Q&A with a CPA: Health Insurance
A recent Harris Interactive poll conducted by the AICPA reveals that many U.S. adults lack a basic understanding of common terms associated with health insurance plans. Considering some of the massive changes we face in how our healthcare and health insurance is handled, this statistic alarms me! But fear not, Career Girls! Your CPA is here to help whisk away your confusion. Keep reading for answers to common questions about health insurance to help you make the right decisions in the coming years.
Q: What is the difference between a premium, deductible and copay?
KCL, CPA: Let’s just break down the definitions:
Premium – This is your monthly cost just to have the insurance, similar to your monthly car insurance bill. If your health insurance is through your employer, this is the amount that comes out of your check each pay period. Or if you’re lucky like me, your employer pays 100 percent of the premium.
Deductible – This is the amount that you’ll be on the hook each year before your insurance kicks in. For example, if your plan has a $1,000 deductible and you go to the doctor for a sinus infection, you’ll pay the entire cost of your visit if you haven’t had any other medical costs for the year. Once you reach $1,000 total, then your insurance will start paying at least a portion of your costs, called coinsurance. This amount also has a maximum that you have to pay each year and when you reach that level, your insurance will cover everything up to your lifetime limit.
A common coinsurance amount is 80%, up to a certain limit, commonly $2,000. Let’s say you haven’t incurred any medical expenses for the year and then you have a car accident that puts you in the hospital, costing you $20,000. You’ll have to pay the first $1,000 to meet your deductible. Of the remaining $19,000, you’ll only owe $2,000 for a total of $3,000, since 20% of $19,000 is more than the coinsurance limit of $2,000. Confusing, I know!
In general the higher your deductible, the lower your premium, because you’ll be assuming more of the cost of your health care. Same goes for coinsurance – the higher the percentage that YOU pay, the lower your premium.
Copay – This is the amount that you “chip in” for certain things like office visits or prescriptions, every time with no limit. Unlike coinsurance amounts, copays are fixed dollar amounts. For example, many insurance plans have a copay of $20 for a doctor’s visit, no matter what the total cost of the visit ends up being. In the above car accident example, you’d probably also have to pay an emergency room copay, which is usually in the $50 to $150 range.
Q: My employer offers three different plans, PPO, HSA and HMO. What is the difference and how should I choose?
KCL, CPA: The main criteria here is how much flexibility you want in choosing your health care providers. If you’re ok with sticking to a relatively restricted list of physicians then the HMO option is almost always going to be the least expensive, unless you end up having to obtain emergency health care from someone who is out of network, in which case you essentially have no insurance coverage. HMOs operate on a referral basis, so if you want to see a dermatologist about a funny looking mole, first you have to go to your Primary Care Physician (which you must designate when signing up for the plan), who will then refer you to a dermatologist within your network.
A PPO offers more flexibility in that you can go to a doctor who isn’t in your network, although it will cost you more out of your own pocket. PPO plans typically have deductibles and coinsurance, whereas HMO plans do not.
Finally, HSA plans are similar to PPOs in terms of the providers you may choose, but they also have a type of savings account associated with them that often includes some type of employer match. You will have out of pocket costs with an HSA and you actually have to put pre-tax money into your HSA in order to spend it on your healthcare, but it’s not “use it or lose it” like FSA plans.
The beauty of the HSA is that you can save pre-tax dollars toward your healthcare and if you’re lucky enough not to have to spend it, the money grows tax-free in the account. As long as you spend the money on qualified healthcare expenses, you’ll never have to pay tax on that money. And once you reach the age of 65, if you still have money in your HSA, you can spend it on whatever you little heart desires.
Take care to follow the rules if you elect an HSA though – the IRS is known for auditing these accounts and the penalties can be severe if you’re found out of compliance. I found this website to be incredibly helpful for further information on HSAs.
What other questions do you have about health insurance? Let me know in the comments.