Planning for out-of-pocket costs a critical component of health plan affordability

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Comparing health plans can be difficult. With so many variables in play, many people focus on two amounts: the amount they will need to pay each month to maintain their coverage (the premium) and the amount they will need to pay before the insurance will begin covering major medical expenses (the deductible). However, the maximum amount an insured is responsible for paying out of pocket in a year (the out-of-pocket limit, or out-of-pocket maximum) is also a critical component of assessing plan affordability.

The most important reason to have health insurance is to protect oneself from large medical bills that result from a severe illness or injury. Before the Affordable Care Act, plans had wide latitude to set their annual maximum out-of-pocket limits, as well as the maximum amount the insurer would pay under the policy. This forced many people to declare bankruptcy at the time they needed their coverage the most. In 2005, a Harvard University study found that over half of all bankruptcies were caused by medical bills, and that most of the people who filed for bankruptcy due to medical bills had health insurance.

Following ACA’s reforms, the maximum a 2015 plan can require an insured to pay is $6,600 for individuals and $13,200 for families. Paying these bills will be a challenge for many middle class families, but it can be done with appropriate planning and saving. Even more at risk of high bills are people covered by “grandfathered” health plans that were in effect before the health reform law was passed and do not have to meet the latest requirements.

One family with this type of plan was recently profiled by Guy Boulton in the Milwaukee Journal Sentinel. The Dufek family was covered by a health plan with a $4,000 family deductible and a $10,000 limit on out-of-pocket hospital expenses. Even though the family had a health savings account, they struggle to pay bills arising from a complex back surgery.

This story underscores the importance of looking at out-of-pocket costs when comparing plans, and also planning to be able to meet these limits in a worst-case scenario. Health benefit consulting firms like Mueller QAAS can help employers educate their employees on the benefits of tax-advantaged funding strategies. Employer or employee-funded options such as Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and Flexible Spending Arrangements (FSAs) can be used to help employees prepare to meet their out-of-pocket limits. We can also help employers evaluate their health plan options and determine if it makes sense to offer a plan with a lower out-of-pocket limit and higher premium, or select a plan with lower up-front costs.

Of course, finding the right answer to these issues will depend upon the needs and resources of your employee population and other factors. But it is critical for employers and employees to carefully consider these factors so that your health insurance plan truly protects your employees and their families.

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