It used to be that your employer presented you with a single health plan and you had a simple decision: take it or leave it. Maybe, if you were lucky, you could pick between the wonderful worlds of HMO and PPO, with one promising low costs if you don’t get any bright ideas about having options, the other promising you that you can do whatever you want so long as you pay for it.
These days, we’re in the age of “healthcare consumerism,” which among many other things means that you’re on the hook for more of your healthcare costs. It also likely means that your employer is making a consumer-driven health plan (CDHP) available to you, which is the combination of a high-deductible health plan (HDHP) and a health savings account (HSA). If these are new or confusing terms to you, you’re not alone. Health insurers specialize in actuarial risk, not marketing and communication, so they often think that the best way to get you to understand a confusing phrase is to make it an acronym. Ugh. Calling something a “CDHP” and saying it’s there to help you understand and control your healthcare spend is like promising a better understanding of your personal finances and then handing you an abacus and saying “OK, have fun!”
But, as Bob Marley might say, don’t worry about a thing, ‘coz every little thing’s gonna be alright…once you read through this primer on which health plan is best for you, your family, and your goals of financial independence.
Do I need coverage?
Some of you may wonder if you need health insurance at all. It’s super expensive, you say, and you never get sick. There’s actually a term for you: young invincible. If you are one of these, good for you, I’m jealous. I was a young invincible once. Then I ate some undercooked chicken vindaloo, spent the night in the emergency room and, $2,500 later, my dreams of invincibility were purged, literally and figuratively.
So yes, it’s called “insurance” because it’s there when something unexpected happens — the kinds of unplanned medical events that stop early retirement aspirations dead in their tracks. You can hate insurance companies and fight to make them more consumer-friendly (please do!), but you can’t sit on the sidelines out of protest without understanding that the only ones you’re putting at risk are you and your family.
How does employer-based health insurance work?
Now that we have that out of the way, let’s look at what may be available to you. There is a wide variance in the ways that employers offer their employees health insurance, but it generally goes something like this:
- You work either on salary or hourly for a minimum of 30 hours per week, which earns you designation as a “full-time, benefits-eligible employee,”
- As a benefits-eligible employee, you can pick a health plan that your employer has negotiated on your and your eligible coworkers’ behalf, which almost always is given for a 12-month term, served in payment increments of once per month — which looks to you like a deduction from your paycheck, in whatever increment you get paid (weekly, bi-weekly, semi-monthly, etc.).
- You typically have only two opportunities during the year to enroll:
- Open enrollment, which is when all benefit plans renew for the year for all full-time employees. Doing it once per year makes it much easier for your employer to manage the plan and also provides the insurer with predictable coverage participation levels, which in turn balances out their actuarial models — all of which is a fancy way of saying that it makes it possible to offer you a set premium amount for a whole year. It also stops “churn,” which is when people don’t pay for their insurance and/or only think about getting insurance when they get sick and need it. Hate on insurance all you want, in order for it to work, it has to follow basic economic principles.
- A life-event change, which is when you have a change in personal status, most commonly the birth of a child, a marriage or divorce, or a spouse/partner losing their employer-based coverage and needing to join yours.
- Your employer typically offers 1-4 plan designs with different premium and deductible levels based on what’s covered (think copays, provider network sizes, need for referrals, etc.). The most common plan designs are Preferred Provider Organizations (PPOs), High-Deductible Health Plans (HDHPs), and Health Maintenance Organizations (HMOs), all of which we explain below.
- You pick a plan and it’s yours for the next 12 months, provided you remain employed by the company.
- Your employer frequently offers you additional benefits as well, which are called “voluntary benefits” and have become increasingly common and important to pair with new plan designs. More on that in another post.
(If you are a freelance, self-employed, 1099, gig worker or whatever other designation you use to describe that you don’t have a single, full-time employer, there are different options for you, which we’ll cover in detail in a separate post. BUT, don’t go away yet because actual plan designs are roughly the same in the individual market — it’s the financial arrangements that can be different. Likewise, if you leave a company during the year, you’re usually able to keep your company coverage for up to 18 months thanks to COBRA, but you also have commercial options that may be cheaper than COBRA. We’ll cover that topic more thoroughly in another post.)
Employers pay a certain amount of your monthly premium, which is your bill for simply having insurance. In most cases, the amount of premium covered by your employer is something between 50-100 percent for individual-only (i.e. just you) coverage and 0-100 percent for any variation of family coverage (individual + spouse, individual + children, individual + spouse + children). If you work for a company that covers 100 percent of your whole family premium, please hook me up with your recruiter ASAP!
In recent years, employers have become more active in “passing” more healthcare costs to employees to help keep their own costs down. For example, they will pay for 100 percent of your premium for the year and 0 percent of premium for anyone else you want to cover, which translates to some percentage of total premium costs paid by your employer. Another way is by stating (and auditing to ensure compliance) that spouses who have access to health insurance through their own employer are not eligible for coverage. That may seem weirdly punitive but it’s often the most cost-conscious option for you because your spouse’s employer probably offers coverage and cost-sharing comparable to your employer. So, if you’re young and don’t have children yet, and both you and your spouse are employed, your task is simple: both of you take your employer-offered coverage.
OK then, now that we understand how employer coverage is offered, let’s take a look at how to decide what’s right for you.
High-Deductible Health Plans with HSA
Over the past 15 years, HDHP’s have made their way into employer health plan options, to the point that they’re now available to more than half of all Americans with private health insurance. They are elected by roughly one-third of all people on employer-based coverage and one-half of all those with individual coverage. Unfortunately, fewer than half of people with HDHP’s also have an HSA, which is sad because HSA’s are the whole point of CDHP’s. HDHP’s are like a mile of raw sewage you have to slosh through to get to a beautiful meadow, which is the HSA. Without the HSA, you’re just wading through crap for no reason.
Here’s how and why: CDHPs were created to help bring healthcare costs down by giving people a higher deductible and, hence, more “first-dollar” exposure to their healthcare costs. Under a traditional HMO plan, you go to the doctor’s office and your “copay” is $20, meaning the other $100 the doctor charges in total is being picked up by your insurance provider/employer. With an HDHP, you’re on the hook for all $120, upfront.
Yowza! That’ll make you think twice about rushing to instacare the next time you feel a tickle in the back of your throat — which is exactly the point. The creators of CDHPs wanted health consumers to have some “skin in the game” so they would avoid getting unneeded care. The tradeoff is that, once you meet your annual deductible, your insurer covers 100 percent of your costs.
(Sidenote: I hate the term “skin in the game.” It’s a gambling term, and something as important to everyone as healthcare shouldn’t be sold as a gamble. It should be sold as a strategy for managing your own healthcare spend effectively. But that doesn’t have the same ring to it, so I digress.)
The larger tradeoff is that you get an HSA, which enables you to set aside tax-free dollars every year and build up a nest egg to cover future healthcare costs as they arise. It’s essentially a 401(k) for healthcare — you can even invest the money you set aside — except even better because, provided you use it to pay for medical expenses, there is no tax penalty for withdrawal at any time. That’s like getting 30 percent off your healthcare expenses from the get-go. And that’s huge if you think you’re invincible but don’t want to test fate.
Here’s something very important about HDHPs: It’s really hard to rid ourselves of the thought that we can beat the system, that we’re somehow invincible. When you get an HDHP, you might think you can go without the HSA and simply put that extra savings into your retirement account, or reward yourself by adding your savings to your disposable income. That’s a mistake. Statistically speaking, you or somebody under your care (think, spouse and kids) will have at least one major medical expense in your lifetime, and probably more than one. Just like saving for retirement when you’re young, saving for medical expenses when you’re young, and especially investing tax-free dollars, means that almost whatever happens to you later in life won’t throw you off course and that you can enjoy your early retirement in comfort and confidence. Go ahead and read that again to be sure you get it.
So, yes, you have to go through some crap to get to the green meadow, but that meadow can be glorious if you plant the seeds early and water them often.
Health Maintenance Organizations
HMOs, AKA “managed care,” shaped employer-based health insurance into what we recognize it as today back in the ‘70s, when Richard Nixon looked to a California network created by Henry J. Kaiser as a model for providing coverage on a large scale at a low cost to employees nationwide. He and legislators used that model to draft new legislation on how employer coverage would be governed and taxed.
That network, of course, was Kaiser Permanente, which is still going strong along the west coast, in Colorado and in the D.C. area. Geisinger Health has been successful with a similar model in Pennsylvania. There are a handful of other pockets across the country with similar “vertically integrated” (meaning, the health insurer is also the service provider) models for their HMO planes.
Other health insurance carriers? Meh.
Health insurers, which typically focus on negotiating utilization rates and network participation by doctors and hospitals, generally don’t own the provider networks the way Kaiser and Geisinger do, so they can’t dictate costs but only hope they’re effective negotiators. In other words, HMOs work when you cut out the middleman and don’t work when the middleman is the one trying to run the HMO.
The selling point of HMOs is that they cost you less. You’ll pay a lower premium upfront and, hopefully, low or no copay when you see a doctor and a lower percentage of costs if you have something more serious than a standard office visit. The tradeoff is that you have to stay in-network if you want your insurance to help pay for something. For example, if your dad recommends his orthopedic surgeon for an unexpected knee surgery you have to get, if that surgeon isn’t in your HMO’s network, you’re paying the whole bill out of your own pocket. So if you refuse to settle for whatever doctor/specialist is available through your HMO, you may as well either put off your early retirement or get used to walking with a limp.
With that said, there are more options available for special cases like the one described above — sometimes called “gap” or critical illness coverage. It will fill in the gaps for you if something unexpected occurs, like you have an injury or, more critically, you are diagnosed with cancer or another serious, and expensive, chronic condition. But be very mindful of costs when looking at your options. On one hand, HMOs with a good network are perfectly good for the vast majority of needs. On the other, if you prefer to play it safe and feel like you need to flexibility of going out-of-network for care, getting the company PPO may be better for you than piecing together an HMO and voluntary gap coverage of various kinds.
If you’re lucky enough to live in the coverage area for Kaiser or Geisinger or one of a handful of other quality, provider-owned HMO plans around the country that have really big, well-managed care networks with lots of options — and if you don’t have an HDHP option — then the HMO is worth your consideration. If you can get your hands on a quality HMO that also qualifies as an HDHP with HSA, then you might save yourself a TON of money upfront; money you can put in your HSA as your healthcare retirement account.
And if you have a chronic health condition, HMOs will likely save you some money over PPOs, provided that condition is more manageable, like diabetes, and hence less likely to require that you see a lot of specialists.
Preferred Provider Organization
For about three decades now, PPOs have been the standard high-quality-to-high-value-ratio health plan design. The basic idea is that you aren’t confined to your insurance picking up some percentage of your costs only if you stick with “in-network” doctors and specialists, as you are with an HMO. PPOs have been widely marketed as a consumer-friendly alternative to managed care — “see any doctor you want” is still a common selling point. The truth is that there’s not much of anything in healthcare that’s consumer-friendly, but it can be nice to not have to find out if a doctor is covered every time something comes up, especially if you have kids that are getting in and out of medical trouble as often as they get in and out of actual trouble.
Going back to our knee surgery example, the PPO would have a pre-arranged percentage of total costs that they would pick up for you to see your dad’s surgeon, whereas the HMO wouldn’t pick up any costs if this surgeon was “out of network.” You’re still going to pay a significant amount of the total costs, but it’ll be a lot less than what you’d pay with an HMO.
The tradeoff is that you will pay more upfront for a PPO, which translates to a higher monthly premium and, in many cases, higher copays for doctor visits and prescription drugs. PPOs can run you anywhere from several hundred to several thousand dollars per year over an HDHP or HMO. If your employer is generous in picking up the majority of the costs for your PPO, or if the PPO is the only option they’ve given you, then by all means, consider the PPO rather than going without insurance. But for most people who don’t have frequent medical needs, a PPO ends up being more insurance, and more cost, than you need to have.
As noted above, a PPO can be a good option, perhaps better than an HDHP if you are managing a chronic condition. It can also be a good option if you or your partner are expecting a child during your next 12-month coverage period. But definitely sit down and do the math, because it could be that the HDHP is going to save you money even in those high-cost scenarios.
Other Types of Coverage
The three plan designs above account for probably 95 percent of all coverage options provided by employers. There are some unique variations on them, but most of them follow the same patterns no matter where you are in the country. If what you’re being offered doesn’t seem to fit in one of these categories, write us and we’ll reply with some personalized advice!
Short-term, limited-duration insurance. One type of coverage that may appear as an option to some employees now that the Trump Administration has enabled their expansion through executive order is STIs. They’re what are also known as “catastrophic plans,” which will cover your medical bills if you get hit by a bus or catch some kind terrible virus that puts you in the hospital — provided neither of these scenarios are your fault. These are sometimes called “junk plans” because they don’t cover much of anything beyond acts of nature or someone else’s stupidity. Seriously, there was a thread on Twitter not too long ago that shamed a company offering STIs because they pictured young people climbing to the summit of a majestic, rocky peak, with a tagline that implied the STI gave them the freedom to do whatever they wanted to do. Problem was, when you read the fine print, you discovered that the plan wouldn’t cover you if you had an accident while hiking or rock climbing. Oops!
Voluntary benefits. We mentioned voluntary benefits, often shortened to VB, above for HDHPs. There has been an increase in “gap” (i.e. cover the deductible gap) and critical illness coverage that will pick up some of your costs if you get sick or injured. These can be good options at the right price, but they may provide less value once you’ve built a sizable nest egg in your HSA because there are annual out-of-pocket limits on what your health insurance will charge you. Plus, once your deductible is met in any given year, the health insurance should be picking up 100 percent of your costs anyway. Definitely consider critical illness coverage because it can be a literal life-saver for things like cancer. But provided you’re properly funding your HSA and you’re still young and healthy, they may not be as critical (no pun intended) for you as for your older coworkers.
OK, are you ready to pick a plan? Want more information? Keep tuned to The Benefits of FI for more detailed information to help you make choices the FI way.Like