Sdi Productions | E+ | Getty Images
But choosing a health plan can be difficult.
Actually, a 2017 study found that many people lose money because of suboptimal choices: 61 percent chose the wrong plan, costing an average of $372 a year. The paper, co-authored by economists at Carnegie Mellon University and the Wisconsin School of Business, looked at the choices made by nearly 24,000 workers at a US company.
More from Personal Finance:
“Cash top-ups” may give up the “easiest money” you can make
These credit cards had “increasingly noticeably” high interest rates
“Home affordability is incredibly difficult,” says the economist
Health plans have a lot of moving parts, such as premiums and deductibles. Each has financial implications for buyers.
“It’s confusing and people have no idea how much they could potentially be paying,” Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners, based in Jacksonville, Fla., told CNBC. McClanahan is also a physician and member of CNBC’s FA Council.
Making a mistake can be costly; Consumers are generally locked into their health insurance for one year, with a limited exception.
Here’s a guide to the main cost components of health insurance and how they may affect your bill.
Frederic Cirou | Photoalto | Getty Images
A premium is the amount you pay an insurer each month to participate in a health plan.
It’s perhaps the most transparent and understandable cost element of a health plan — the equivalent of a sticker price.
The average premium paid by a single worker was $1,401 a year — or about $117 a month — in 2023, according to overview about employer-sponsored health coverage from the Kaiser Family Foundation, a nonprofit organization. Families paid $6,575 a year, or $548 a month, on average.
Your monthly payment may be higher or lower depending on the type of plan you choose, the size of your employer, your geography and other factors.
Low premiums don’t necessarily translate to good value. You may be in for a big bill later if you see a doctor or pay for a procedure, depending on the plan.
“When you’re shopping for health insurance, people naturally shop like they do for most products — on price,” Karen Politz, co-director of KFF’s patient and consumer protection program, told CNBC.
“If you’re shopping for tennis shoes or rice, you know what you’re getting” for the price, he said. “But people really shouldn’t just shop around, because health insurance is not a commodity.”
“The plans can be quite different” from each other, he added.
Luis Alvarez | Digitalvision | Getty Images
Many workers also owe a copayment — a flat dollar fee — when they see a doctor. “Supplementation” is a form of cost sharing with health insurers.
The average patient pays $26 for each visit to a primary care physician and $44 for a visit to a specialty physician, according to KFF.
Patients may owe additional cost sharing, such as coinsurance, a percentage of health care costs that the consumer shares with the insurer. This cost sharing generally begins after you pay the annual deductible (a concept explained in more detail below).
The average coinsurance rate for consumers is 19% for primary care and 20% for specialty care, according to KFF data. The insurer would pay the remaining 81% and 80% of the bill, respectively.
For example: If a specialty service costs $1,000, the average patient would pay 20%—or $200—and the insurer would pay the rest.
Copays and coinsurance may vary by service, with separate classifications for office visits, hospitalizations or prescription drugs, according to KFF. Prices and coverage may also vary for in-network and out-of-network providers.
Selectstock | E+ | Getty Images
Rebates are another common form of cost sharing.
This is the annual amount a consumer must pay out of pocket before the health insurer starts paying for the services.
Ninety percent of workers with single coverage have a deductible in 2023, according to KFF. Their average annual deductible is $1,735.
Deductible grids with other forms of cost sharing.
Here’s an example based on a $1,000 hospital bill. A $500 deductible patient pays the first $500 out of pocket. This patient also has a 20% coinsurance and therefore pays another $100 (or 20% of the remaining $500 tab). That person would pay a total of $600 out of pocket for that hospital visit.
Health plans may have more than one deductible — perhaps one for general medical care and another for pharmacy benefits, for example, Pollitz said.
Family plans can also assess deductibles in two ways: by combining the total annual out-of-pocket costs of all family members and/or by subjecting each family member to a separate annual deductible before the plan covers the costs for that member.
The average deductible can vary widely by plan type: $1,281 in a preferred provider organization (PPO) plan; $1,200 in a health maintenance organization (HMO) plan. $1,783 in point of service (POS) program. and $2,611 in a high-deductible health plan, according to KFF data for individual coverage. (Details of plan types are described below.)
Rawstock | Moment | Getty Images
Most people also have an upper limit.
This is a limit on the total cost-sharing that consumers pay during the year — including co-pays, coinsurance and deductibles.
After you pay the maximum out-of-pocket amount for the year, “the insurer can’t ask you for doctor or pharmacy copays or hit you up for more deductibles,” Pollitz said. “That’s it; you gave your pound of flesh.”
About 99% of workers with single coverage are in a plan with a cap in 2023, according to KFF.
The range can be wide. For example, 13% of workers with single coverage have a coverage limit of less than $2,000, but 21% have one of $6,000 or more, according to KFF data.
Maximum limits for health plans purchased through an Affordable Care Act marketplace cannot exceed $9,100 for individuals or $18,200 for a family in 2023.
Health insurers treat services and costs differently depending on their network.
The term “in network” refers to doctors and other health care providers who are part of an insurer’s preferred network. Insurers sign contracts and negotiate prices with these in-network providers. This does not apply to “out-of-network” providers.
Here’s why it matters: Deductibles and limits are much higher when consumers seek care outside their insurer’s network — generally about twice as much as in-network, McClanahan said.
In addition, sometimes there is no limit at all on the annual cost for out-of-network care.
“Health insurance is really about the network,” Pollitz said.
“Your financial liability for going off the grid can be really, really dramatic,” he added. “It can expose you to some serious medical bills.”
Some plan classes do not allow coverage for out-of-network services, with a limited exception.
For example, HMO plans are among the cheapest types of insurance, according on Etna. Among the trade-offs: The plans require consumers to choose in-network doctors and require referrals from a primary care doctor before seeing a specialist.
Similarly, EPO plans also require in-network services for insurance coverage, but generally have more options than HMOs.
POS plans require referrals to see a specialist, but allow some out-of-network coverage. PIT plans generally have higher premiums, but have more flexibility, allowing for out-of-network visits and non-referral specialists.
“The cheaper plans have weaker networks,” McClanahan said. “If you don’t like the doctors, you may not have a good choice and you may have to go out of network.”
How to put it all together
Fatcamera | E+ | Getty Images
The budget is among the most important issues, Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California, told CNBC. He is also a member of the CNBC FA Council.
For example, would you struggle to pay a $1,000 medical bill if you needed health care? If so, a health plan with a higher monthly premium and lower deductible may be your best bet, Sun said.
Similarly, older Americans or those who need a lot of health care each year — or who anticipate an expensive procedure in the next year — may do well to choose a plan with a higher monthly premium but better cost-sharing.
Healthy people who generally don’t max out their health spending each year may find it cheaper overall to have a high-deductible plan, McClanahan said.
Consumers who enroll in a high-deductible plan should use their monthly premium savings to fund a health savings account, the advisers said. HSAs are available to consumers who enroll in a high-deductible plan.
“Understand first dollars and potentially last dollars when choosing your insurance,” McClanahan said, referring to upfront premiums and cost-sharing.
Each health plan has a Summary of Benefits and Coverage, or SBC, which presents basic cost-sharing information and plan details uniformly across health insurance, Pollitz said.
“I would encourage people to spend some time with the SBC,” he said. “Don’t wait an hour before the deadline to take a look. The stakes are high.”
Additionally, if you currently use a doctor or provider network that you like, make sure those providers are covered by your new insurance plan if you plan to switch, McClanahan said. You can consult an insurer’s in-network online directory or call your doctor or provider to ask if they accept your new insurance.
The same reasoning applies to prescription drugs, Sun said: Would the cost of your current prescriptions change under a new health plan?