The saying goes “the United States has the best health care in the world…if you can afford it.”
While there are many trends that are concerning from a personal finance standpoint, such as high cost of living and stagnant wages, the two issues on the forefront of my mind on a daily basis are student loan debt and the high cost of health care.
I’ve addressed student loan debt extensively on this blog, and even dedicated my entire second book to the issue. While I’ve addressed medical costs from time-to-time, it deserves much more attention due to the magnitude of the issue.
The high cost of health care, and the strain it puts on individuals and families, has been in the headlines for years not. Recently the CEO of GoFundMe told CBS News that one-third of all donations made on GoFundMe go towards health care costs.
When we think of health care more broadly in the United States, U.S. health care spending grew 3.9 percent in 2017, reaching $3.5 trillion or $10,739 per person. This equates to approximately 18% of the United State’s GDP.
At the end of the day all that matters to most people is how much they will have to pay for medical costs, and if they have the money available. But the broader industry can have a big influence on the cost of health care at an individual level, so it’s important to not overlook the greater system.
The Affordable Care Act, or Obamacare as most refer to it, accomplished one major thing: provided health insurance access to everyone. More importantly it made it so health insurance companies were unable to discriminate or price an individual policy based on pre-existing conditions.
Providing access is an important first step, but the messaging of the ACA wasn’t that it would simply increase access, the very name implied that it would also provide affordable health care. While the ACA does have built-in mechanisms to subsidize health insurance based on income, it’s undeniable that many of the policies are unaffordable to families. This has been a big topic in the personal finance space over the years, with many freelancers and entrepreneurs jumping at Health Sharing Ministries (which have their own issues and could arguably exacerbate the unaffordability of health insurance).
The ACA highlighted how expensive health care is. ACA plans with high deductibles, premiums, and out-of-pocket maximums, could still be losing millions for the health insurance companies that are providing them. Nothing highlights this more than UnitedHealth Group’s exit of the exchanges after losing $650 million in 2016. There were already complaints that plans were unaffordable, can you imagine an insurance company needing to price in over a half a billion dollars of additional revenue just to break even?
My reason in pointing out some of these dynamics in the health care system is that there is no magic solution that is going to all of a sudden make your health care super affordable and your medical costs low. With that in mind, it’s important to have a medical emergency fund.
The Rise of High Deductible Health Plans – and the Need for a Medical Emergency Fund
High Deductible Health Plans, or HDHPs, are becoming very popular. It’s common for an individual to have a deductible of $3k+ and a couple or family to have a deductible of $6k+, sometimes even reaching the $10k+ level. That means that an individual may have to foot $3k of a bill before insurance kicks in and covers any of the costs. It doesn’t end there, though. Out-of-pocket maximums can be $6k+ for an individual and $12k+ for a family. So even after insurance kicks in after a deductible is hit, there is still potential for more medical bills.
The logic behind this setup is that it gives consumers “choice” and forces them to shop around. This is partially true, and I will hit on that, but the reality is you can’t always shop around. An unexpected surgery or overnight hospital stay has a good chance of blowing through your deductible and possibly your out-of-pocket max as well. You don’t always have time to “shop around,” and even if you do your procedure may be so expensive that it doesn’t matter where you get it done.
That’s why it’s so important to prioritize building a primary emergency fund that covers all unexpected bills, and then once that’s established, build a secondary medical emergency fund. The secondary medical emergency fund should be built through a Health Savings Account, or HSA, because it comes with big tax benefits. We’ll dig into that shortly.
Strategies to Save Money on Medical Costs
Everything I’ve said up to this point was to prepare you for the inevitable: there are market forces behind health care, and the best way to protect yourself from a personal finance standpoint is to have cash set aside in emergency savings (I know, easier said than done). The way the system is set up today millions and millions of Americans are exposed to financial liability, and that’s even with health insurance.
With that in mind, let’s look at a few proactive ways to save money on health care.
Shop Around, When Possible
As I mentioned earlier, it’s not always an option to shop around. If you have an emergency you may need to go to the ER. If you have emergency surgery, you won’t have weeks to find the most cost-effective place to have it.
There are some select opportunities, though, to save money on medical costs by shopping around. For example, when I needed a CT scan I leveraged my insurance companies health care cost estimator to compare the cost at different facilities. The facility I was initially referred to by my physician would have cost more than a thousand dollars. Instead, I went to an imaging center where the cost was $350. Because I had a high deductible health plan and was still working through my deductible, I essentially saved $700+ with less than an hour of looking into costs.
This can be applied to many procedures that can be planned. For example, some low-cost surgical procedures can be done much cheaper at a surgery center compared to a hospital. Sometimes the amount differential can be as much as ten-to-one, meaning a procedure costing $15,000 at a hospital could be as low as $1,500 at a surgery center. Again, this assumes you are not going to pay more than your deductible or out-of-pocket max, which may be the case with many surgeries and high-cost procedures.
Finally urgent care centers can provide significant savings, mainly if you are able to avoid the emergency room. This is a tough one because you obviously don’t want to avoid going to the emergency room if you truly need to. Urgent care centers can provide many of the same services, though, and do not require appointments. One example of this was when I was playing in an adult recreational soccer league. A freak accident happened where one of my teammates broke his leg. We went to an urgent care center instead of the emergency room and he was able to be treated essentially exactly the same, but at a lower cost.
Leverage Your Health Savings Account (HSA) Whenever Possible
Many who are young and healthy are missing out on a big opportunity to sock away money in their HSA, where it can grow tax-free through the investment portion of their account, and be taken out tax-free when used for qualified medical expenses. There are annual limits of $3,500 for an individual and $7,000 for a family, so the sooner you can start building up your balance the better.
As far as the tax savings, they can be summed up as:
- Put Money in Tax Free – You can contribute up to $3,500 as an individual or $7,000 as a family per year into an HSA. If you are 55+ at any point in 2019 you can contribute an extra $1,000. Those contributions are pre-tax dollars, meaning it shields those contributions from being factored into your taxes.
- Grow Money Tax Free – With an HSA you are typically required to keep somewhere around $2,000 as a cash balance. Once you get past that minimum benchmark, though, you can move money into the investment portion of your HSA. Similar to a 401(k) or an IRA, there will be a variety of mutual funds you can invest in. The gains on these investments are tax free, and you can shift the money back into the cash portion of your HSA at any time.
- Take Money out Tax Free – When you withdraw funds from your HSA for qualified medical expenses (think prescriptions, doctor bills, etc.) you are not taxed on the withdrawal. If you withdraw money for non-qualified medical expenses, the amount will be taxed as regular income and incur a 20% penalty. An important point on this: No withdrawals from an HSA after age 65 are penalized, though withdrawals for non-qualified medical expenses are taxed as regular income, meaning withdrawals are treated similar to a standard IRA.
While an HSA may not save you money on medical costs the same way that comparing the cost of something at Target or Amazon would, the tax savings do add up over time. I call an HSA a “retirement account on steroids” because it gives you the added benefit of being able to withdraw at any time for qualified medical costs tax-free, while also giving you the same tax benefits of a standard IRA or 401k in retirement.
Again, this doesn’t exactly “save” you money on medical costs, but having enough money in an HSA to cover your deductible and/or out-of-pocket maximum can help you make better decisions about your health care. Having the money set aside helps you take the cost out of the equation, whereas someone may delay going to a doctor or having surgery if they know it will cost them hundreds or thousands of dollars that they don’t have at the time.
One additional thing I could add is to live a healthy lifestyle. While this advice is obviously good and appropriate, it’s overdone and sometimes rubs me the wrong way. Many illnesses are essentially impossible to prevent, and all the running and eating of veggies and fruit aren’t going to change it. For example, I have had asthma and allergies my entire life and despite taking countless measures such as not opening windows in the Spring/Summer/Fall, running air purifiers, etc. it hasn’t prevented the conditions from causing me to require surgeries and expensive immunotherapy.
So yes, obviously it will benefit you to live a healthy lifestyle, but you already know this.
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