Finding the Balance between Premiums and Deductibles
When making purchases most people seek to optimize their funds and to get as much value for their money as possible. Because of the multitudes of variables and the nature of the product, deciding how best to do that when purchasing health insurance can sometimes seem challenging. One of the major questions to consider is how best to balance the amount spent on premiums and deductibles.
Purchasing insurance is different than purchasing durable goods like furniture or cars. When goods are purchased, even if payments are made monthly, items are eventually paid off, and no more payments are needed. Purchasing insurance is more like paying for a service like housekeeping or lawn care. As long as the service is used, payments continue to be made. Unlike other services, however, monthly health insurance payments, called premiums, are made whether or not the service (healthcare) is used. In order to have health insurance coverage when it is needed, payments must be made even in the months when it is not.
In addition to paying premiums, insurance policy-holders also pay deductibles. A deductible is the amount that is paid out of pocket for medical expenses before the insurance company starts picking up all or part of the tab. For policies with yearly deductibles of $1,000, policy-holders will pay all medical expenses up to that amount after which time their insurance companies will pay for or reimburse expenses at the rate specified in their policies.
Although consumers would undoubtedly like to purchase policies that have great coverage, low premiums and low deductibles, the reality is that decisions generally have to be made about which part of the equation to sacrifice. There are also other variables to consider such as copays, coinsurance and out-of-pocket maximums. Although there can be variability in all areas, often the most basic and obvious decision is whether to choose a policy with high premiums and a low deductible or one that offers lower premiums which are balanced with a higher deductible amount.
Factors to Consider When Purchasing Health Insurance
When making the choice, there are many factors and questions to consider including the following:
- What is your general pattern of healthcare usage? – No one knows what the future holds, and anyone can have unexpected medical expenses. It is possible, however, to make an educated guess about future needs based on past trends. People who are generally healthy and do not utilize many healthcare services may find it most cost-effective to purchase a plan with low premiums and a high deductible. On the other hand, people with chronic conditions that require ongoing treatment may find that their best value comes from a plan with a lower deductible but higher premiums.
- Do you have enough in savings to cover the deductible if a large medical expense arises? – Many people do not have large amounts in savings and find it easier to pay a monthly insurance premium than to produce the money to pay a large medical bill not covered by insurance. An accident or other medical emergency that occurs near the end of the year, with expenses that carry into the next, can be especially expensive for those with high-deductible plans.
- What is your risk tolerance? – Some people are more comfortable with the risk of having to pay a large uncovered medical bill than others are. Some people find higher monthly premiums worth paying for the increased peace of mind they offer.
- Would you like to utilize a Health Savings Account (HSA)? – One advantage of a high deductible insurance plan is that it can be paired with an HSA. An HSA is a personal savings account that has tax advantages as long as funds are used to pay for eligible expenses. Contributions to an HSA are tax-deductible (up to the legal limit), qualified withdrawals are tax-free and interest earnings are tax-deferred. Even if employers contribute to the plan, the money belongs to the individuals who use it, and is theirs to keep, even if they change jobs. The funds are also cumulative and continue to grow. A high-deductible plan with an HSA can be a good choice for people who utilize healthcare services that are not always covered by insurance or that are covered in a limited way. Qualified medical expenses are listed in IRS publication 502 and include acupuncture and chiropractic care. To be eligible for an HSA, policy-holders must have health insurance plans with a deductible of at least $1,250 for an individual or $2500 for a family.
Health Insurance Trends
The rising cost of health insurance premiums has led more and more insurance purchasers to high deductible policies. This is true for both individual and employer-purchased group plans. A 2014 article in the Democrat and Chronicle notes that over the past six years, the number of workers with employer-purchased high-deductible plans has quadrupled from five to 20 percent.
A danger with high-deductible plans is that policy-holders will forgo needed medical care in an attempt to save money. A 2013 article in the journal Health Affairs reported on a two-year study of high-deductible health plan users. The study found that plan users of low socioeconomic status reduced their high-severity emergency room visits by 25 to 30 percent. During the first year of the study, hospitalizations also declined for the population, but in the second year they rose. The authors suggest that the initial reduction in emergency room visits may have increased the later need for hospitalization.
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