Health insurance in the USA is deliberately tedious to deal with, because it obfuscates how much you are actually paying to the insurance company versus how much they actually pay out.
The policies given out these days are mostly high deductible health plans and work the same way. There are some terms you should understand.
This is what you pay out of your check each pay period for the plan.
This is the obvious up front cost. Health insurance premiums are taken from pre-tax money you earn and that should also factor into your decision on cost. If you have to come out of pocket for healthcare with after-tax money you’re paying that amount plus whatever income tax you paid on those earnings. That said, there are few reasonable plans where you can pay everything up front.
Usually, the trade off is that if you pay more up front for the premium you pay less later out of pocket. A lower premium means a higher out of pocket cost.
This isn’t always bad. If you are generally healthy and don’t go to the doctor and can cover the out of pocket cost in the event of an emergency then taking a higher deductible might save you money at the end of the year assuming that emergency never comes up.
I want to stress that if you do something like that, you want to have the out of pocket money available in case something does happen.
This is the amount you have to pay out of pocket each year before the insurance will cover anything at all. Your premium does not cover any of this.
With some policies once you pay the deductible you are covered 100% afterwards. Plans that do that usually cost more up front in premiums.
With most other plans what they do instead when you reach the deductible is start paying a percentage for each procedure usually around 80% (can vary). When they do this 80/20 split they call this co-insurance. The insurance company pays that percentage until you reach your out of pocket maximum.
Out of Pocket Maximum
This is the maximum you have to pay out of pocket each year before the insurance company will start paying everything 100%. Your premium is not counted against this.
The most confusing part is that with co-insurance the deductible is not your out of pocket maximum. You might have a $1500 deductible and then have to pay another few thousand dollars to reach your out of pocket maximum.
It’s important to understand though, that the money you pay towards the deductible counts towards your out of pocket maximum. So, if you have an out of pocket maximum of $6500 and you pay $1500 towards the deductible you only have another $5000 to pay to reach the out of pocket maximum.
It can also be a bit confusing understanding that once that 80/20 co-insurance kicks in, only the 20% you pay is counted towards your out of pocket maximum. In the above 80/20 case if you have $5000 you have to pay to get to the maximum after you hit co-insurance, the insurance company will have been billed $25000 by the time you get to your max.
Insurance pays 80% – $20000
You pay 20% – $5000
In many cases these plans include a Health Savings Account that you can put money into pre-tax from your paycheck. The maximum you can put in per year is determined by the type of plan (single or family), but is usually set up to be right around the amount you need to pay out of pocket to satisfy your out of pocket maximum.
If you know that you go to the doctor regularly for service and will come out of pocket then it is smart to put money into the HSA to cover those expenses, because it is tax free money and it’s also your money, you control it, not your job. For instance, with my family we usually reach our out of pocket maximum before the end of each year so we take enough out of each paycheck to cover that.
Some employers will contribute a lump sump to your HSA, so if you have a choice between a non-HSA plan and one with an HSA check how much your employer will contribute to the HSA. Whatever they contribute becomes your money that you can use for medical expenses.
The other thing to note is that HSA funds do not have to be used in the same year they are deposited. They will carry over from year to year if unused.
One more thing. The deductible, co-insurance and out of pocket maximum reset each calendar year (people have pointed out that some plans have ‘plan years’ which still run for a year, but start and end at different times of the year, unbelievable). Meaning you have to pay all of that again the next year.
If you reach your out of pocket maximum during a calendar (or plan) year take advantage of it if you or your family need further medical care. Have your doctors schedule as much as possible before the end of the year because it’s all on the insurance company at that point.