Basics of healthcare costs: what they are and ways to save

Setting aside money for emergencies, like a roof replacement or a major auto repair, is one of the age-old mantras of personal finance.

But today, there is one major potential expense that, until relatively recently, few workers rarely thought about: paying out-of-pocket medical expenses.

Why? Because until the last decade, most employer health plans covered the majority of employee medical expenses.

No more.

Skyrocketing health care costs have prompted many employers to shift more of these expenses to employees. Monthly premiums for traditional health care plans that were once quite reasonable can now cost $600 a month or more. And most of these plans have annual deductibles — money you have to pay out of pocket for medical expenses before the plan takes over most of the costs.

Since most employees cannot afford these plans, many companies now also offer high-deductible health plans (HDHPs). How common are these plans? In 2019, 51% of all US employees were enrolled in HDHPs.

And for those who aren’t covered at work and must purchase their own health insurance, HDHPs typically offer the lowest premiums of plans available in the state and Affordable Care Act insurance markets.

However, one day – maybe in a few years, maybe next week – you will need medical attention for a serious injury or illness. If you’re not financially prepared, you may find out the hard way what “high deductible” really means.

Three types of expenses

Franchises

Your HDHP may state that it has an annual deductible of $4,000. That means you’ll need to use $4,000 of your own money to pay for medical treatments before the plan starts covering some of the costs. If you don’t think you’ll have to pay that much, think again. In 2018, the average cost for a knee replacement was $35,000. For spinal fusion, $110,000. Are you thinking of having a child? This could cost you $4,500 or more once all expenses related to antenatal, childbirth and postpartum care have been compiled.

As a participant in an HDHP, I have personally experienced the painful cost of health care. Last year I was healthy for most of the year, but the costs of an out-of-state emergency room visit and follow-up appointments consumed all of my my deductible of $2,800.

Fortunately, my deductible was relatively reasonable, considering that in 2020 the average deductible for single subscribers was $4,364 and $8,439 for those with family coverage, according to research conducted by eHealth.

But your expenses may not end when you reach your deductible limit. Many HDHPs require you to continue to pay a portion of the costs through co-payments and coinsurance.

Co-payments

Co-payments are fixed amounts that you pay out of pocket for health care expenses. The amount you pay depends on whether you have earned the deductible or not. For example, if a procedure costs $500 and your co-payment for such procedure is $20, you will pay $20 alone if you have paid the maximum deductible. Otherwise, you will pay the full $500 out of pocket.

coinsurance

If deductibles and copayments weren’t enough, coinsurance can add even more to your medical bill. This is a percentage of covered health care services that you may have to pay for yourself, even if you have reached your maximum deductible.

Let’s say your plan has a coinsurance requirement of 25%. If you have already reached your deductible and undergo another procedure that costs $1,000, you will still have to pay $250 out of pocket.

When does it end?

Fortunately, the IRS sets maximum annual limits for the total reimbursable medical expenses for HDHPs. In 2022, this limit is $7,050 for individuals and $14,100 for families. All expenses above this level will be fully covered by your HDHP.

But remember that these limits reset each plan year.

Health savings accounts to the rescue

If there’s a silver lining to this scenario, it’s that many employers who offer HDHPs also offer Health Savings Accounts (HSAs).

With an HSA, you make pre-tax contributions from your paycheck into an investment account that allows you to withdraw tax-free contributions and income to pay for eligible health care expenses.

In addition to medical treatments, you can use your HSA to pay for prescription and over-the-counter medications, medical equipment, dental bills, physical therapy, and even acupuncture and aromatherapy. You can also use your HSA to help pay long term care insurance premiums.

For 2022, the maximum amount you can contribute is $3,650 per person ($7,300 per family) with an additional $1,000 in “catch-up” contributions per person for those age 55 and older. Some employers also make periodic contributions to their employees’ HSAs to help offset some of these out-of-pocket expenses.

Completely Portable

The advantage of HSAs is that you never have to make any withdrawals. For example, you can choose to pay your current medical bills from your savings and set aside your HSA money for healthcare costs during retirement. (Note that once you enroll in Medicare, you can no longer contribute to an HSA.)

If you start a new job with an employer who has an HDHP and an HSA, you can transfer assets from your old HSA to the new HSA. If they don’t offer an HSA, you can transfer the assets from your old HSA to one offered by a financial services company. Keep in mind that if you don’t register with your new employer’s HDHP (or they don’t have one), you can’t make additional contributions to your HSA.

Having an HSA can help reduce out-of-pocket medical expenses when they arise, but only if you contribute.

This can be difficult if you’re also trying to save for retirement, your kids’ college education, or a new home. But since the pre-tax contributions you make to your HSA have the same tax-reducing benefits as contributing to a 401(k) account, there are benefits to contributing as much as you can to both accounts.

If you are lucky enough to receive a tax refund, consider paying some of it to your HSA. Even though these contributions are after tax, they may be deductible. If you plan to do so, make sure your combined pre- and after-tax contributions don’t exceed the annual limit.

Other Ways to Cut Healthcare Costs

It may seem like a tough love situation, but the fewer family members covered by your plan, the lower your premiums and payouts can be. If your adult children are covered by your HDHP but work for a company that offers its own healthcare plan, it might be time to encourage them to experience the “joys” of managing their own healthcare expenses. They’ll have to anyway, because at some point they’ll be too old to be covered by your plan (usually 26, but older in a few states).

If you and your spouse both have HDHP at work, compare the monthly premiums, deductibles, co-payments, coinsurance and maximum payouts for each option. If both options allow you to use your current primary care physicians and specialists, you may both want to switch to the potentially more affordable option.

And if you’re thinking about having surgery, you might also want to estimate total costs in your region.

It’s unfortunate that people need to add “future health care costs” to their list of savings goals, but it’s a reality that many will need to plan for. If you need help balancing these competing priorities, a qualified financial planner can provide advice to ensure that staying healthy doesn’t significantly affect your financial well-being.

Financial Advisor, Partner, Canby Financial Advisors

Joelle Spear, CFP® is a Financial Advisor and Partner at Canby Financial Advisors in Framingham, Mass. She holds an MBA with a concentration in finance from Bentley University.Securities and advisory services offered by Commonwealth Financial Network®, Member FINRA/SIPC, a registered investment adviser. The financial planning services offered by Canby Financial Advisors are separate and unrelated to Commonwealth.

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