"A key decision: How much flexibility do you want? That will determine whether you favor managed care or indemnity insurance."
How to Keep Medical Costs from Derailing Your Finances
On this one, there's no argument. We are often reluctant to buy disability, long-term care and life insurance. But when it comes to medical insurance, our reluctance disappears.
We all have a pretty good idea of what doctors and hospitals can cost—and we are anxious for a safety net and the peace of mind that comes with it.
But where should we turn for that safety net? Here's how to help make sure you have coverage between now and age 65, when Medicare kicks in. Keep in mind that the 2010 health-reform law will transform the market for health insurance over the next few years, so you will want to keep tabs on the changes, especially if you don't get insurance through your employer. Some of the provisions that take effect in 2010 are listed in the accompanying box.
Working for benefits
Many folks get healthcare benefits through their employer. Unfortunately, such benefits are becoming increasingly expensive, with many companies asking employees to pick up a larger share of their healthcare costs. Frequently, companies are also offering a variety of health plans, each with different benefits, different degrees of flexibility—and often widely differing costs.
Picking among these plans can mean making the sort of judgments you have to make when purchasing medical insurance on your own. A key decision: How much flexibility do you want? That will determine whether you favor managed care or indemnity insurance.
Health maintenance organizations and other managed-care companies typically cover a broad range of services, co-pays are low and deductibles, if any, are modest. The downside: You are limited in the hospitals and medical providers you can use and you need to receive authorization for medical services.
Indemnity insurance, also known as fee-for-service, offers more freedom. But these policies are often more expensive and coverage may not be as broad.
In between are plans that combine elements from managed care and fee-for-service. For instance, a plan might charge less if you use the plan's network of doctors and hospitals. You can, however, go out of network—if you're willing to pay the higher costs involved.
Going it alone
While many folks get coverage through their employer, lots of families aren't so lucky. Maybe you're self-employed or your employer doesn't offer medical insurance. Maybe you lost your job. Maybe you retired before age 65, so you need coverage between now and when you become eligible for Medicare.
If you're hunting for medical insurance on your own, much depends on state law. Some states have guaranteed-issue laws, which means companies can't refuse coverage based on your health. Some states insist that insurers charge everyone the same rate, a system known as a "community rating." Problem is, such rules mean high rates for those in good health.
Because state laws are so important, you might start your search by checking your state insurance department's Web site. Next, get a handle on policy prices by heading to some of the insurance Web sites and by talking to a local insurance agent who specializes in medical insurance. If you're a member of a professional association or some other membership group, check whether you can purchase coverage through the organization.
But whatever you do, make sure you have coverage. Remember, medical insurance doesn't just help pay bills. You may also benefit from the price discounts that insurers negotiate with doctors and hospitals.
As you analyze policies, look beyond the premium. For instance, a policy may have a modest monthly cost, but it may also come with a high annual deductible and a hefty co-pay for each doctor visit. Similarly, check on the breadth of coverage, which may be limited to hospital stays and doctor visits or which could extend to dental care, mental health and prescription drugs.
Sticking with the plan
Not sure what to buy? To give yourself time to shop around, see if you can continue your old employer's coverage by taking advantage of COBRA, named after the Consolidated Omnibus Budget Reconciliation Act.
Under COBRA, if you have just left your old company and it has 20 or more employees, the firm is required to let you—at your own expense—continue your group coverage for up to 18 months. You may be surprised by how much it costs to maintain your old employer's coverage—but, given the risks, you can't afford not to have some insurance.
What happens if your COBRA coverage ends and you can't get insurance elsewhere? Under the Health Insurance Portability and Accountability Act, if you have been covered by a group policy within the past 63 days, there has to be some healthcare option available in your state. Check with your state insurance department for more details. Be warned: You will likely pay steep premiums.
Catching a break
Suffering sticker shock? See if you can trim your medical costs by taking advantage of various tax breaks.
Your employer may offer a medical spending account, which you can fund with pre-tax dollars and then use to pay for unreimbursed medical expenses. If you are self-employed, you might be able to deduct your insurance premiums on your tax return. Meanwhile, even if you aren't self-employed, you may be able to use Schedule A of your federal-tax return to deduct those medical expenses—including insurance premiums—that exceed 7.5% of your adjusted gross income.
Another option: Consider a policy with a very high deductible. You can couple one of these high-deductible policies with a health savings account, which you can fund with pretax dollars.
Withdrawals from these accounts are tax-free, provided they are used for qualified medical expenses. Money that is unspent at the end of the year can be rolled over and used in subsequent years. You can even use the money for non-medical costs, though you will face income taxes and possibly tax penalties.
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A policy change may incur fees and costs and may also require a medical exam.
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