by dollar for their clients. Although choosing the most financially advantageous plan might seem overwhelming, it really isn't as hard as it might appear at first.