Frugal Parenting
(featured column)

How to Stretch Your Health Insurance Dollars
by Rachel Keller 

This month we are proud to present an informative article written by Rachel's husband, Maynard Keller, on the ever frustrating topic of... health insurance!  We hope it will be a blessing for you and your family.  More...

Part I

Let’s face it. The days are over when your employer paid 100% of your health insurance, gave you a gold watch after 25 years, and paid you a generous pension in retirement. Increasingly, you are responsible for your own benefits and must be more educated about your options.

For starters, why do you need health insurance anyway? Couldn’t you just go without it and hope for the best? Unfortunately, medical bills can be very expensive. What if you had a stroke, and your hospital bill was $35,000? My mother had a stroke, and this was the amount of her bill. Thankfully, she had medical insurance that covered most of it. Do you have $35,000 sitting around earmarked for that hospital bill? Probably not, and if you own valuable assets such as a home, investments, or a business, you must protect them. Having health insurance is a method of transferring risk from yourself to another party--the insurance company.

Traditional policies with low deductibles and small co-pays are the most expensive. The premium is higher because the insurance company pays out more. Years ago, employers routinely provided this type of medical plan for their employees. High-deductible policies with no co-pays cost the insurance company less, hence a lower premium. Insurance is not designed to cover every cough and runny nose, just major health problems. Does your auto insurance policy cover oil changes and tune-ups? No, you only use it if you’re in an accident or something serious.

Choosing a high-deductible policy saves you money. If you have a family deductible of $5,000 and 0% coinsurance and reach your deductible, the insurance company will pay the rest of your medical bills for the rest of the year, up to the lifetime benefit limit of the policy (usually $1,000,000 to $5,000,000).

Health Savings Accounts (HSAs), offered in conjunction with a qualified high-deductible policy, allow you to set aside money pre-tax in a special type of account. For 2007 a single person can contribute up to $2,850 per year, while a family can contribute up to $5,650 per year. Many banks and firms can serve as custodian for these funds which grow tax-deferred like an IRA. When you have a qualified medical expense with an HSA, you write a check or use its debit card to pay your medical expense tax-free. Whatever money you do not use accumulates tax-deferred until age 65. Suppose that you contribute $5,000 annually to your HSA and you use $2,500 of it for medical expenses. The other $2,500 remains in your account, and you do this for 25 years. At 5% interest you would have over $65,000 in your account! A caution with HSAs, however, is that using these funds for anything other than qualified medical expenses results in taxation and a 10% penalty from the IRS.

Choose a policy with an annual out-of-pocket maximum. I don’t like 80/20 plans that do not have out-of-pocket caps. Case in point: What if you had a heart attack, and your hospital bill was $100,000. With an 80/20 plan without a cap, you are responsible for $20,000—not a pleasant thought. This actually happened to a friend of mine, and he is still paying off  that bill. On the other hand, suppose your maximum out-of-pocket were $5,000. Your risk is limited, making it more manageable. Certain policies pay a fixed amount for certain types of illnesses. Avoid these types of policies like the plague!

COBRA (Consolidated Omnibus Reconciliation Act) coverage is an option. If your previous employer had 20 or more employees and was not a church, the company is required by law to let you continue your group coverage for up to 18 months (or more in certain situations). Some states have similar laws for smaller employers. You generally foot the entire bill yourself, plus up to 2% in administrative charges. This type of coverage is very expensive but is a good option if you're in poor health, in a market with few choices, or if you want to retain your current doctors. Because group plans often have more bells and whistles than you'd buy yourself, you might find a better deal by shopping on your own.

In most states after 18 months of COBRA coverage, you can enroll in a private plan that covers your pre-existing conditions. You are a HIPAA (Health Insurance Portability Accountability Act) Eligible Individual. The only problem is the very expensive premium.

Another option is getting an individual health insurance policy. You must apply, pay the premium, and be approved. Different insurance companies have different underwriting criteria. Some will issue an exclusion rider that doesn’t cover a certain illness for a period of time. For example, if you have had back problems, the insurance company will not cover any medical bills related to your back or spine for one year. After one year, everything’s covered. Other companies will cover everything, just charge you a higher ongoing premium based on your potential risk. Be aware that the higher your deductible, the less stringent the underwriting requirements.

Here’s a tip. If your employer offers you COBRA coverage when you leave, you have 60 days to elect coverage. This is retroactive to the day you left your job. You could immediately apply for individual coverage with an effective date of 60 days in the future. Your policy will probably be issued within 30 days. If the insurance company offers you a policy acceptable to you, you can accept it. If you have a major medical issue during the 60 days, go back and get COBRA. If you have no major problems, you just saved two months of premiums! If the insurance company offers you a policy which is not acceptable, you can pay the COBRA insurance premiums retroactive to day one.

Part II 

Let’s look at more health insurance options. Stay in-network. Different insurance carriers utilize PPOs (preferred provider organizations) to save money through negotiated cost savings. For example, a colonoscopy has a retail price of $1,500. The PPO’s negotiated cost is $995. My personal experience is that PPOs are very different. We recently had a PPO that had no OB-GYNs in it. Have women stopped giving birth or what? Our current PPO includes about 85% of all doctors and hospitals in Virginia. How’s that for an improvement? When you go out-of-network, you’ll often have a separate deductible, higher co-pays, and generally higher expenses.

If you have a small business and have two or more employees, including yourself, you may be eligible for small group coverage. Each state has slightly different rules for this type of coverage. In most states this coverage is guaranteed issue, which means they cannot deny you coverage. They can, however, charge you more based on the general health of the group. If your group is composed of people with diabetes, heart conditions, cancer, etc., be prepared for rate increases and high premiums.

Association Health Plans (AHPs) are another option to consider. These plans are available through professional associations, such as a chamber of commerce or your professional trade group. AHPs strive to provide affordable health care through economies of scale, greater bargaining power, regulatory uniformity, and flexibility in health benefit design. The health insurance industry is generally opposed to this for various reasons. Some see it as the start of deregulation. Remember how expensive long-distance calls used to be? Now they’re dirt cheap. Insurance companies are in business to make a profit, and AHPs are a potential threat.

Another alternative is faith-based healthcare, non-profit associations whose purpose is to share health care expenses among their members. These organizations often utilize lifestyle criteria when selecting members. For example, you cannot smoke, drink, ride motorcycles, etc. The assumption is that cleaner living results in fewer medical problems. I like the concept of this, but the reality is not always what you expect. Furthermore, because these are not insurance companies, they are not regulated by the state insurance commissioners. When these organizations want to change something, they just do it. I was a member of one of these organizations for the past two years. They kept raising rates throughout the year, raising deductibles, changing PPO providers, and lowering benefits. I finally had enough of this and switched to a real insurance company. The concept is good, but there are many issues to fix. Twice in my life I have had coverage through a faith-based non-profit health provider. Both times I have regretted it.

Many city or county health departments offer low cost or free immunizations for all children and even adults as well as basic health services. Appointments are not always offered every day, and you may have to wait. Every health department is different so call yours for more information on services offered, times available, and costs.

While most group health plans include maternity coverage automatically, you must opt for it in an individual health policy. If you and your spouse are in your child-bearing years, seriously consider a maternity rider. Routine deliveries cost between $5,000 and $10,000, and C-sections are $15,000 to $25,000. If you don’t have this optional coverage, your insurance company won’t pay a dime of the labor and delivery charge. "Being careful" and birth control are not 100% foolproof! Even being over 40—or 45—is no guarantee. A friend of mine thought she was beyond child-bearing years, so she had no coverage. In 2003, she had a healthy baby boy, but her high risk pregnancy and c-section cost her $16,000.

Use the services of a health insurance broker, not a captive agent. Brokers are not employees of one particular carrier and can shop around for a policy that best meets your needs while captive agents want to sell you a particular product. Be aware that most brand-name insurance companies utilize captive agents. You may have success finding a health insurance broker by looking under Employee Benefits.

Know what your policy does and doesn’t cover, and review all medical bills for mistakes. Over the years, I have discovered many errors that would have cost my family thousands more. For example, some plans cover "routine" colonoscopies. What if your doctor’s office did not code it routine, but rather "diagnostic" or "surgery?" You might have to pay the entire amount out-of-pocket.

Save up to $100 per person, by using the dental services of your local community college. Dental hygiene programs need patients to clean and offer free or low-cost teeth cleaning services. Because the students are very thorough and the teacher checks everything to make sure your teeth are perfectly cleaned, the appointments can take considerably more time. You may have to be flexible with your appointment time, and you may have to wait weeks—or longer—to schedule an appointment. Other times, you may receive a call that morning because of a last-minute cancellation.

Prescriptions can be costly. You insurance may not cover prescriptions, but shop around. Alumni associations, wholesale clubs, and auto clubs offer discounts on prescriptions. Many stores offer shopping cards or “free” groceries with new or transferred prescriptions.

Medical insurance offers many choices and may seem complicated. Understanding your options, however, can save you money and give you better coverage. You’ll have peace of mind when you carefully consider your options and make the best choice.

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©2007 American Financial Planning, Inc. All rights reserved.

About our guest author:

Maynard L. Keller, Jr. is married and has been blessed with five children and a wonderful wife, Rachel Keller, who is a Senior Writer here at BetterBudgeting.com.  He is a fee-only CERTIFIED FINANCIAL PLANNER™ professional specializing in morally screened investments and financial planning for families and small businesses. He is also the president of American Financial Planning, Inc., the creator of The Traditional Values Index™--The World's Most Politically Incorrect Investment™. He can be reached at info@traditionalvaluesindex.com or www.traditionalvaluesindex.com. He does not sell insurance, but is licensed as a Virginia Life & Health Consultant and has worked with health insurance for many years. Maynard is a registered investment advisor representative of American Financial Planning, Inc.

This shall not be deemed to be a solicitation in any jurisdiction where American Financial Planning, Inc. is not registered to conduct business. The information contained here is believed to be accurate at the time of publishing. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. Please consult an appropriate professional before making any insurance, investment, tax, or legal decision.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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