Planning for healthcare costs in the new year
The beginning of a new year is a great time to budget for upcoming expenses, including those for healthcare. Considering that average annual healthcare expenses for American families range from $5,0001 to nearly $20,000/year,2 planning ahead can make a significant difference in your overall financial picture.
Understand your healthcare costs
Several factors go into how much you'll spend on healthcare in the coming year. When budgeting, be sure to account for each of the following:
- Premium, or the amount it costs every month to have health insurance.3 If you have insurance through your employer, they will likely pay at least part of the premium.
- Deductible, or the amount you pay for covered services before your insurance pays.4
- Copay, or the amount you pay for a covered service after you've paid your deductible.5
- Coinsurance, or the percentage of a covered service you're responsible for after you pay your deductible.6
Take a look at your insurance plan's annual out-of-pocket maximum, which is the total you'll have to spend on your deductible, copays, and coinsurance for the year. The out-of-pocket maximum doesn't include your premium.7 Multiply your monthly premium payment by 12 and add the out-of-pocket maximum to discover the high end of what you might owe. Just remember that you might spend more than this amount if you get services from doctors or in facilities that are out of network, or if your plan doesn't cover those services (such as chiropractic or vitamins and supplements8).
Examine previous healthcare spending
It's impossible to know exactly how much you'll spend on healthcare in the coming year. For planning purposes, however, look at how much you spent in the current year and the year before. Go through your medical receipts and ask your doctors and pharmacies for a history of payments. This will give you a rough idea of what the new year might bring.
If you're planning to get a particular screening (such as a colonoscopy), research the cost of that test and include it in your estimate. Think about what life changes will impact your healthcare spending, such as a pregnancy9 or becoming self-employed.10
Research cheaper alternatives
You can sometimes find less expensive options for health services. For example, with non-life-threatening issues, consider going to an urgent care or retail health clinic, both of which could be more cost-effective than going to your hospital's emergency department.11 Telemedicine, which enables a patient to access a practitioner through video or telephone, is an increasingly popular option that can cost less than going to the doctor.12
Save on taxes with a health savings account
Health savings accounts, or HSAs, can lower your overall healthcare spending.13 They are a special kind of savings account that allow you to contribute pre-tax money to pay for future expenses such as deductibles and copays. Your HSA balance rolls over year to year, and it never expires. If you take out money from your HSA before age 65 for expenses not related to healthcare, you'll pay a 20% penalty.14
You must have a high-deductible plan to use an HSA. If your employer offers a high-deductible insurance plan with an HSA, check to see if they contribute some funds to your account. If your plan doesn't have an attached HSA, you might be able to open one through a bank or other financial institution.
For the best control of your future healthcare expenses, consider setting aside the amount of your out-of-pocket maximum. This can help you be ready to handle whatever comes your way for healthcare spending in the new year.
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1Matthew Frankel, May 8, 2018, "How Does the Average American Spend Their Paycheck? See How You Compare," USA Today
2Ester Bloom, June 23, 2017, "Here's How Much the Average American Spends on Health Care," CNBC, https://www.cnbc.com/2017/06/23/heres-how-much-the-average-american-spends-on-health-care.html
3Healthcare.gov, "Glossary," s.v. "premium."
4Healthcare.gov, "Glossary," s.v. "deductible."
5Healthcare.gov, "Glossary," s.v. "copayment."
6Healthcare.gov, "Glossary," s.v. "coinsurance."
7Healthcare.gov, "Glossary," s.v. "out-of-pocket maximum/limit."
8"How to Estimate What You'll Spend on Healthcare," WebMD
9"Which Changes to Report to the Marketplace," Healthcare.gov
10Hannah Levy, March 21, 2017, "How to Budget for Healthcare," Amino
11Sara Heath, September 19, 2017, "What Is the Difference Between Urgent Care, Retail Health Clinics?" Patient Engagement Hit
13Healthcare.gov, "Glossary," s.v. "Health Savings Account (HSAs)"
14Allison Schrager, May 2, 2018, "The Health Savings Account (HSA) Explainer You Never Knew You Needed," Quartz, https://qz.com/1267011/the-complete-guide-to-health-savings-accounts-hsas/