I’ve reviewed a lot of health insurance plans.

Whether it’s on Marketplace or in your employee handbook, some health insurance options are great and some are.. sad.

But one thing is universal: no one understands them.

And why would you? You have better things to do and the plans are overcomplicated and riddled with confusing acronyms.

But health insurance, for some of us (hi self-employed), is our largest recurring cost.

And for anyone who has a goal of early retirement or self-employment, health insurance comes up again and again as one of the largest obstacles to overcome.

The first step in overcoming this obstacle is to analyze your options, understand the costs, and understand your coverage.

The second step is to plan for it.

So let’s dive in.

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Your Guide to Health Insurance

Your Coverage

We will cover 3 common plans:

• PPO
• HMO
• HDHP

1) PPO (Preferred Provider Organization) plans have the most flexibility.

You are not required to have a referral from your Primary Care Physician to see a specialist.

So if you have an injury and want to head straight to the physical therapist?

You’re good to do so.

You can go in- or out-of-network, but out-of-network will still be more expensive.

But all of this flexibility is not free:

PPO plans tend to have higher premiums.

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2) HMO (Health Maintenance Organization) plans have less flexibility.

You typically are required to have a Primary Care Physician (PCP) on file and are required to go to them first to get a referral to see a specialist.

Out-of-network is not covered (unless you have a true medical emergency).

But with less flexibility comes a cheaper plan (lower premiums).

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3) HDHP (High Deductible Health Plan)

Technically a HDHP can be a PPO or HMO (or POS or EPO, but we won't get into those today).

The defining characteristic is found in the name: you will have a higher deductible.

There are two main benefits with this type of plan:

1) Lower premiums, and

2) They are typically paired with a Health Savings Account (HSA), which helps save on taxes.

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Your Costs

Most people have no idea what they’re on the hook for when they go to the doctor.

Younger me would head to the doctor with fingers crossed hoping my trip would be covered.

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To avoid surprises and familiarize yourself with your plan, understand these terms:

Premium: this is the amount you pay (usually monthly) to have health insurance.

Unfortunately, your expenses may not stop there.

Deductible: this is the fixed dollar amount you must pay every year until insurance steps in to start covering non-preventative services. Oftentimes, your insurance will cover preventative services even before your deductible is met.

But once I meet my deductible, my expenses are covered, right?

Maybe!

But also maybe not..

Copayment: a fixed $ amount you pay for services after the deductible is met. Your insurance will cover the rest.

Example) $20 copayment to see your PCP, $30 to see a specialist

If your PCP visit is $200, you pay $20 and your insurance pays $180.

Coinsurance: a % you pay for services after the deductible is met.

Example) You pay 20% for all services, insurance covers 80%.

As you can probably guess, not as good a deal as a copayment.

Now what happens if you have a $100,000 medical expense and have a 20% coinsurance?

Are you on the hook for $20,000?

No, thankfully, the insurance should step in at a certain point to actually, finally, cover 100% of expenses.

This is where Out of Pocket Maximum (OOPM) enters the picture.

OOPM is the most you will have to pay in a plan year across your:

• Deductibles
• Coinsurance
• Copay

for in-network costs (yes, out-of-network is still not covered in most cases).

Your premiums are not included in calculating your OOPM.

After you hit your OOPM, your insurance covers 100% of the costs.

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Now, it's important to calculate your potential total healthcare costs in one year.

This way you can save for it and be ready in a worst-case scenario.

Example)

You have a standard PPO plan.

Your premium is $500/month → $6,000/year.

Your deductible is $2,200 for family in-network costs.

Your coinsurance is 20%.

Your OOPM for family is $12,500.

Let’s find your max cost in one year.

The formula is simple = Premium + OOPM

So $6,000 + $12,500 = $18,500

$18,500 is the most you could spend on health insurance in one year.

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Health Accounts

This analysis would not be complete without considering the benefits of health accounts that might be offered to you.

This gives you the option to pay for health expenses pre-tax.

A Flexible Spending Account allows you to put money in pre-tax to spend on medical expenses throughout the year.

But it is a use it or lose it account.

You have to use the money in your plan year or say goodbye to it.

So plan carefully here and be sure not to overfund it.

Note: some plans do allow you to roll over a small amount to the next year (up to $610).

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Now everyone clear the way for the Health Savings Account.

If you follow me on Twitter, ever listened to me on a podcast, or interacted with me IRL there is a good chance you know about my affinity for HSAs.

An HSA allows you to:

• Send money in pre-tax.
• Grow the money tax-free.
• Come out tax-free for qualified medical expenses.

And this account is portable: you will never lose the funds.

The maximum contribution into this account for 2023 is $3,850 (individual) and $7,750 (family).

For 2024 it is $4,150 (individual) and $8,300 (family).

Access to the HSA does require a HDHP (mentioned earlier).

Now, if you have access to the HSA, you should consider it when calculating your total potential health costs in one year.

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Example) You are in the 32% tax bracket and looking at an HDHP with an HSA:

Your premium is $300/month → $3,600/year.

Your deductible is $3,300.

Your coinsurance is 30%.

Your out-of-pocket maximum is $17,500.

Now, we adjust the previous formula a bit to consider tax savings.

Max cost = Premium + OOPM - Tax Savings

Tax Savings = $7,750 (max family contribution) x 32% = $2,480

So

$3,600 (premium)

+$17,500 (OOPM)

-$2,480 (tax savings)

= $18,620

Now, the two plans are more comparable in cost when you consider tax savings

$18,500 for the PPO vs. $18,620 for the HDHP

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Save

Now, that we’ve calculated total costs, we need to plan for it.

Take your max costs in one year and place them into your emergency fund or a separate savings account.

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Final Note

Do not opt for the HDHP if it will make you less likely to go to the doctor.

When planning for health costs, medical care should always be priority #1.

There are no savings worth neglecting your health.