One of the most complex and important personal insurance decisions is an individual’s approach to health insurance. For workers, health insurance is a major consideration. Yet when it is provided by their employer, they realize that the possibility of being downsized threatens not only their livelihood but also their access to quality health insurance. Even with employer provided health insurance, the migration of physicians and healthcare systems in and out of insurance networks can result in difficult choices for families relying on those resources. For millions of Americans who need to purchase health insurance because they are self-employed, between jobs, retired or in some other circumstance, there are myriad considerations to navigate.
Individual health insurance: The basic glossary
Individual health insurance is purchased to cover you when you do not have health insurance through your employer (or former employer) or spouse or from a government-provided program.
To start the journey, it’s important to know the relevant terms of coverage:
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Deductible: This is what you are responsible for paying before the policy’s coverage kicks in for covered services.
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Copay: Usually this is stated as a fixed fee for covered services, for example, $25 for a doctor’s office visit.
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Coinsurance: After reaching your deductible, this is the amount you share with the insurance company for covered services.
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Out-of-pocket maximum: This represents the amount you must pay each year, after which the policy will pay 100% of covered costs.
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Network: This can be a group of physicians, other types of healthcare professionals, and healthcare systems that include hospitals and out-patient services. Most common types of networks include a Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO).
While is important to know what the plan specifics involve from a deductible, copay, coinsurance and out-of-pocket maximum, diligence is necessary to review the breadth and depth of the network for primary care physicians, specialists, hospitals and outpatient facilities. Check to gauge whether your doctors and conveniently located hospitals are included in the network.
Group health insurance: A valuable benefit
A major consideration in changing jobs is what the new employer provides for health insurance from both a coverage and cost standpoint. Decades earlier, health insurance was perhaps an afterthought as employers of any size provided it as a benefit with comparable coverage to other employers. However, as the cost of healthcare greatly outpaced inflation, employers varied in their aggressiveness in managing their healthcare costs.
There are distinct advantages that most group health insurance plans have over the individual market. First, there is less chance of “adverse selection” when the individual (or a family member) has a known medical condition. Consequently, group health insurance plans do not have a “pre-existing condition” limitation for someone enrolling when hired or changing plans at their annual election. Because the health risk is spread across the organization’s employees, the resulting economies of scale help keep costs lower than a comparable individual health insurance plan.
Generally, employers share in the cost although there are different philosophies regarding how much of the family cost versus individual coverage to subsidize. To the degree that employees contribute to the plan, the contributions are made on a before-tax basis, which subsidizes the cost by the amount of the person’s federal, state, and FICA (Social Security and Medicare) marginal tax brackets, which in total typically start at 25% or more of the cost. And the employer’s cost is a valuable employee benefit because employees are not taxed on the employer’s contribution.
There are also specific rules that group plans of a certain size must comply with under the Affordable Care Act (ACA). For organizations with 50 or more full-time employees, employers must offer “affordable coverage,” which stipulates that the employee’s premium can’t exceed a certain level of household income and covers 60% of expected costs.
Annually, at open enrollment, group plan participants are given the opportunity to revisit their health insurance choices, along with other health benefits, which can include dental and vision insurance. Employees have the opportunity to update their health insurance coverage outside of open enrollment when they experience a change in family status, such as marriage, divorce, the death of a spouse, or the birth of a child.
If you leave your job, depending on the size of your employer (or the state you reside in) you may be eligible for COBRA continuation coverage, which allows you to continue to stay in your employer's plan for a limited time, which is usually 18 months for the employee and up to 36 months for dependents. But there is no employer subsidy available, so you will have to pay the entire cost of the plan plus up to 2% for administration. For someone between jobs this can be a costly burden, and the ACA state exchanges may be a less expensive alternative.
ACA state exchanges: A more affordable option?
The Affordable Care Act, which became law in 2010, established a marketplace for individuals and families to compare options and purchase health insurance on “exchanges.” Currently, 21 states provide and administer their own exchanges with the remaining ones fully participating in the federally facilitated marketplace. The exchanges fill a void for people who are not covered by an employer-sponsored health plan, Medicare or Medicaid. The four types of exchange health insurance plans are Bronze, Silver, Gold and Platinum. Generally, the plans range from Bronze plans that provide 60% of in-network benefits, on up to Platinum plans that provide 90%, with the trade-off being premium costs.
Aside from an array of health plans for most states, people whose income does not exceed the thresholds can receive a premium tax credit that lowers their out-of-pocket costs. The impetus for this approach was to allow more people to afford coverage, which helps hospitals by having more patients with insurance and spreads the risk of insuring by getting more people to participate. The exchanges’ open enrollment period is usually November 1 through January 15; however, you can enroll during the year if you have a qualifying life event such as losing coverage under your employer’s plan, getting married or divorced, having a child or moving to another state.
Participating exchange health plans are required to provide 10 categories of “essential health benefits.” The categories include hospitalization, maternity care, mental health care, emergency services, prescription drugs and preventive services. Of most significance to people with a preexisting condition, they can’t charge higher premiums or deny coverage, which caused great anxiety to people who lost their employer benefits and needed to buy individual coverage. Although the ACA penalty for not having insurance is gone, there are still several states that penalize people without insurance.
Medicare and Medicare Supplements
Medicare was signed into law by President Lyndon Johnson on July 30, 1965. This federal health insurance program was created for Americans age 65 and older and for people with qualifying disabilities regardless of age. It has two key components:
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Part A — hospital insurance and Part B — medical insurance: This program provides coverage for a broad range of services. There is no out-of-pocket maximum and there is a coinsurance of 20% for individuals for most outpatient costs. Because there is no ceiling, people can be faced with large remaining bills. Medicare does not provide coverage for dental, vision or hearing care. Medicare premiums are usually deducted from Social Security benefits (or paid separately if the person is not yet claiming Social Security). The premium is based on a person’s or household’s income, which has a two-year lag to determine the cost.
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Medicare Supplement insurance: To fill the gaps that Medicare leaves, Medicare Supplement insurance plans are standardized policies to allow for comparisons among plans. The types of plans offered have evolved over time. Currently, Plans A, B, D, G, K, L, M, N are available. Plans G and N are the most commonly selected as they cover Medicare Part A deductible, Part B coinsurance, and excess charges. If a person signs up during the enrollment periods, there are no required physicals or pre-existing condition limitations that can be applied. Prescription drugs are not covered under Medicare Supplement policies but rather under Medicare Part D, a separate policy that you can purchase, and the cost is based on your income.
Medicare Supplement policies provide flexibility to the insured to select any doctor who accepts Medicare, avoiding networks and referrals. They continue to be quite popular because of the ease of use. The cost varies by which plan you take, and people should carefully review their healthcare needs within the confines of their budget.
Medicare Advantage
Medicare Advantage plans are also referred to as Part C coverage. The plans were created to be more inclusive to cover other services not covered by Medicare Parts A and B. It is private insurance that enters into a contract with Medicare to provide Part A and Part B benefits plus Part D prescription drug coverage. As an enticement, many Medicare Advantage plans extend coverage to eye exams, hearing aids, dental and even gym memberships. Most Medicare Advantage plans charge lower premiums than Medicare Supplement plans G and N.
How do they do it? And given these features, why doesn’t everyone take a Medicare Advantage plan? The answer lies in the design, which includes the use of networks that use an HMO or PPO approach to manage the care given but which restricts the freedom that Medicare Supplement plans contain.
The conventional wisdom is that Medicare Advantage plans are a better fit for healthier individuals who are more focused on preventive care and watching their budget dollars. Medicare Supplements are preferred by utilizers of health care to deal with known conditions. Since no one is assured of continued good health, however, despite healthy life habits, people need to know that they can’t switch plans between open enrollments. If having more flexibility brings peace of mind, having a Medicare Supplement plan may be a better fit.
Tax-advantaged ways to lower costs
As health costs continue to escalate, individuals and families have sought alternatives that allow them to “self-insure” with higher deductibles in return for lower fixed monthly insurance premiums. Since the threshold to deduct health expenses is high – 7.5% of adjusted gross income, (AGI) — using a high deductible health plan (HDHP) allows people to contribute $4,400 for individuals and $8,750 for families in 2026 in pre-tax accounts known as health savings accounts (HSAs). To qualify as an HDHP, the plan’s deductibles must be at least $1,650 for individuals and $3,300 for families.
The interaction between the two is that an HSA allows for pre-tax contributions, the earnings grow free of taxes, and when used for eligible medical expenses, the funds are tax-free when withdrawn. They can be rolled over and accumulated every year and eventually used for retiree medical expenses.
The key assumption when using an HDHP with an HSA is that the users are in good health and can fund the HSA to take advantage of the tax-savings feature. Also, to the degree that the HSA account balances are used up, the family will have sufficient other savings to pay for remaining health care expenses.
Other health insurance products
Because health insurance is designed to reimburse health-related expenses, there is a very real exposure of not being able to work while recovering from an accident or illness. There are insurance products designed to help with lost income. However, it is important to put them in context. They are not meant to replace health insurance, rather to supplement it. Here is a description of some of these products.
- Critical illness insurance: These types of plans pay the benefit, which is usually in a lump sum, to the insured, rather than the hospital or doctors. The benefit is tied to a condition such as cancer, kidney failure, stroke, heart attack, organ transplant or other critical illness. The payments help with lost income, healthcare expenses, daily living expenses, transportation and other needs.
- Accident insurance: This is designed to pay a benefit to a person who is injured in an accident. The need is that the unforeseen nature of accidents often puts individuals and families in difficult financial circumstances. Whether there are unpaid medical bills or lost income to replace, being able to receive money quickly is greatly appreciated by the affected household.
- Hospital indemnity insurance: This provides a predetermined daily or per-admission benefit following hospitalization. As HDHPs have grown in popularity they can help supplement the deductibles and co-insurance that are incurred following sickness or an accident that requires hospitalization.
Finding the right fit
The starting point to achieving the best personal choice is first asking introspective questions to understand your current health status and the health outlook for you and any family members. Next, review your past health utilization, continued employment outlook, financial situation, and age or service-connected health care options.
Then as you crystallize your personal factors, review the types of plans available to you, or your spouse, comparing plan benefits and costs. Do these use a network such as a PPO or an HMO? Are your healthcare providers in the network? Don’t forget to consider the after-tax cost if the employer pays some or most of the premiums, or for your portion of the costs on an after-tax basis (through before-tax payroll payments or using HSAs and FSAs.)
If you need to buy your own policy, examine the exchange options that are available in your state. Which plan best fits your coverage needs and is affordable? Do you anticipate having your policy for an interim period or for the foreseeable future? Do you qualify for a subsidy for an exchange policy?
If you are Medicare eligible, which type of approach works best for you? Is the flexibility of being able to choose your doctors important without regard to a network (if they accept Medicare)? What are your health status and budgetary realities? Do you have options such as using a VA (Veterans Administration) facility? Does a former employer provide you with any retiree health benefits?
As you answer these questions, it’s important to remember that managing your health care options is a dynamic process not a static one. As your situation evolves, you need to perform this exercise before each open enrollment to make sure that your choices fulfill your needs in the most cost-effective way.
Given the complexity of health insurance, choosing an insurance agent to help you assess and select your approach can save buyer’s remorse down the road. Be sure to consider the value proposition that knowledgeable agents bring to the health insurance equation. Find a health insurance agent near you to guide you through discovering policy choices and choosing coverages.