The S&P 500 set another all-time high last week, as inflation came in slightly lower than expected. With both inflation and employment cooling, expectations have been set for two additional rate cuts this year.
And as we approach the end of the year, open enrollment is here for many of us. The decisions you make on overall benefits and specifically in health insurance can have a big impact on your finances. Health insurance generally comes in two varieties: HMOs, or Health Maintenance Organizations, and PPOs, or Preferred Provider Organizations.
HMOs generally have a smaller network of doctors and hospitals and offer limited to no out-of-network coverage. Traditionally, you have to be seen by your primary care provider, who can then make a referral to a specialist if needed. Some plans are now Open Access HMOs, which still limit the network but no longer require a referral to see a specialist. Out-of-pocket costs for an HMO are usually a small fee for each visit.
An Open Access HMO functions much like a PPO, which typically offers a wide network of medical providers and does not require referrals. After meeting your deductible, PPOs generally have a cost-sharing. Your physician submits the bill to the insurance company, which applies the negotiated rate to the bill. Then, the remaining amount is split, often paid 80% by the insurance company and 20% by the patient.
Choosing between an HMO and PPO is a matter of preference. As financial planners, we prefer that, regardless of the type of plan, you seriously consider a High Deductible Health Plan, or HDHP. To compare plans, we look at three numbers. First, the annual premium. This is what you will pay regardless of whether you ever go to a doctor. Add to this the plan’s deductible, less any contribution your employer makes to a Health Savings Account on your behalf. We often find that a HDHP is less expensive than a traditional plan, even if you spend the entire deductible. If you have a good year and don’t need treatment, the savings is even greater.
The third number we look at is the maximum out-of-pocket limit. This is the maximum you will pay in medical bills in a plan year. This number is usually similar across plans, but it is worth checking.
The biggest advantage to an HDHP is not the premium savings. It’s access to a Health Savings Account, or HSA. An HSA is the only type of account that is triple-tax preferred. Your contributions are made before tax, any growth is tax-deferred, and if you withdraw money to cover medical expenses, the withdrawals are tax-free. You can invest your money inside the HSA, and it rolls over from year to year.
Someone turning 65 this year will likely need over $150,000 in retirement just to cover medical expenses. Starting an HSA and fully funding it can be a tax-efficient way to pay for those expenses.
Your action item this week is to get your flu shot if you haven’t already.
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