September 11, 2014 by Tony Novak
As Americans become familiar with the details of their brand new Obamacare health insurance policies for 2014, the most obvious distinction is the higher out-of-pocket payments required by the policyholder. Despite the fact that the new insurance policy covers more types of medical services, policyholders are often surprised to learn that a larger portion of the cost of medical services is excluded through deductibles and co-payments. In fact, the cost of deductibles and co-payments is often more that the cost of the policy premium itself. Total out-of-pocket costs of $5,000 to $10,000 per household per year are common. Many middle-income households are not financially prepared for this new additional expense so new financial strategies are necessary.
Unlike the premium expense that is often paid by government-provided subsidies, most working class Americans find that there is no government assistance available to pay the costs of deductibles and co-payments. Medical service providers are well aware of this feature of the new insurance and have aggressively stepped up collection efforts to collect money that, for many of their patients, represents the bulk of the medical provider’s revenue.
The combined effect can be negative for consumers who are not expecting to shell out immediately for the bill. One man in Philadelphia shared a story about how he waited several months to get an appointment with a referred specialist and was then surprised that he had to pay more than $1,700 on a credit card before being allowed to meet with the doctor. Doctors and hospitals now offer a wider range of financing options for patients short on cash but these arrangements typically carry high interest rates.
Financial advisers find that they must warn clients of the dangers of falling victim to the “affordable” thinking of the changes triggered by the Affordable Care Act. The reality is that medical expenses are the #1 fastest-growing expense for many of us. Our total health care expenses – including all insurance and out-of-pocket expenses – will average more than 16% of our total household income. Medical expenses are our second largest lifetime expense, second only to housing. Adapting the financial plan to put health care planning at the center makes sense to a growing number of professional financial advisers.
A natural reaction for consumers without professional advice is to look for supplemental health insurance. Supplemental insurance is tax-deductible when paid by employer or through a salary-deducted flexible benefit plan sponsored by an employer. These tax-advantaged plans are increasingly popular among large and small employers. (In contrast, individual major medical insurance purchased through an exchange must be paid on an after-tax basis). Small employers can set these plans up for as little as $150 and can be integrated into the firm’s existing payroll accounting system. The wage tax savings for employers and employees are typically more than $300 per employee.
Yet supplemental insurance is not a perfect solution either. Premium cost for the best supplemental policies can be larger than the cost of primary coverage. This is because the supplemental insurance policy pays the first part of a medical bill and so claims are more likely under the supplemental policy that under the major medical policy. In addition, supplemental insurance is not as simple and straightforward as consumers might imagine. A deductible supplement for a $5,000 deductible policy does not pay exactly $5,000 and the benefits do not match dollar-for-dollar, the uncovered portion of the medical claim left by the major medical policy. Instead, supplemental insurance attempts to imitate coverage for the deductible based on a separate and unrelated schedule of benefits. This awkward arrangement is necessitated by the language of the Affordable Care Act that exempts certain types of insurance from the new regulations.
Freedom Benefits recommends using non-insured options including Health Savings Accounts (HSAs) and special purpose Health Reimbursement Arrangements (HRAs). Tax law also permits these medical expenses to be paid without penalty from an Individual Retirement Account (IRA) but this only makes sense when the account owner is fully funding the retirement accounts. Since the best strategy varies depending on individual circumstances, Freedom Benefits offers a free consultation for small business owners and self-employed individuals to help choose the best approach.