In this episode of the podcast, we do a deep dive into the topic of health insurance. We start out by reviewing some of the key definitions and terminology related to health insurance. We then transition into discussing how to think about your health insurance coverage and how that thought process changes over time.
From there, we move on to a breakdown of the two key phases of health insurance (pre-65 and post-65) and talk about the planning opportunities that are available within each phase. And lastly, we wrap up our discussion by explaining how to apply the information and framework of this episode to your own situation in order to create the best health insurance plan for you.
Outline of this episode
- Key health insurance terms to be familiar with [1:15]
- How to choose the best health insurance plan [6:35]
- Health insurance planning before Medicare [11:19]
- Health insurance once you’re eligible for Medicare [15:09]
- The recap [18:21]
Key health insurance terms to be familiar with
These are some health insurance terms that you need to be familiar with to make informed choices for you and your family:
- Monthly premium: The premium is the amount of money you have to pay for a health insurance plan. It’s usually taken out of each paycheck and is the minimum you’ll pay toward healthcare costs in a given year.
- Copay: This is a set fee you pay for a given appointment or service. It might look like a $50 copay for a checkup at the doctor’s office.
- Deductible: This represents the amount of money you have to pay out of pocket before your health insurance starts covering expenses. You have to pay this in addition to your monthly premium. A high deductible health plan (HDHP) is when you have a $1,500 individual or $3,000 family deductible. To be eligible for a health savings account (HSA) your health insurance must be a high-deductible plan.
- Coinsurance: After reaching your deductible, you’re then responsible for a percentage of medical expenses. You might be responsible for 20% while your health insurance covers 80%.
- Out-of-pocket (OOP) maximum: This dollar amount specifies the most money you’ll be responsible for paying for healthcare in a calendar (or plan) year. Your plan might have an OOP maximum of $6,000.
- In-network providers: You’ll receive different levels of coverage depending on where you receive treatment. In-network refers to a preferred group of health insurance providers for a particular plan. It typically means that the insurance company has worked out a special reimbursement rate so you pay less.
- Out-of-network providers: Out-of-network providers usually accept your insurance coverage, but you’ll pay more since they aren’t preferred providers.
- HMO: With an HMO, you have to establish care with a primary care physician who acts as your point person. You must see them to be referred to a specialist. An HMO is more cost-effective than a PPO (but includes more work and restrictions).
- PPO: A PPO is far more flexible and gives you access to more providers, allows you to see specialists without referrals, and is easier to work with. But PPO plans tend to have higher premiums.
How to choose the best health insurance plan
What’s the best health insurance plan for you? Here’s everyone’s favorite answer: It depends. You have to understand the key variables of a decision—just like financial planning—and apply those to your unique situation. There are two main components to consider: finances and preferences.
There are four key areas we look at in finances:
- The cost of monthly premiums
- The tax benefits (access to an HSA or not)
- Free money (such as an employer making an HSA contribution)
- Your break-even point
Let’s assume you pay $100 a month in premiums, have access to an HSA, and receive $500 from your employer for electing the high-deductible plan with the HSA option. You’d have $1,200 in premiums as your only “cost.” Your true cost is $700 ($1,200 minus the $500). You can also contribute to your HSA and receive a tax deduction. So when you calculate your tax savings, you might be net ahead (assuming $0 in medical costs).
However, you’ll rarely have $0 in medical costs in a calendar year. That’s why you want to compare your options. What level of medical costs would you need to have per year to justify paying for the “better” health insurance plan (lower deductible, better coinsurance, and a lower OOP)?
What happens if you retire before age 65?
If you retire early, you’ll need to find health insurance coverage on your own. The first thing to be aware of when you’re purchasing private health insurance is that it’s expensive. Monthly premiums can easily be $2,000 per month for a couple. This is a large expense you want to account for if you retire before Medicare eligibility at age 65.
But there are some things you can do to lower the cost of healthcare. When you retire, you have more control over your taxable income in a given year. As a result of the Affordable Care Act, the government offers subsidies—refundable tax credits—to people who purchase health insurance through the government exchange (healthcare.gov) and meet certain income thresholds (as determined by your tax return). In some cases, the subsidies can be $1,000 or more per month, which can dramatically lower the cost of private health insurance.
Resources & People Mentioned
- Episode #25: Planning for Healthcare in Retirement
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup