“It’s easy to conduct this analysis. Sadly, it’s easy not to, which is why most people don’t. But you should. Your costs – and perhaps your care – are at stake.”
William G. (Bill) Stuart
Director of Strategy and Compliance
Nov. 15, 2018
I hope that this advice doesn’t come too late to affect your 2019 benefits decision. Many employees are nearing the end of their annual open-enrollment period during which they choose their benefits for the following year. It’s an important time – far more important financially than most employees realize.
The sad truth is that the average employee spends far more time watching Chip and Joanna renovate a home than they do making their benefits decisions. Is the cause apathy or ignorance? Or is it both, as ignorance drives apathy?
Let’s see whether we can move the needle a little bit on this discouraging statistic and the resulting potential financial loss.
Many employees are given a menu of choices during open enrollment. Usually two or more medical plans. A dental plan. Perhaps a vision plan. Often a Health FSA. Sometimes supplemental (sometimes called voluntary) coverage. When you live in the benefits world, it’s easy to make sense of these options and process the information that your employer and coverage providers make available to you. When your primary work is to clean hotel rooms, prepare legal briefs, prepare and serve food, or transport people or products, the opportunity is overwhelming.
If you spend two hours studying your coverage options and projecting your risks during the next year, you are likely to make choices that save you hundreds of dollars. Divide hundreds of dollars by two hours to determine your hourly “wage” for taking the time to study. Are you paid at that same wage rate for your normal work? Probably not. The time that you spend studying your options and choosing the right coverage is among the most valuable time that you invest in any activity.
Here’s a guide to help you understand how to evaluate your benefits options:
If you’re offered only one medical plan, skip to the next section.
If you can choose between two or among three or more options, you need to determine which plan is right for you. You can default to the plan on which you’re enrolled this year. That’s easy. But the cost may be hundreds or thousands of dollars. And most employees fail to consider all costs and financial risks when they make their choice.
You have three major cost categories:
- Your portion of the premium. This amount is deducted from your paycheck (on a pre-tax basis by most employers). This figure is included on your pay stub, but with today’s electronic pay slips, who looks any more? Answer: You, if you want to make the right choice. You must factor your premium cost into your coverage decision.
- Your cost-sharing for covered services. You’re responsible for the cost of diagnostic services and treatment, whether that responsibility takes the form of a copay, a deductible, or coinsurance (and most coverage incorporates two or all three). You need to project the type and quantity of services that you’ll need to access during 2019. This figure is elusive for some (healthy people who need care for only random events) and known for others (people with a chronic condition that requires ongoing care.
- Your cost for services not covered by your plan. It’s important to understand which services (and with what benefit limits) a plan covers. It’s important to analyze the network to see which providers aren’t contracted to deliver care on that plan and whether the plan offers any coverage for non-contracted providers.
Here’s how you might analyze a choice between an HMO plan with a $1,000 self-only deductible and an HSA-qualified PPO plan with a $3,000 deductible:
Premium difference: If the HSA PPO plan has a payroll deduction $30 lower than the HMO, you save $780 annually. That’s a guaranteed saving.
Employer contribution: If your employer contributes $750 to your HSA, you receive that money whether or not you incur claims.
The absence of copays: All non-preventive services are applied to the deductible on the HSA PPO plan. You may save $200 annually by not paying a copay for office visits and prescription drugs subject to the deductible. Yes, these services are not subject to a deductible, but a $63 prescription for which you pay a $25 copay on your current plan is a net increase in the cost of $38, not $63.
Let’s add up the savings: $780 + $750 + $200 = $1,730. Nearly the entire $2,000 difference in deductible between the two plans is offset. The HSA PPO plan is a viable option. It may not be the right plan for you, but you can’t rule it out as you might have if you hadn’t gone through this exercise.
Now, let’s ask ourselves a few more questions:
- How are services covered after the deductible? My PPO plan, for example, has a $6,000 deductible. My family has satisfied it during each of the last three years. That’s a lot of money (although I complete the exercise above each year and conclude it’s the right coverage for me). Once we satisfy our deductible, all services are covered in full. No copays for medical services or prescription drugs. No coinsurance. Your coverage may differ. Be sure to check. It’s not uncommon for a non-HSA-qualified plan to impose greater cost-sharing than an HSA-qualified plan after you satisfy the deductible.
- What dollar value do you place on a PPO versus an HMO? A PPO plan allows you to self-refer to specialists, so you can factor in convenience and cost of care when determining where to receive specialty care. An HMO plan typically requires referrals from your PCP, whose physician group may limit referrals to specialists who are part of that group. They may not be the most cost-effective specialists – or the ones that you want to see. I personally value the freedom that my PPO plan provides at $500 or more annually. Your figure may be different.
- How much care do you expect to need? In our example above, we saw that lower payroll deductions, an employer HSA contribution, and the absence of copays covered about 85% of the difference in deductibles. That analysis is true only if you incur at least $3,000 of covered expenses subject to the deductible. If your utilization is lower, these three areas of savings make the HSA PPO plan more attractive financially.
- How much do you plan to contribute to your HSA? Every dollar that you contribute saves you, on average, 25% in taxes. If you contribute $60 per pay period to your HSA, your net pay after taxes decreases by about $45. That’s a $15 net reduction because you apply your $30 premium savings to that figure. You save nearly $400 in taxes – enough to fill the remainder in the difference in your costs between the two plans, assuming that you reach the $3,000 deductible.
Of course, you don’t have to conduct this analysis during open enrollment. You can simply do what you’ve always done. You’ll still probably receive the care that you want and need, when you want and need it. This analysis is designed to show you that there may be a better coverage option than what you have now.
It’s easy to conduct this analysis. Sadly, it’s easy not to, which is why most people don’t. But you should. Your costs – and perhaps your care – are at stake.
Should you participate in a reimbursement account if your employer offers one? Probably.
If you have qualified medical, dental, and vision expenses, it almost certainly makes sense to enroll in a Health FSA. This program allows you to reimburse qualified expenses – everything from medical and prescription copays to new glasses, contact lenses, orthodontia, and restorative work that dental plans don’t cover in full – with pre-tax dollars.
If you don’t participate because you once forfeited an unused balance, it’s time to reconsider. The IRS allows employers to choose one of two options: A Grace Period that extends the time you can incur claims by an additional 2 ½ months (essentially giving you a 14 ½ month plan year); A $500 carryover that allows balances up to $500 to roll over to the new plan year. Many employers have modified their plans to include one of these options. Even if your employer doesn’t (and there are benefits combinations that may make it unwise for employers to adopt one of these modifications), take a fresh look at a Health FSA. Don’t let a mistake that you made years ago – or one that a co-worker made and is quite vocal about describing – keep you from reducing your taxable income.
If you enroll in an HSA-qualified plan and are eligible to open and contribute to an HSA, your HSA offer the same tax benefits as a Health FSA (with a lot more flexibility). You can’t participate in a general Health FSA if you contribute to an HSA. You can enroll in a Limited-Purpose Health FSA through which you can reimburse your qualified dental and vision expenses tax-free. Read more here and here.
Dental insurance is a limited benefit, as anyone who has undergone extensive restorative work can tell you. It usually provides two cleanings at no cost annually and then covers a percentage of other expenses, such as 80% for basic services (like fillings) and 50% for major services (like crowns). The contracted (discounted) rates may save you money, even when your premium approaches the annual benefit maximum.
Be sure to understand these aspects of your dental coverage:
- Is your dentist in the network? If the plan has an in-network and out-of-network level of benefits and your dentist is outside the network, what’s the difference in your financial responsibility for the services that you expect to access?
- Dollar limits. What is the annual dollar limit, and does it have a rollover feature? A rollover allows you to carry any unspent dollars (the difference between your annual dollar limit and the insurer’s reimbursement for your expenses that year) to the following year. A rollover feature helps if you’re a low utilizer who suddenly needs major restorative services.
- Care beyond dollar limits. Must your dentist continue to honor the insurer’s contracted rate once you exceed your annual limit, or can she revert to her (higher) charges? Ideally, you want to continue to receive the contracted (lower) rate when you continue to receive care.
- Actual services covered. As my family has learned recently, when both spouses have access to dental coverage and you have a known upcoming expense (a dental implant), it’s important to understand the coverage that each policy offers. Does one not cover an implant to replace a lost last tooth (usually a 12-year molar)? Does one not cover an implant if the patient wasn’t born with an adult bicuspid? Yes, these are two real situations in our family, and we’re juggling dental insurance to determine which one works best each year. In 2019, we’ll enroll in both employer’s dental plans now that we understand what we need and which services each insurer covers.
Remember, you can use HSA or Health FSA funds to reimburse tax-free all qualified dental expenses that aren’t covered (or aren’t covered in full) by dental or medical insurance.
Many employers offer vision insurance. It may or may not represent a good value for you. This coverage usually offers:
- A routine annual vision screening. If your medical coverage reimburses only one visit every two years, this benefit may be appealing. The benefit is redundant if your medical plan covers an annual visit.
- Discounts on glasses, frames, and contact lenses. If multiple family members purchase these products regularly, the discounts may more than cover premiums. Be sure to determine whether the discounts result in a lower price than you could achieve by purchasing your glasses through a discount retail or online optometry shop.
Remember, you can use HSA or Health FSA funds to reimburse tax-free all qualified vision expenses that aren’t covered (or aren’t covered in full) by vision or medical insurance. And if vision coverage makes sense only in years that you purchase new glasses, remember that you don’t have to enroll every year.
A growing number of employers offer supplemental coverage. Options include:
Hospital insurance: Pays a fixed dollar amount per hospitalization or per day in the hospital.
Critical illness: Pays a fixed dollar amount for a diagnosis of a covered illness, such as cancer or a cardiac condition.
Accident: Pays based on a schedule for an accident, loss of limb, or disability.
These plans aren’t medical insurance. They’re designed to pay you cash that you can then apply to your medical expenses or other living expenses. You can enroll in these plans without disqualifying yourself from opening and contributing to an HSA.
If you have high-deductible coverage, these plans can help you pay your deductible expenses when you experience a covered event. Note, though, that you can satisfy even a high deductible without experiencing an event that would be covered by a hospital, critical illness, or accident policy. Outpatient care (MRI, physical therapy, injection) for a degenerative extruded spinal disc likely wouldn’t be covered by any of these policies, nor would outpatient care for sleep apnea, plantar fasciitis, or a deviated septum.
In contrast, if you have a scheduled inpatient service next year (maternity, operation), have a family history of a covered disease, or have family members whose active lifestyles regularly send them (and you) to the emergency department to stop bleeding, set bones, and run through concussion protocols, this coverage is especially attractive.
What We’re Reading
Regular readers of this column won’t be surprised at Kiplinger’s list of 10 HSA myths.
How will the results of the mid-term elections affect medical care, costs, coverage, and financing? Forbes columnist Robert Pearl, MD, weighs in.
A PricewaterhouseCoopers study analyzes election results as well. Among its conclusions: In states in which governorships flipped from Republican to Democrat, we could see philosophical shifts that lead to policy changes at the state level.