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Unexpected medical costs can be frustrating and stressful.  Insurance premiums continue to rise, benefits continue to decrease, employers contribute less and less and out of pocket costs continue to skyrocket.

As the insurance policyholder, it is your responsibility to find out exactly what you are responsible for when it comes to medical costs. That means creating and keeping a budget for health insurance.  Medical facilities have no obligation to tell you what your cost will be, and if they do it is as a friendly service for you.  You can find out exactly what medical costs you are responsible for by calling your insurance company’s phone number on the back of your insurance card.  Tip: when you talk to your insurance company write down the name of whom you are speaking with and the date and time.

In this article, we will talk about some of the different costs, what to expect, how to budget for them and how to save some money.

Common Health Insurance Terms Defined

Before we dive into budgeting, let’s look at some definitions of different health insurance terms.

  • Exclusive Provider Organization (EPO): A managed care plan where services are covered only if you use doctors, specialists, or hospitals in the plan’s network (except in an emergency).
  • Health Maintenance Organization (HMO): A type of health insurance plan that usually limits coverage to care from doctors who work for or contract with the HMO. It generally won’t cover out-of-network care except in an emergency. An HMO may require you to live or work in its service area to be eligible for coverage. HMOs often provide integrated care and focus on prevention and wellness.
  • Point of Service (POS): A type of plan where you pay less if you use doctors, hospitals, and other health care providers that belong to the plan’s network. POS plans require you to get a referral from your primary care doctor in order to see a specialist.
  • Preferred Provider Organization (PPO): A type of health plan where you pay less if you use providers in the plan’s network. You can use doctors, hospitals, and providers outside of the network without a referral for an additional cost.
  • Deductible: A specific dollar amount that your health insurance company may require that you pay out-of-pocket each year before your health insurance plan begins to make payments for claims. Not all health insurance plans require a deductible. As a general rule (though there are many exceptions), HMO plans typically do not require a deductible, while most Indemnity and PPO plans do.
  • Co-payment:  A specific charge that your health insurance plan may require that you pay for a specific medical service or supply, also referred to as a “co-pay.” For example, your health insurance plan may require a $15 co-payment for an office visit or brand-name prescription drug, after which the insurance company often pays the remainder of the charges.
  • Coinsurance:  The amount that you are obliged to pay for covered medical services after you’ve satisfied any co-payment or deductible required by your health insurance plan. Coinsurance is typically expressed as a percentage of the charge or allowable charge for a service rendered by a healthcare provider. For example, if your insurance company covers 80% of the allowable charge for a specific service, you may be required to cover the remaining 20% as coinsurance.
  • Premium:  The total amount paid to the insurance company for health insurance coverage. This is typically a monthly charge. Within the context of group health insurance coverage, the premium is paid in whole or in part by the employer on behalf of the employee or the employee’s dependents.
  • HSA (Health Savings Account): A tax-advantaged savings account to be used in conjunction with certain high-deductible (low premium) health insurance plans to pay for qualifying medical expenses. Contributions may be made to the account on a tax-free basis. Funds remain in the account and rollover from year to year and may be invested at the discretion of the individual owning the account. Interest or investment returns accrue tax-free. Penalties may apply when funds are withdrawn to pay for anything other than qualifying medical expenses.  Contributions are tax-deductible, but can also be taken out of your pay pre-tax. Growth and distributions are tax-free.
  • FSA (Flexible Spending Account):  A Flexible Spending Account (FSA) is a type of savings account available in the United States that provides the account holder with specific tax advantages. Set up by an employer for an employee, the account allows employees to contribute a portion of their regular earnings to pay for qualified expenses, such as medical expenses or dependent care expenses.  With a few exceptions, FSAs are “use it or lose it,” and you forfeit any unused balance.  In most cases, you’ll lose your FSA with a job change. One exception: if you’re eligible for FSA continuation through COBRA.  Contributions are pretax, and distributions are untaxed.

Choosing Insurance Based on Monthly Premiums

First things first, when choosing health insurance most people are drawn to the plan with the most inexpensive monthly premiums.  The problem with choosing a lower monthly premium is that you will typically have to pay more out of pocket for your medical care (higher deductibles, co-pays, co-insurance and out of pocket maximums).  If you choose insurance with a higher monthly premium you typically have fewer out-of-pocket costs for your medical care.

Here are two things to consider when choosing coverage in regard to the premium:

  • If you are generally healthy and don’t typically need more than routine medical care, you can go with a lower monthly premium. The chance of you needing medical care is low and any costs you might incur would likely be minimal.
  • If you are older or have some chronic and on-going medical conditions or have a large medical procedure on the horizon, it might benefit you to pay for a higher monthly premium so your out-of-pocket costs are lower.

Your employer might offer an insurance plan for you and they might even pay a portion of the cost for you.  They might also offer an FSA and match a certain percentage.  If your employer does not offer health insurance you will have to choose health insurance from The Marketplace, Medicaid, Medicare or a Health Cost Sharing plan.  You might find that these plans cost less and have better benefits than your employer’s plan.  Be sure to consider not only the monthly premiums but what you will be responsible for on the back end including your deductible, co-pays, and co-insurance.

Budgeting for Medical Costs

First, you will have to budget for your monthly insurance premiums.  This is pretty easy as they are billed and paid the same amount and time every month.

Next, you should look at your deductible amount if you have one.  This could be $300 all the way up to $10,000.  This is an amount that you must pay in full before insurance starts to pay their portion.  First, determine your deductible then divide by 12.  This is the amount you should save per month to pay towards it.  If you have the resources, pay towards this as fast as you can.  It is recommended that you first pay towards an HSA or FSA and put that deductible money in those accounts and max them out.  HSA’s are capped at $3,350 for individuals or $6,650 for families while FSA’s are capped at $2,550.  HSA’s and FSA’s have tax benefits that paying cash doesn’t have.

Once you have maxed out your HSA or FSA, you can start a savings account with your bank or an online bank such as Capital One 360 or Ally Bank.  For the most part, once you have saved the total amount of your deductible, you can hang on to that money in your savings account until you need it.  Note that if you use an FSA, you will lose any unused money at the end of the year.

Next, determine the amount of your co-pay and co-insurance.  These typically take effect after you have met your deductible.  For example, you paid your $500 deductible after two visits to your doctor and two physical therapy appointments.  You are now responsible for a co-payment of $25 every time you go to physical therapy but don’t have a co-pay for your primary care doctor.  These amounts are different for every plan.  Co-payments are usually due at the time of service.

Co-insurance is usually based on a percentage of what your insurance pays and what you are responsible for.  For example, once you have met your deductible your insurance will pay 80% of all medical bills and you are responsible for the remaining 20%.  Medical facilities typically bill you the balance after service has been performed.  Sometimes they also let you pay towards it based on an estimate and then either bill you the balance due or refund you if you have overpaid.  For example, say that each physical therapy visit costs about $100.  Your insurance will pay $80 of that and you must pay $20.  After your physical therapy has concluded, we’ll say you had 10 visits, you will get a bill for $200 for your PT treatment.

If you have co-pays and co-insurance, we recommend that you try to beef up your monthly budgeted savings for your medical costs.  This allows you to pay towards your deductible as well as have money available for the co-pays and co-insurances.

The take-home point of this article is that if you are not saving money to pay your deductible, co-pays and other out-of-pocket costs, you will likely have to put them on your credit card, and you don’t want that debt hanging over your head.  It is best to plan on budgeting money monthly to save for the costs you know you will have to pay for eventually.  If you like to use credit card rewards, paying towards your deductible or co-pay is a good time to use your card as long as you have the cash saved to pay off the bill immediately.

If you budget your money and plan like you are eventually going to have to pay it, the hit of your medical costs will be significantly less than if you don’t budget at all.  Budgeting isn’t a perfect practice but there should always be progress.  Having budgeted and saved a large amount of money and only having to put $200 on a credit card is definitely easier to handle than having to put your entire deductible on a credit card at once.