A little knowledge can go a long way toward helping you choose a health plan and account that are right for your situation
Your health plan will include certain expenses that you will need to pay for with your own money. These expenses typically include deductibles, coinsurance, and copayments for covered health care services plus the costs for services that aren’t covered by your plan. Before making a decision about which plan or account to enroll in, it’s important to look at your plan options and understand your liability for each of these out-of-pocket expenses. Let’s break this down further.
- Deductible: The amount you pay out of pocket for covered health care services before your insurance plan starts to pay. For example, if you have a $2,000 deductible and undergo three $1,000 procedures in a year, you will have to pay the full bill for the first two procedures and your insurance provider will cover the third procedure.
- Coinsurance: A percentage of the cost associated with a covered health care service that you must pay (20%, for example) after you’ve paid your deductible. For example, if your plan has a $1,500 deductible and 20% coinsurance and you use $2,000 in services, you’ll pay the $1,500 deductible plus 20% of the remaining $500, up to your out-of-pocket maximum.
- Copayment: A fixed amount ($20, for example) that you must pay for a covered health care service. Copays are typically associated with routine health services and preventative care to which your deductible does not apply. For example, some plans charge you a copay for visiting your primary care physician, or an urgent care facility, or an emergency room, or purchasing a prescription drug.
The good news? Your health plan most likely has a cap (a.k.a. out-of-pocket maximum) associated with out-of-pocket expenses. This is important because it limits the total amount you pay for health care during the plan year including copays, deductibles, and coinsurance. Once you reach the out-of-pocket maximum for your plan your health insurance company will step in and pay 100% of the allowed amount for covered services.
As a rule of thumb, health insurance plans with lower monthly premiums (the amount you pay for your health insurance each month) have higher out-of-pocket limits, while plans with higher monthly premiums have lower out-of-pocket maximums.
Now that you understand what is meant by out-of-pocket health care costs, you may be asking yourself how you can minimize these expenses. Opening and funding a tax-advantaged benefit account – such as a health savings account (HSA) or flexible spending account (FSA) – allows you to save up to 30% on expenses not covered by your health plan. In a nutshell, these accounts provide the option to set aside money, tax-free, to pay for out-of-pocket health care expenses – helping you to reduce your taxable income and stretch your dollars further.