Financial Makeover: Health Insurance Costs

— Q U E S T I O N: I am a self-employed consultant and so I have to purchase my own health insurance. My business has suffered some setbacks recently and I'm not bringing in as much income as I did in the past. But health insurance rates keep rising and I'm getting killed with premiums that are nearly $600 each month and rising fast. My wife talks about getting a job that offers health insurance so that we can stop paying premiums out of our own pocket. We'd prefer that she not have to go back to work, but it may be the only way since if insurance costs keep going up we'll be forced to drop our current coverage. We also sometimes think about just going without health insurance because we rarely see the doctor anyway, but we know that's not a good idea.

— Michael

A N S W E R:

Michael and his wife are feeling the pinch of rapidly rising health insurance premiums, which run nearly $600 each month and consume a significant portion of Michael's consulting income. Millions of Americans face similar concerns as rising insurance premiums are forcing many companies, especially smaller ones, to ask employees to accept a larger portion of health insurance costs. Self-employed people like Michael are especially vulnerable since they bear the entire cost of health insurance rate increases.

Unfortunately, some people faced with this dilemma simply drop their health insurance coverage entirely, which creates an enormous financial exposure in the event that a person becomes seriously ill. Congress recognizes this problem and responded late last year with a solution that, while definitely not perfect for all people, begins to address the issue of skyrocketing insurance costs.

High-Deductible Health Insurance

Many economists believe that one of the main reasons behind rapidly rising health care expenses is that most consumers are not connected with the true cost of the care they receive. Why should consumers care about how much health care they use, or from whom, or at what cost, if an insurance company pays almost the entire bill? If consumers cover a material portion of their own routine medical care, these economists say, they'll have a financial incentive to economize their own health care spending by seeking lower-cost options, avoiding unnecessary treatment, and maintaining a healthy lifestyle.

This theory led to the creation of high-deductible health insurance policies. Unlike traditional insurance, where the insured pays a small office visit co-pay and perhaps a $500 annual deductible, high-deductible insurance features a high annual deductible of between $1,000 and $2,600 for individuals, or $2,000 to $5,150 for families.

The tradeoff is that high-deductible insurance is much less expensive than low-deductible insurance. For example, Michael and his wife are paying $600 each month for a low-deductible health insurance plan. They could replace this costly coverage with a $5,150-deductible family insurance policy that costs about $300 each month, for a premium savings of $300 each month, or $3,600 annually!

Health Savings Accounts

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