There are many different factors that need to be considered when looking at health insurance cost. What are your family’s healthcare needs and what can you afford?
How much does health insurance cost ?
It is important to understand the out-of-pocket costs that are associated with your insurance plan.
A few questions to consider:
• Are there any upcoming surgeries or expensive procedures?
• Do you or your family members have a serious health condition?
• How much can you afford to spend on healthcare costs?
• Do you have enough savings to cover a large deductible?
• How important is it to keep my current doctors, hospitals or pharmacy?
• Are your current prescriptions covered?
What do I have to pay ?
You’ll usually pay a premium every month for health insurance, and you usually have to meet a deductible once each year before the insurance company starts to pay its share.
How much you pay for your premium and deductible is based on the type of insurance you choose, your age, your location and whether or not you smoke.
Cheap insurance is not really cheap
Just as important as the premium cost is how much you have to pay when you get services.
• How much you pay before your insurance pays (a deductible).
• What you pay out-of-pocket for services after you pay the deductible (coinsurance or copayments).
• The maximum amount you will have to pay (the out-of-pocket maximum).
What your policy covers is directly related to how expensive the premium is.
♦ The policy with the cheapest premium usually has the highest deductible, coinsurance and the most restrictions.
The cheapest plans may not cover as many services and treatments as the more expensive plans.
♦ The cheapest health insurance usually ends up costing you a lot more in out-of-pocket expense if you get sick or injured and have to use it.
Having insurance but being afraid to use it is a situation too many people find themselves in.
How are premiums decided ?
The Affordable Care Act prohibits insurance companies from using rating factors such as health status, medical history, gender, and industry of employment to set premium rates.
This is a major plus for people applying for health insurance, compared to before the ACA took effect.
The Centers for Medicare & Medicaid Services (CMS) established rules that permit insurance companies to only vary rates based upon age, tobacco use, and geography factors.
There are also rules in place to control rates depending upon family size.
• Insurance companies cannot charge women and men different prices for the same plan.
• They also can no longer take your current health or medical history into account.
The rules establishes certain age bands.
Children: A single age band covering children 0 to 20 years of age, where all premium rates are the same.
• Adults: One-year age bands starting at age 21 and ending at age 63. The premium can vary only by a predetermined percentage either established by CMS or the state.
• Older adults: A single age band covering individuals 64 years of age and older, where all premium rates are the same.
The rules allows tobacco users to be charged as much as 1.5 times a non-smoker. State law can require a smaller amount or prohibit varying rates for tobacco use.
The term “tobacco use” is defined as the use of a tobacco product or products four or more times per week within the last 6 months. It includes all tobacco products.
• The surcharge on tobacco users can only be applied to an individual who can legally purchase a tobacco product. Thus, the surcharge does not generally apply to a person under age 18.
The rule clarifies that the term tobacco use does not include religious or ceremonial uses of tobacco (for example, by American Indians and Alaska Natives).
Marketplace coverage: if you qualify for a premium tax credit the credit amount will be based on the premium before any tobacco surcharge is applied, which means that a smoker must pay the full cost of the surcharge.
What if ...
... I did not tell the truth about tobacco use when I enrolled ? — An insurer is allowed to retroactively impose the tobacco surcharge to the beginning of the plan year. However, the insurer is not allowed to cancel your coverage because of the false or incorrect information.
... I start smoking after I enrolled ? — You would be subject to the tobacco surcharge when you renew your plan the following year.
... I stop smoking after I enrolled ? — The insurer is not required to lower your premium until you renew your policy the following year.
States can decide the rating areas.
Geographical location must be based on one the following geographic divisions: counties, three-digit zip codes, or metropolitan areas and non-metropolitan areas.
♦ If a state does not establish adequate rating areas, or a state does not submit to CMS information on those rating areas, the default rating area will be one rating area for each metropolitan area and one rating area for all the remaining non-metropolitan.
How age affects premiums
The rules allows rates to vary based on age within a ratio of 3:1 for adults.
♦ In simpler terms, this means a 64 year old cannot be asked to pay more than 3 times the price of a 21 year old for the same plan, in the same location.
A real example is the following POS plan offered off the exchange by BlueCross BlueShield of Georgia in the same zip code.
BCBSHP Silver Blue Open Access POS 3500/25% ($3,500 deductible/25% coinsurance)
The 21 year old would pay $266.33 / month and the 64 year old $798.99. The 64 year old gets charged the maximum allowed, 3 times that of the 21 year old.
In 2017, Republicans in Congress proposed to allow premiums for older people to rise to 5 or 6 times that of a younger person.
This would have effectively priced pre-Medicare seniors out of the market.
Public outrage defeated this plan.
How smoking affects premiums
Using the same BlueCross BlueShield plan.
The 21 year old is not penalized for smoking. Both the non-smoker and smoker would pay $266.33 /per month.
♦ This changes as the person gets older, the rates start to separate with the smoker paying more.
Using the same BlueCross BlueShield plan, a 30 year old non-smoker would pay $475.67 / month. A 30 year old smoker would pay $523.23 (1.1% more).
As you can see it pays to stop smoking not only for your health but also your wallet.
How location affects premiums
Insurance companies have always charged people living in different places different prices for similar policies.
Rates can be dramatically different from one side of a state to another.
♦ A Kaiser Family Foundation study found that in 2014, Alaska and Vermont and large parts of Wisconsin and Wyoming were the most expensive places to buy health insurance.
One common reason for excessive premiums in some areas seems to be the limited number of hospitals and specialists in these areas. This allows those who dominate the market to demand high prices from insurers.
In other cases, high premiums are a result of a lack of competition between insurance companies that offer plans in that area.
♦ High individual insurance rates also reflect the extra costs that come when locals tend to be in poor health and where large numbers of people lack employer-sponsored insurance, leaving hospitals and other providers with more charity cases and lower-reimbursed Medicaid and Medicare patients.
• A sicker population does not explain the fact that the most expensive region in the country is four mountain counties around Aspen and Vail.
People here are generally healthy, but medical prices and the use of medical services are both high.
As a result, insurers say they need higher rates.
How family size affects premiums
Employer provided health insurance
Roughly 49% of Americans received some form of health insurance through their employer. This is referred to as Group Insurance.
♦ The ACA’s employer mandate requires businesses with 50 or more full-time employees to offer health insurance to their employees and their children. However, there is no requirement that the employer pays any portion of the premiums.
The larger the company the more likely you are to be offered health insurance.
♦ Almost all employers with 1,000 or more employees offer health insurance, while the national average is less than 35% of companies with fewer than 50 employers offer health insurance.
Larger employers offering family coverage usually have one monthly family premium regardless of the family size. This can be the most cost effective option, especially for larger families.
Individual health insurance
When you cannot get insurance through an employer, you need to purchase either from the Marketplace (Exchange) or off-exchange.
The CMS has established rules covering family size that help control costs for larger families.
♦ Insurers can charge more for a plan that also covers a spouse and/or dependents.
However, if you have more than three children (under the age of 21), you only pay for the three oldest children.
Here is an example:
• Dick and Jane have five children, ages 5, 8, 12, 14 and 16. Their health plan covers all seven family members. They pay their monthly premium for five people. They're not charged for their two youngest children.
• In five years, when their oldest turns 21 they will pay for six people if their 21 year old stays on their plan. And they will not be charge for the one youngest child.
• In two more years the second oldest turns 21 and they will now need to pay for seven people. (This is assuming the 21 year old stays on their plan and their oldest, who would be 23 now, stays on their plan.)
Are health insurance premiums tax deductible ?
Yes, maybe. IRS publication 502 spells this out the best.
It is not the easiest document to read but with a little patience and a tax preparation software you will get through this.
The publication reads in part:
• If you itemize your deductions …you may be able to deduct expenses you paid for medical and dental care for yourself, your spouse, and your dependents.
• You can include in medical expenses insurance premiums you pay for policies that cover medical care.
• You may deduct only the amount of your total medical expenses that exceed 10% of your adjusted gross income or 7.5% if you or your spouse is 65 or older.
• The 7.5% limitation is effective only from January 1, 2013 to December 31, 2016 for individuals age 65 and older and their spouses.
• You figure the amount you are allowed to deduct on Form 1040, Schedule A.
Can I deduct insurance premiums taken from my paycheck ?
In most cases, you can't deduct your share of health coverage costs for a group plan offered through your employer.
• Most premiums are paid with pre-tax dollars, which means they are deducted from your wages before taxes are applied. Deducting them again as a medical expense would be "double-dipping."
You can only deduct the premiums if your employer included them in Box 1 (Gross Wages) of your W-2.
Similarly, HSA and MSA contributions that come out of your paycheck aren't deductible either, as these contributions are funded with pre-tax dollars.
You can find the newest edition of Publication 502 at the IRS website.