Healthcare Costs: What’s Your Strategy?
By Jeff Bernier
Healthcare costs in the US have skyrocketed over the past few decades, and there seems to be no end in sight to the rising expense for individuals and families who need care. That makes having an effective strategy for covering healthcare-related expenses a critical piece of every holistic financial plan for every one of us—healthy or sick, working or retired.
As we head into open enrollment season for corporations (which typically takes place in October/November) and the Affordable Care Act (which begins on November 1), now is the perfect time to take a close look at your options to be sure you are making the best possible decisions for the coming year.
Why is choosing a smart strategy so critical? The recent rise in the cost of healthcare has made this single expenditure one of the most challenging pieces of the financial planning puzzle. What was once a relatively small piece of any household budget has become increasingly significant. It’s almost inconceivable that the average cost of healthcare in 1970 was just over $300, compared to just under $10,000 dollars today!
It’s a serious issue. In fact, according to Debt.org, more than 5% of the US economy is spent on healthcare for people 65 and older—and that number is expected to double by 2030 and triple by 2050. Additionally, a typical (in other words, affordable) health insurance policy now covers less of a family’s costs than ever. Couple those issues with the fact that healthcare inflation will continue to drive up costs throughout your lifetime, and it’s clear that creating a smart strategy is more critical than ever.
Here are a few of the most important things to consider as you head into open enrollment:
- A high-deductible plan may be your best investment.
Before marking the box for a PPO or HMO, I urge you to do the math and see if an HDP is right for you. High-deductible plans, or HDPs, can sound pretty scary. HDPs don’t pay anything until the deductible is met, which means that you’re paying more out of pocket every time someone in your family needs care, so it can feel like a big risk. But in reality, as long as you’re relatively healthy, this type of plan may be a smart choice.
First, if you take the time to run the numbers, the savings in premium costs can put a significant dent in the deductible. If you simply set aside the amount you save each month and earmark that money for your deductible, you can help cover the deductible throughout the year. But that savings is tiny compared to the financial benefit you can receive from a key feature that goes hand-in-hand with every HDP: a Health Savings Account, or HSA. (More on this valuable, tax-advantaged savings tool below!) Plus, many employers offer a cash incentive for the HDP by contributing a set amount into the HSA each year to help cover the higher deductible costs.
- The Health Savings Account (HSA) offers unbeatable tax benefits.
The HSA is an incredibly powerful savings tool that has unique power to dramatically impact your retirement income. Similar to a Flexible Spending Account (FSA), an HSA can be used to pay for qualified healthcare expenses in the current year. But unlike an FSA, an HSA is not a “use it or lose it” account and does not expire at the end of the plan year. Instead, it allows you to save the money you contribute for the future and, in many cases, you can even invest your assets to help them grow even more over the long-term. That makes the HSA an excellent vehicle for saving for future healthcare expenses on a tax-favored basis.
On top of it all, the HSA offers triple tax benefits. With other retirement savings vehicles, you either pay taxes up front and take tax-free withdrawals in retirement, or you contribute pre-tax dollars, grow your assets tax-deferred, and then pay taxes when you withdraw the money. The HSA allows you to contribute to your account with pre-tax dollars, grow your assets tax-free, and make tax-free withdrawals (as long as they are used for qualified medical expenses)—making it the only tax-deductible and completely tax-free savings vehicle available today.
- Why is it important to save for future healthcare costs today?
According to a recent study by the Employee Benefit Research Institute (EBRI), a couple retiring in 2017 at age 65 needed $280,000 of savings to cover future medical costs, including premiums for Part B and Part D coverage. That number does not include long-term care or assisted living. And because healthcare expenses are very likely to rise in the future, it’s important to have ‘money in the bank’ to cover higher healthcare costs during retirement.
If retiring before age 65 is a goal, you face another financial challenge: paying for healthcare during the gap between the time you walk away from your employer-provided healthcare plan and the day you become eligible for Medicare. Funds from an HSA account can be used to pay premiums for COBRA or a private insurance policy for the months or years of a coverage gap. (And don’t assume that COBRA is your best option; because COBRA requires you to pay the entire premium based on a corporate plan, private insurance is sometimes the better choice.)
- What if you choose a HDP and someone does get sick?
The downside of the HDP is that anyone can have a healthcare crisis at any time. I was just chatting with a friend about a situation where his teenage son was diagnosed with a health issue that required specialty care, and tthe best doctor available was out-of-network. With a HDP, he knew the family would blow through the deductible within a month or two. Of course, he wanted the best care for his son, so choosing a different doctor wasn’t an option.
His solution: both he and his wife had been putting off some minor medical procedures, so they decided to have them done within the calendar year to maximize the payout from their plan. Depending on his son’s progress in the next few months, he may choose a lower deductible plan for next year at open enrollment, but at least he’s found a way to get the most bang for his buck with the HDP. Of course, if you must, you can always turn to the assets you’ve accumulated in your HSA, but because of the powerful benefits of that savings tool, withdrawing from it should be reserved as a last resort.
- Be your own healthcare advocate.
No matter what type of plan you choose (HDP, traditional PPO, HMO, ACA) now or later, it’s important to always be your own healthcare advocate. Use in-network doctors and facilities whenever possible, and when seeking a new provider, ask “Are you in my network?” rather than “Are you covered by my plan?” There could be a big difference in what you pay out of pocket! Confirm that testing, out-patient, and other facilities are also in your network. And when your doctor prescribes medication, always ask if the medication is covered or if there is a cheaper or generic version (especially if you choose a High Deductible Plan that requires you to pay the full cost until your deductible is met).
It’s also a good idea to understand how balance billing affects your costs. This is the gap between what your insurance company pays under “usual and customary charges” and what you are actually charged, and while some states prohibit the practice, Georgia law does not prevent patients from being billed for the difference.
I know that’s a lot to take in, and yet it’s only the tip of the iceberg when it comes to managing healthcare costs. Our goal is to do what we can to help you achieve financial confidence at every stage in life, and though our team at TandemGrowth does not specialize in healthcare benefits, we are happy to put you in touch with one of our trusted collaborators who can answer any questions you may have and help you make decisions that meet your needs. Of course, if there’s anything we can do to help, we are always at your service.
 “Georgia Health Insurance Law Cheat Sheet,” Medical Association of Georgia