Five Questions to Ask about Individual Health Insurance

Whatever else might be said about individual health insurance, it is not easy to buy. You have to decide between companies, plans, deductibles. The choices are bewildering. Here are five questions to make the process simpler:

1. What can you afford? Insurance companies want you to make all your other choices first, and then consider cost, but it has to be the other way around. Health insurance should not put you into debt. To control costs, you can select a plan with a higher deductible—the amount you have to pay before the insurance takes over—higher co-payments, or fewer benefits. Make sure the risks you assume are limited, however. For example, agreeing to pay $2,000 in deductibles is a limited risk; it cannot exceed $2000. Accepting a limit on hospitalization and outpatient care is an unlimited risk, because the costs resulting from a serious illness or accident could far exceed insurance company’s limits.

2. Do you want to keep your doctor? If you have a doctor and/or a specialist you want to continue seeing, your choice of plans may be limited. With a managed care plan such as an HMO (Health Maintenance Organization), PPO (Preferred Provider Organization), POS (Point of Service), or IPA (Individual Practice Association), your doctor would have to be part of the network. If he or she is not in any network, you would have to consider an indemnity plan, sometimes called a “fee-for-service” plan. This type of plan allows you to go to any doctor, hospital, and specialist, but it has a high annual deductible. After the deductible is met, the individual health insurance plan will pay about 80 percent of the bill. You are responsible for the other 20 percent. In addition, indemnity plans set “usual and customary” rates for treatment. If your doctor charges more than the usual and customary rate, you pay the difference.

3. What medical conditions do you have? If you have a chronic medical condition such as asthma or diabetes, you will want to compare coverage to see how the insurance company will handle your condition. If your condition has been diagnosed or treated before joining a new plan, it will be considered “pre-existing.” Under the Health Insurance Portability and Accountability Act (HIPAA), a pre-existing condition must be covered without a waiting period when you join group plan, provided you have been insured during the last twelve months. When buying individual insurance, however, the insurance company can place a waiting period on coverage related to the condition, or it can decline to cover you outright. Five states–Massachusetts, Maine, New Jersey, New York and Vermont—require insurance companies to make health insurance available to all people regardless of their health (guaranteed issue). Some other states offer high-risk individuals the opportunity to participate in insurance pools that provide coverage to people who have been denied insurance based on pre-existing conditions.

4. Do you take prescription drugs? If so, you will want to compare the drug benefits of the different plans. Some plans require you to meet the annual deductible before covering prescription drugs. Other plans do not require a deductible for medication. Most plans require you to pay part of the drug cost, known as a co-payment, or co-pay. The amounts of the co-pay can vary widely from plan to plan. Some plans place annual limits on their drug benefits; others do not. Most plans adjust the co-pay amounts, depending on whether you use generic drugs, brand-name drugs that are preferred by the plan, and name brand drugs that are not preferred.

5. Can you use a tax break? Health insurance premiums are not tax deductible, but the money you spend to meet your deductible can be sheltered not only from income taxes, but also from Federal Insurance Contributions Act (FICA) tax. You can deposit up to $2,850 for an individual and up to $5,650 for a family per year into a tax-free federal Health Savings Account (HSA). Since contributions to an HSA are exempt from withholding taxes (as high as 9.3% for state income tax, 28% for federal income tax, 7.65% for FICA tax), HSA dollars have up to 44.95% more buying power than after-tax dollars do. Medication that would cost $1000 in after-tax dollars could cost as little as $550.50 in HSA dollars. HSA contributions roll over from year to year, and the funds remain untaxed as long as they are used for medical expenses or are withdrawn for any purpose after age 65. HSA funds can be invested, and the earnings are tax-deferred. To open an HSA, a person must enroll in a High Deductible Health Plan (HDHP). An HDHP requires a minimum deductible of $1,100 for an individual and $2,200 for a family. The high deductible keeps the monthly premiums low. The lower monthly costs and the tax-sheltered out-of-pocket expenses combine to make an HDHP plan the best option for many people.

By asking these five questions, you will be able to narrow down your choices, making the selection of a plan much simpler.