Managing Health Care Finances

Keeping yourself and your family healthy takes more than a yearly checkup. And the same goes for your financial health. Understanding your healthcare finances is one important aspect of achieving better overall financial wellness.

And with open enrollment coming up fast, you’re probably asking yourself:

• · Can I afford the coverage and care my family needs?

• · How much will each health-plan option really cost me out-of-pocket?

• · How much will I need to save to cover out of pocket healthcare expenses this year?

• · How can I get better value for the money I spend on healthcare?

The responsibility of managing your healthcare finances can feel overwhelming, stressful, and frustrating—don’t worry, we can offer some insights.

Health insurance plans today often require significant individual out-of-pocket financial responsibilities. That means you have to plan and save for healthcare costs—just like any other major personal expense. But you don’t always have the knowledge, access to information, or support you need to feel confident and take control of your healthcare finances.

Now, here are five important strategies to help you take greater control of your healthcare finances, and improve your overall financial wellness:

1. Treat healthcare finances with as much care as personal finances. Take the time to track and understand your spending. Spend wisely. Save ahead for big expenses when you can, and build a savings buffer for the unexpected.

2. Don’t blindly re-enroll in the same benefits year after year. Do your homework and choose the plan option that offers the best value for your unique situation. And it may not be the plan with the lowest deductible.

3. Be a savvy shopper. If you look for the best price on a TV or car, why wouldn’t you do the same for your healthcare? From generic drugs to alternative locations or providers, there are plenty of ways to save without compromising the quality of your care.

4. Think about the future. Healthcare costs will continue to be a major expense. Don’t just assume your long-term care costs will be covered by your existing retirement savings. Calculate to make sure you have an appropriate savings plan.

5. If possible, pay for out-of-pocket costs with pre-tax dollars. No matter what type of plan you choose, you’ll have some out-of-pocket costs. If available, then you should consider enrolling in a tax-advantaged account like an HSA or FSA to pay with pre-tax dollars and save an average of 30% on qualified medical expenses, depending on your tax bracket.

It will take time and effort to learn how to optimally manage your healthcare finances, but if you take advantage of the resources at hand, ask questions, and stay committed, it doesn’t have to be a major source of stress.

Choosing a health insurance plan

Choosing a health insurance plan – and figuring out how much it will really cost you – can be a stressful process.

It may seem like a strange analogy, but buying health insurance really isn't too different from buying a car. Sure, the sticker price matters, but for most people, individual features and options—and overall value—are the deciding factors. It’s the same when you're choosing the right health plan. Knowing which features of a plan matter most to you can make the difference between choosing a plan you love, and a plan you can barely live with.

So, before you start to evaluate your health plan options this open enrollment season, make sure you fully understand different types of health plans available.

Let’s start by explaining how health insurance works.

You pay a monthly premium in exchange for your coverage. Preventative care, such as checkups and other well visits, are typically fully covered by your plan. Beyond that, you are responsible for paying out of pocket for additional healthcare services (such as sick visits and prescriptions), up to a certain dollar amount – called a deductible.

Some plans charge a “copay”, or a fixed dollar amount, for certain medical services – such as $20 for a doctor visit. And there may be different copays for different types of visits (such as specialists, urgent care, ER, or prescriptions). Other plans may require you to pay co-insurance – or a percent of certain covered costs, after you have met your deductible.

Now let’s talk about the difference between different types of plans.

More traditional insurance plan designs – such as PPOs - offer more modest deductibles, so out-of-pocket costs are limited. Think of traditional health plans as a “pay-up-front” model—where you pay more up front, in the form of higher premiums, for richer coverage to minimize the required out-of-pocket spending. But, you may be paying for coverage you don’t really need.

On the other hand, consumer directed health plans or CDHPs typically offer reduced premiums so you’ll likely have lower monthly costs, but a higher deductible. Which means higher out-of-pocket costs. You can think of CDHPs as more of a “pay-as-you-go” model where you pay for only what you need—which translates into direct savings for you.

CDHPs are often paired with tax-advantaged savings accounts, like HSAs and HRAs, that enable you to save on out-of-pocket costs by using pre-tax dollars. Your employer may even be partially funding these accounts for you, to offset costs not covered by your plan.

When you factor in the premium savings associated with CDHPs, coupled with the tax-savings of using pre-tax dollars to pay for out of pocket expenses, they are often more cost effective than traditional plan options, despite the higher deductible.

Here are some important questions to ask yourself to determine whether a CDHP is right for you:

How’s your health? When it comes to saving money on healthcare, one of the best ways to spend less is to stay healthy. Healthier individuals consume less healthcare, and have even greater potential for savings with a CDHP.

Are you comfortable paying for healthcare coverage you may not need? Traditional plans require higher up-front premiums, meaning you may be paying for coverage you don’t need. With a CDHP, on the other hand, you are only paying for what you use.

Do you want more control over your healthcare finances? Typically, CDHPs trade lower premiums for higher deductibles—which means you pay for your medical expenses out of your own pocket until you hit your deductible. However, greater control means greater opportunity for savings.

Are you a savvy shopper? Would you be willing to shop around for the best price on routine orders like prescriptions or bloodwork? With a CDHP, savvier shopping translates into more savings for you.

Are you disciplined when it comes to your personal finances? If you’re budgeting philosophy is "spend first, ask questions later," you may want to think twice about a CDHP. But, if you’re disciplined about your personal finances, you’ll be in position to take greater control over your health care finances.

Do you worry about rising healthcare costs? If cost concerns keep you up at night, a CDHP might help you get some sleep. An HSA can help you build wealth for the future. And taking more control of what you spend—by price shopping and actively managing your healthcare finances—can help you feel more empowered and less anxious.

Whichever plan you choose, do your homework first so you can make an informed decision – and ensure you get the best fit and value for you and your family.

And no matter which health plan you choose, realize that you will likely incur some out-of-pocket costs. Benefit accounts such as FSAs, HSAs, or HRAs are a powerful tool to enable you to save an average of 30% on these costs if the programs are available on a pre-tax basis.