How to avoid paying too much for the protection you need
Published: September 2013
On Oct. 1, America’s health care system will undergo its biggest change since Medicare’s arrival almost 50 years ago when the major provisions of the Affordable Care Act start kicking in. And although millions of people who have been without health insurance should finally be able to get it—under the law, everyone must have some kind of health coverage as of Jan. 1, 2014, or pay a small fine—the system will remain just as complex and unforgiving as it is today. That puts you at risk of being left without adequate coverage when you need it most. To avoid unnecessary fees, penalties, and just plain bad deals, here’s our list of health-insurance don’ts.
1. Assuming because you’re healthy you don’t need health insurance
If you get sick and then decide to buy health insurance from plans made available as part of the Affordable Care Act, you might not be able to, at least not right away. You’ll only be allowed to purchase individual health insurance during the initial open enrollment period—Oct. 1, 2013, through March 31, 2014. In subsequent years, open enrollment will run from Oct. 15 through Dec. 7 for coverage that begins Jan. 1. The best place to buy is your state’s Health Insurance Marketplace, a new kind of virtual insurance agency where you can compare plans and possibly qualify for income-based subsidies. The marketplaces open for business Oct. 1.
So if you decide to thumb your nose at the 2013-14 deadline and on April 1 are hit by a bus, you’ll have to wait nine full months to get health insurance. And needless to say, it won’t retroactively pay for care you received when you didn’t have it. Don’t count on free emergency care, either. Although an emergency room will take care of you if you require urgent attention, even if you don’t have insurance, it will send you a bill afterward—most likely a very large one, and might make aggressive efforts to collect payment.
In certain circumstances, you’ll be allowed to purchase individual insurance outside the open enrollment period. Losing insurance because of a change in employment, or moving away from your health plan’s service area, are examples of such “qualifying events.” But suddenly needing expensive health care because you are sick is not.
There is no free lunch in health insurance, but there is a menu of payment options to choose from. You can pay for your care up front, in the form of a higher premium, or later, in the form of a higher co-payment, a bigger deductible, or both. Neither form of payment is inherently better; it depends on your personal situation and preferences.
For instance, if you’re in generally good health and have an adequate financial cushion, you might save money with a lower insurance premium and higher cost-sharing. But if you have ongoing medical needs, you might do better with a higher premium and lower cost-sharing. Of course, you take a risk if you pick a plan with a very high deductible and co-pay and then can’t afford your share of expenses if you do happen to get sick.
One little-known benefit of the health care law is that plans sold to individuals can’t impose more than $6,350 in annual cost-sharing in 2014, no matter how low the premiums. Today it’s not uncommon for plans on the individual market to have deductibles of $10,000 or more.
(You're legally entitled to receive a Summary of Benefits and Coverage [PDF] outlining your choices. If you don't have one, ask your company's insurer or benefits manager for a copy.)
3. Carelessly going out of network
One of the big selling points of a preferred provider organization (PPO) over a health maintenance organization (HMO) is that if you have a PPO, you can opt to get your care from doctors or hospitals that don’t participate in the plan’s network, whereas with HMOs you can’t.
But the fine print can cost you if you’re not careful. For instance, if your PPO says it will pay 60 percent of the cost of out-of-network care (compared with, say, 80 percent for in-network care), it will pay 60 percent of whatever it determines is a “reasonable” price for the service—not 60 percent of whatever the doctor decides to charge. So if his fee is $2,000 and your insurance company decides that the fair price is $1,000, it will reimburse you only $600, leaving you on the hook for the other $1,400.
The way around that is to avoid going out of network except when you absolutely can’t find an in-network provider. The only time that won’t work is when you receive non-network care involuntarily, such as during a trip to an emergency room of an in-network hospital where the doctor taking care of you isn’t in the network, or when you have surgery and the anesthesiologist doesn’t participate in your plan.
Strictly speaking, you have no legal recourse but to pay those bills. Yet in practice, polite but persistent complaints to the provider or your insurer can often succeed in reducing the price.
Where people get in trouble is when they, or a spouse, continue working past their 65th birthday. As long as you or your spouse works at a job with health benefits and there are 20 or more employees, you will probably get little or no benefit from being on Medicare. That’s because Medicare pays secondarily to your employer’s group plan.
But once you (or your spouse) stops working and you lose your insurance—even if you can continue with the employer plan through COBRA or some other retiree benefit—you must switch to Medicare as your primary insurance. You need to sign up within eight months after you stop working. If you don’t and your private plan finds out, it can refuse to pay for your health care.
It gets worse. If you don’t sign up for Medicare when you should, you’ll be hit with a permanent 10 percent premium surcharge for every year you should have been on Medicare but were not.
The surcharge usually doesn’t matter with Part A, which covers hospital care, because there’s usually no premium. But Part B, which covers doctors and most other outpatient care, costs $104.90 a month (more for higher-income retirees).
There’s a similar late-enrollment penalty for Part D, the Medicare drug benefit, but it’s calculated differently: There’s a 1 percent premium surcharge for every month you could have signed up but didn’t.
Worse still, if you wait too long, you won’t be able to enroll in any part of Medicare until the next general enrollment period, which takes place annually from January through March, and your coverage won’t start until July 1. The penalty clock will be ticking the whole time.
5. Picking the wrong Medicare drug plan
Only 5 percent of Medicare beneficiaries who choose a stand-alone Part D drug plan are covered by the plan cheapest for them, according to a study in the October 2012 issue of Health Affairs. The average beneficiary paid $368 more in premiums and drug costs than he would have if he had chosen the cheapest plan for his specific assortment of prescriptions. And more than a fifth overspent by at least $500 a year.
The biggest mistake people make is picking a plan that pays for generic drugs in the coverage gap known as the doughnut hole, according to study authors Chao Zhou and Yuting Zhang from the University of Pittsburgh. People wound up paying hundreds of dollars more for that feature than they got back in benefits.
Even if you went through the exercise of finding the cheapest plan last year, it’s smart to do it again during the open enrollment period—Oct. 15 to Dec. 7 for 2013. Drug plans change their preferred drug lists and costs may change as well. So last year’s good deal may no longer be your best bet.
It also pays to review your Medicare Advantage options every year. You may be able to find a plan with a higher quality rating at a lower cost. That’s especially important nowadays, because Medicare gives plans with higher-quality ratings (that is, with four or five stars) more money to spend on their members—in the form of lower premiums or more services—than it gives lower-rated plans.
To see your full range of choices, ignore the brochures cluttering your mailbox because they won’t give you the full picture of your options. Instead, go straight to medicare.gov and click on the yellow oval that says “Find health & drug plans.” Follow the simple online instructions to compare all Medicare Advantage and Part D plans available in your area.
6. Not taking advantage of flexible-spending accounts
A flexible-spending account lets you set aside money tax-free from your paycheck to pay for medical expenses not covered by insurance, such as deductibles and co-payments, as well as dental care, eyeglasses and contact lenses, and some alternative treatments.
Contributing to an FSA will also reduce your taxes. Say you have a taxable income of $75,000 a year and taxes claim 20 percent, or $15,000. If you put aside $2,500 in an FSA, your taxable income will be reduced to $72,500 and your taxes will be cut by $500, from $15,000 to $14,500. The higher your tax bracket, the greater the benefit.
Those advantages remain despite two changes in FSAs due to the health-reform law. You can no longer use money in your FSA to pay for over-the-counter drugs unless you get a prescription for them from your doctor. And the maximum amount you can set aside is capped at $2,500 for 2013 and will rise by the annual general inflation rate each year after that. Previously, employers set the cap, typically up to $5,000. Keep in mind that FSA funds don’t carry over year to year, so you must use the total amount you set aside or lose it.
7. Failing to use your insurer’s preferred pharmacy or mail-order service
Some commercial and Medicare Part D plans have negotiated deep discounts with specific mail-order and retail pharmacies. For example, people with Humana’s Walmart-Preferred Rx Plan can get prescriptions for select generic high-blood-pressure drugs for only a penny at more than 4,000 preferred pharmacies, including Neighborhood Market, Sam’s Club, Walmart, and Walmart Express. Other generics cost as little as $1 a month after a deductible.
People who have a Medicare Advantage plan with Part D coverage through United Healthcare can get some prescriptions for as little as $2 at Kroger, Target, and many other pharmacies. Aetna has partnered with CVS pharmacies to offer a special Medicare prescription drug plan: a $2 co-pay for preferred generic prescriptions and a $5 co-pay for nonpreferred generics. Other pharmacies are available in the network, although higher costs may apply.
And if you take a generic drug regularly for a chronic condition such as diabetes or elevated cholesterol, you might get an even better deal through mail-order. The Humana plan described earlier has little or no co-pays (after a deductible) on generic drugs ordered by mail.
8. Not keeping young-adult children on your insurance
Under the health-reform act, you can now keep children on your insurance up to their 26th birthday, even if you don’t claim them as dependents on your tax return or they are no longer in school or living with you. Your workplace can’t charge a different premium for your adult children than it does for younger children. And eligibility isn’t based on their living circumstances—they can stay on your insurance even if they get married. They can also go on and off your insurance as many times as needed.
There are a couple of caveats, though. If you’re retired, you might not have the option of keeping your children on your insurance. The law doesn’t require retiree-only plans to cover adult children of beneficiaries. And Medicare doesn’t cover any dependents, period, including spouses.
And if your workplace charges an extra premium for each added dependent (that’s allowed), and your young-adult child is living and working independently, it may be cheaper for her to purchase individual coverage on her state’s health-insurance marketplace, especially if she earns less than about $46,000 a year and therefore qualifies for a subsidized premium. It costs nothing to check, in any event.
Paying for medical and drug bills is the most common financial problem Americans report having—even more than missed mortgage payments, job loss, and home foreclosure, according to the 2013 Consumer Reports Best Buy Drugs Prescription Drug Tracking Poll.
Best Buy Drugs is a free Consumer Reports project that evaluates the effectiveness, safety, and cost of common drugs to help you find the best value for your health care dollar.
Editor's Note: This article appeared in the October 2013 issue of Consumer Reports Money Adviser.
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