How do I plan for healthcare costs?
After the passing of the Patient Protection and Affordable Care Act (PPACA . . . or more commonly referred to as obamacare) there were two schools of thought as to the future of healthcare costs for U.S. Citizens. One side claiming the program would help lower the costs of healthcare, the other stating it’s a flawed system that will implode on itself. Though the PPACA is important to this topic, it is not the problem we will be discussing.
Recently over dinner, a group of us were having the discussion of health insurance and their frustration of “it doesn’t pay for anything”.
What is Total Cost of Risk?
The problem we all face is not the lack of payments from insurance, but an understanding of the total cost of risk. What is total cost of risk? Industry understanding is the TCoR encompasses ALL costs you are responsible for in any given situation. You can transfer some away, but not all.
How is TCoR applied to healthcare costs? Consider all financial exposures ( considering the probability of something happening) you may encounter in a given year.
- Health insurance premiums – the amount you pay to maintain a health insurance policy.
- Deductibles – the amount you pay before insurance kicks in for a given service or amount.
- Co-pays or coinsurance – the amount you pay as a share of the cost. That could be a set dollar amount or a percentage.
- Medication/equipment costs – whether through copays, percentage shares, or even over the counter remedies or cold medicine.
- Out of pocket maximum – the maximum amount you will pay out of pocket for your healthcare costs as they related to covered claims.
What most people don’t understand is that this is a quantifiable and controllable number. This is why the subject of Risk Management has always been a growing staple of the economy. All it takes is a little elbow grease, some planning, and full participation.
Healthcare TCoR Example
Brief Example. Let’s say you pay $2,400/year in health insurance, a $50 co-pay per visit (let’s say 2 visits per year), and prescription costs of $80/month, and an additional budget for unexpected visits/meds of $300.
Your expected TCoR for the year would be:
$2,400 + ($50*2) + ($80*12) + $300 = $3,760
The Risk Management Process
One of the first epiphanies I had while in college was that the risk management process can (and should be) applied to almost any life processes.
The RM process involves five steps:
- 1: Identify – Identify your exposures (things subject to loss or costs).
- 2: Asses/Analyze – Quantify the value of your exposures, and potential/probability/frequency of those losses.
- 3: Plan – develop a plan to control, reduce, and budget your costs.
- 4: Implement – put your plan into action.
- 5. Measure, Control, & Monitor – periodically evaluate and monitor the effectiveness of your plan. Make necessary changes.
What are the Steps?
Step 1: Identify Our Healthcare Exposures.
We’ve already started the process! Look above and we’ve identified some of the different costs associated with healthcare. Take time to sit down and ask yourself the question: “What is my exposure to healthcare costs?” Most likely it will be most if not all of the items (and maybe others) listed above. Write them down, and let’s move on to step 2.
Step 2: Asses/Analyze Our Healthcare Exposures.
The next step is to analyze the value of those costs. How is this done? Take the list we made from above, go through each item and figure a real dollar amount you think that item will cost you in the next year. For some this may be easy, others may be a little more challenging.
For me this item is a little easier when I use a personal budgeting app to keep track of all my expenses, because I’ve got records of all my costs for any given category. Even if you don’t have this, this is still doable! Start by asking yourself these kind of questions:
“What is my co-pay? I usually visit the Dr. two to three times per year, so if my co-pay is $50 per visit, which totals $150.”
“I’m prone to getting a cold a few times a year. What is the current cost of OTC meds? I usually buy a decent amount of decongestants and cough meds.” OR “My insurance doesn’t cover all of these medications. How much did I pay out of pocket last year? Maybe I can start budgeting ahead so these don’t get out of hand.”
OR. You’re an adventurous family with a broken bone from a sports event or outdoor excursion? A little savings to plan for your deductible or event co-pays make a huge difference in your cash flow.
Step 3: Plan.
This stage is where you take your budgetary number and develop an action plan. Finding the most appropriate health insurance policy with the right coverages, deductible, etc.
As mentioned in the first article. Insurance is used as a tool to transfer some risks, but not all. If you get in a wreck you are covered, however they don’t pay for routine items such as oil changes, new tires, headlights, etc. You must budget for those items when they are needed. Why not treat your health costs the same way? Most situations we treat as “emergencies” don’t have to be. A little planning can give you peace of mind when the time does come to use those funds.
Take the figures above for your estimated out of pocket costs to develop a budget. Take your annual costs and figure out your monthly savings need to meet those figures, keeping in mind the most needed months when you normally schedule your appointments.
A great tool to use in your healthcare budgeting is a Health Savings Account (H.S.A.). Money deposited here is tax deductible when used for qualified expenses. So if you plan on spending $1,500 in out of pocket (qualified) costs, open an H.S.A. and deposit that money to use for your visits. There are maximums you can contribute per year, make sure you research extensively and consult with a professional on how to best use an H.S.A.
Planning Example
One personal example is I ended having some dental work done recently. I knew I had a few issues that needed attention, however an unforeseen incident caused that to happen and escalate. After it was all said and done, even with my dental insurance, cost me about $3,000 out of pocket. I wasn’t ready for this, and ended up working a second job for three months. It was rough. Because I neglected to plan ahead of time, it caused much more headache and stress to play catch up. A little more prudence on my part, could have saved me 3 months of working nights at a second job. Work smarter, not harder.
Step 4: Implement.
You’ve got the insurance policy, you’ve set up your estimated budget, opened your H.S.A. or other savings method, and any other items you may have planned. Now it’s time to put it into action. So take the advice from Nike and “Just Do It.”
Step 5: Measure, Monitor, Control.
Pick a set period of time to measure your progress. This could be every 6 months, a year, or whatever reasonable period of time works for you. Review your budget to your spending and determine if you need to save more, or maybe even a little less. Is the H.S.A. working? Is my health insurance covering what I need it to cover? Are there new options for health insurance available that are better for me?
Review your plan periodically to see if there need to be any adjustments. Make necessary corrections and re-implement.
Additional Points to Consider.
Have athletic kids? Make sure to try and budget for your deductible and co-insurance if you have an ER visit for a broken bone, or similar situation.
Pay attention when purchasing prescriptions. Sometimes there are different prices for the same drugs when using insurance VS paying cash. Generic VS name brand. Etc.
Tax Considerations.
Have a crazy year? If you have medical bills that total more than 10% of your annual income you may qualify for income tax deductions. Consult a tax professional for additional info.
Another feature of the PPACA was making health insurance premiums also tax deductible. Make sure you keep receipts and track of what you pay in premiums per year to make sure you take taking advantage of this during tax season.
One good feature of an H.S.A. is once it reaches a certain amount you can elect it into investments, so it can earn interest and grow for you. Also most financial advisors offer that one should always have an emergency fund of 5-6 months of expenses, or relative to your income – so when something big does happen, you don’t have to touch your other assets in times of need. Though charity is a great thing, you shouldn’t expect someone else to brunt your risks. This is a dangerous assumption.
One of the most common items in bankruptcy filings is medical bills. Though some things can get away from you, avoid debt. If you don’t have enough in your budget for an unforeseen medical expense, negotiate with the provider. Many cases they are willing to work with people on either payment schedules, or negotiating prices.
Unexpected Costs?
What about escalating costs in old age? Many people now are seeing their retirement nest egg disappear because of unexpected costs. Tragedies do happen, however that is not an exemption to being pro-active when you can.
By following these steps and being proactive, you can help turn “unexpected emergencies” into “Oh, I’ve got that. No Prob.” Whether large or small, using the Risk Management process and applying the Total Cost of Risks approach to your healthcare can help protect you from the stress of your healthcare costs.
Did this information help? Make sure to share this article with family and friends.
Additional comments? Questions? Feel free to interact in the comments below.
This is part two of a discussion on healthcare. For part one and a brief history of Health Insurance in the U.S. click here.
Here are a few sources for additional information:
For commons terms and info from HealthCare.gov. Click here.
Healthcare costs calculator in retirement? AARP. Click here.