Health Insurance 101

It only takes one wrong action on our part, one wrong action on someone else's part, or simply exposure to the elements that we can't control to put us in a very bad financial situation with medical bills.  First you must educate yourself, and understand how your plan works and realize you have many options of coverage.  Below I will explain the two different types of health insurance coverage available.

You have an individual and family deductible, an office visit co-pay, co-insurance after your deductible, and prescription drug coverage.

Example: $1,000 Deductible, $3,500 Max out of pocket, 80/20 Co-insurance, $30 Office Visit and Prescriptions $15/$30/$50 25%. 

Pros: You pay less out of your pocket at the time of service.

Cons: These plans have the highest monthly premium.  Whenever you pay a co-pay, or pay for prescriptions, these items never count towards your deductible.  The deductible only counts if it's lab work, x-rays, hospital procedures etc...  These traditional plans have the highest premium rate increases each year because people abuse these plans by running to the doctor 24/7 when something silly happens.  The plan doesn't encourage you to be a smart consumer and typically you will not shop around and compare prices from other doctors when something comes up, because all you will think about is the $30 co-pay.  Which in return increases the insurance companies amount of paid claims which results in a higher premium increase the next year on your policy.

HDHP or HSA Compatible Plans also known as the consumer driven High Deductible Health Plans are very popular.  These plans became available through legislation passed in December of 2003, and were put in place to allow consumers to take a bigger role in their health insurance situation to control cost.  These plans are kind of like car insurance.  The insurer doesn't pay a claim until you have met your deductible.  However all plans now pay 100% for preventative care without meeting your deductible due to the Health Care Reform Act (see policy specific details).

Three main things to remember:

 1 - Typically, you have no co-pays or prescription drug co-pays.

Example: You go into the doctor to receive an X-ray of your wrist.  You will pay 100% of the cost of all services until you meet your deductible.  You still get the insurance "In-Network" discount for having health insurance as you would with the traditional coverage; however if the doctor's retail cost of an x-ray is $200, and they are in-network, they have an agreed contract price schedule for their members.  For example, if Blue Cross Blue Shield members come to my office the x-ray will only cost $150.

2 - All medical expenses like office visits and prescriptions, count towards your deductible.  Once you have met your deductible on this plan, everything is covered at 100% even prescriptions.  This differs from Traditional Coverage, where co-pays and prescriptions do not count towards your deductible and you are still responsible for those co-pays even if your deductible is met.

3- Tax Incentive - With this plan, also referred to as the HSA Compatible plan.  The government allows you to have a Health Savings Account (HSA) at a bank.  The HSA is very similar to an IRA (Investment Retirement Account). Typically the rules in an IRA are:  You can deposit money into that account tax free.  You can not withdraw it until your 65; unless you want to pay a 10% penalty and taxes on the money.  With the HSA the same rules apply like in an IRA except you are allowed to withdraw money out if it without a penalty or tax consequence, only if it is a qualified medical expense (see link below for an example of the qualified expenses).

If you have to pay 100% of the cost up to your deductible, you are most likely going to ask questions about services and how much things cost, so you can compare with other doctors to get the best deal.  Consumerism is the reason you will see that the rates are cheaper on this plan, because it encourages you to be more involved in your health care, to stay healthy, shop prices with other doctors, and to not abuse the insurance which means not as many claims are paid out by the insuer.

Comparison Example: For a young healthy male, the premiums on a traditional coverage plan set up with a $1,000 deductible, 80/20 co-insurance, $30 office visit co-pay, and a maximum out of pocket of $3,500, would be $135 a month.  On the High Deductible HSA Compatible plan with a $1,500 deductible, and 100% coverage after that is met, would be $91 a month.  With this plan you will save about $44 a month, and your total risk is $1,500 less because you are not paying %20 of the cost on that plan from $1,000 up to $3,500.  The ideal thing to do would be to take that monthly premium savings, and deposit it into your HSA bank account, let it build interest and accumulate that money to save for future medical expenses.  If you do need to go to the doctor, you will have that safety net you created with the HSA account, and will have that money to spend tax free, to pay for the medical expenses up to your deductible should something arise.  However, the money you deposit into your HSA account can only be taken out only for qualified medical expenses unless you want to pay the penalty and tax consequence.

Tax Savings - How it works:  At the end of the year, the bank will send you a statement like a W-2, that states you have deposited and withdrawn X amount of dollars into your HSA.  When you file your taxes, you will enter the appropriate amounts, into the correct sections of your tax return so you do not pay income taxes on the dollars contributed to your HSA.

HSA Reminders: Make sure that all expenses are on the qualified list of elligible expenses.  Also there are annual caps on the amount of tax free money you can deposit each year into your HSA account. 

Disclaimer: RiderSurance.com and its affiliates are not engaged in rendering tax, investment or legal advice.  Federal and state tax regulations are subject to change.  If tax, investment or legal advice is required, seek the services of a licensed professional.

Please visit the IRS website for exact rules and regulations for the HSA account guidelines.