Healthy for life: Budgeting for health care expenses

Medical costs can be unpredictable, so it pays to plan ahead. Learn how much money you can save with the right budget.

How do I estimate my health care costs?
How can comprehensive health insurance help me financially?
How can short-term insurance help me financially?
How can supplemental insurance help me financially?
How can I save money for medical expenses?
How much money do I need to save for medical expenses?

Budgeting for health care expenses can be tricky. You want to have money set aside if you need to pay for care due to an unexpected accident or illness. But it’s tough to predict what will happen and how much it will cost.

How much you end up spending out of pocket each year will depend on things such as your age, health, health insurance policy, income and location.

While you can estimate what you might need for monthly health care premium (bill) payments, doctor visits and prescriptions for the year, there are some unpredictable medical events that you can’t always plan for. A cancer diagnosis, heart attack or stroke could cost you tens of thousands of dollars, even with insurance. How can you prepare for something like that? We’re here to help.

Below, find out ways you can budget for medical expenses.

Looking for different types of health and supplemental insurance? Learn more about available insurance plans now, or call a licensed insurance agent at 1-844-211-7730 to discuss your options.

How do I estimate my health care costs?

A first step to budgeting for your health care expenses is to know what care you and your family may need and how much you typically spend on health care. According to David Anderson, research associate at Duke Margolis Center for Health Policy in Washington, D.C., you need to consider:

Whether you have any medical conditions or specific needs, such as knee pain or the desire to get pregnant, that might require regular health care
The current health of everyone in your family
What you’ve spent the past few years on health care

If you have a chronic medical condition (or conditions), it may be easier for you to predict your medical expenses for the coming year than it is for people without medical conditions. If you receive care often, you may have a history of expenses to look at as a starting point.

“Most people, thankfully, are not predictably and chronically ill,” says Anderson. But everyone should track medical expenses from year to year. One way to do this is by signing into your online account with your health insurance company. From there, look for your explanations of benefits. These statements lay out what your health care provider charged, what your insurance paid and what you paid.

If you didn’t receive medical care last year, you can still estimate what you might need this year. Are you hoping to start mental health care or get pregnant, for instance? If so, you may need to budget more than someone anticipating only an annual checkup and a couple of dental cleanings.

Of course, you’re really only estimating based on medical care that you may or may not receive. But even guessing what you might need can help you make sure you have the right health insurance when you need it the most.

Looking for a way to get health insurance? Enter your ZIP code to search available plans, or call a licensed insurance agent at 1-844-211-7730.

How can comprehensive health insurance help me financially?

Health insurance is an important tool for saving money on medical expenses. If you don’t have health insurance, you have to pay all your medical expenses out of pocket. That can be a hefty sum if you happen to get sick or injured.

Example: If you break a leg, it can cost you as much as $7,500, and the average cost of 3 nights in a hospital is $30,000. A major diagnosis such as cancer can cost hundreds of thousands of dollars.

Health insurance covers some or all of your medical bills, depending on your covered services. But you must pay a monthly premium to have insurance. Your premium may be higher or lower depending on your age, sex and where you live. Depending on your income, you might qualify for additional tax savings if you buy an Affordable Care Act (ACA) plan.

It’s tempting to just choose the plan with the lowest monthly premium when comparing health insurance options. But it’s important to understand what you get for that price. The premium is what you pay just to have insurance. You’ll also have some out-of-pocket expenses when you use your insurance. Typically, the higher your premium, the lower your out-of-pocket expenses (and vice versa).

How much will I have to pay out of pocket if I have health insurance?

When you get health care services, you’ll usually have to pay a copayment (copay) or coinsurance for the service. A copay is a fixed amount (say, $25) that you pay for a service. With coinsurance, your insurance will pay a certain percentage of the bill (say, 80%), and you’ll have to pay the rest out of pocket. You’ll also have to pay your deductible out of pocket each year before your insurance starts paying for certain covered services.

The good news is that many plans have a cap on how much you pay out of pocket each year. So even if something catastrophic happens, you’ll be protected financially. Your out-of-pocket maximum — or the most you’ll have to pay out of pocket in a plan year — may not include certain copays and doesn’t include your premium payments or service charges not covered by your plan. Be sure to check your plan documents for more information on what’s covered.

How to estimate your out-of-pocket expenses

Let’s say your premium is $400 per month and you have a $1,500 deductible, 20% coinsurance, a $10 copay for prescription medication and a $4,000 out-of-pocket maximum. This year, you know that you have a prescription you’ll fill each month, and you need 16 physical therapy visits that cost $300 each. Here’s what you might pay this year:

Your $400 premium x 12 months totals $4,800.
Your $10 prescription copay x 12 months comes to $120 for your medication.
Your physical therapy will cost $4,800 (16 sessions x $300). Your insurance won’t pay coinsurance on this until you’ve met your deductible. So, you’ll pay full price for the first 5 sessions ($1,500).
After your deductible is met, your insurance will pay 80% of the cost of each session. You’ll be responsible for the remaining 20%. That’s $60 per session for the remaining 11 sessions for a total cost to you of $660.

The total cost for the year for your premium payments, prescription medication and physical therapy comes to $7,080. But only the $2,160 you paid for your physical therapy goes toward your $4,000 out-of-pocket maximum (your premium payments and prescription copay don’t count).

So, let’s say you end up needing to get your appendix removed, and that costs $12,000. Your portion of the coinsurance would be $2,400, but you’ll need to pay only $1,840 to reach your out-of-pocket maximum for the year. After you have paid that maximum amount, your insurance will pay 100% of medical bills instead of 80%. That said, you may still have to pay out of pocket for certain copays.

These numbers are just examples. Check the plan you’re interested in for specifics. You can explore your insurance options now, or contact a licensed insurance agent at 1-844-211-7730 for more information.

How can short-term insurance help me financially?

Say you can’t set aside enough money to buy health insurance just yet. Maybe you’re between jobs or self-employed. One option you might think about is short-term medical insurance, which is underwritten by Golden Rule Insurance Company. This type of plan gives you coverage for a limited amount of time when you don’t have health insurance.

Note that short-term insurance plans don’t offer the same protections as comprehensive plans. That’s because the insurance company can do something called medical underwriting, during which they can pull your medical records and deny you coverage if you have a preexisting condition. They also don’t have to cover preventive care.

So, it’s a good idea to read the plan’s brochure before buying it.

How can supplemental insurance help me financially?

Even with health insurance or a short-term plan, you’ll still have to pay some out-of-pocket expenses. Your costs can be especially high if you get in an accident, become critically ill or have a particularly long stay in the hospital. A supplemental insurance plan can help cover costs in those situations.

These policies pay cash, usually directly to you (or the health care provider if your state requires it). You can use this cash to pay for medical bills or cover living expenses such as rent, childcare or groceries. This is particularly helpful if you can’t work because of an illness or injury. Some supplemental policies you might consider:

Accident insurance pays a fixed amount of money for certain injuries, such as burns, fractures and concussions. It will also pay for certain services related to your injury, such as an ambulance ride, x-rays, surgery or physical therapy. These plans cover only specific injuries and services, so be sure to read the policy documents to know what’s covered.
Critical illness insurance will pay a lump sum if you’re diagnosed with a qualifying illness, such as cancer, heart attack or stroke. But again, plans cover only a specific set of diagnoses, so check the policy documents to see what’s covered.
Hospital and doctor insurance pays a fixed amount for each service it covers, such as a doctor visit, prescription medication or hospital care. It’s usually paid to the provider, not to you.
Hospital indemnity insurance pays a fixed amount of money for each day you’re in the hospital.

Supplemental policies won’t offer you the same coverage as a traditional health insurance policy. That said, if you have more than 1 of these policies, you may get paid from each one for the same service. For example, if you have accident and hospital indemnity insurance, both policies might pay you for a hospital stay related to an injury.

It’s impossible to know when or if an accident or illness might happen. These supplemental policies provide an extra level of financial protection. Want to explore a supplemental health plan? Explore available plans now, or contact a licensed insurance agent at 1-844-211-7730 to discuss them further.

How can I save money for medical expenses?

Any traditional savings account could be used to save for medical expenses. You might consider contacting a financial planner or your bank about opening a separate account just for these expenses. But be sure it’s an account you can withdraw money from at any time without penalty.

How can I use a Health Spending Account?

You can also choose a tax-advantaged option for saving money for health care. If you have a qualifying High-Deductible Health Plan (HDHP), you can open a Health Savings Account (HSA). High-deductible plans typically have the lowest monthly premium, but your out-of-pocket costs can be higher if something happens. Setting aside money in an HSA can help you pay those expenses. If you’re insured through your job, your employer might open one for you. If not, a financial planner can help you open one.

So, what can you use your HSA to buy? Eligible expenses can include:

Birth control pills
Breast pumps
Copays
Dental and vision care
Eyeglasses and contact lenses
Home improvements (if their main purpose is medical care for you, your spouse or your dependent)
Medical bills
Medical conference (if the medical conference concerns the chronic illness of yourself, your spouse or your dependent)
Menstrual products
Over-the-counter medications
Prescription medications
Transportation
Travel for medical care
Weight-loss programs

HSAs have many tax advantages. “Contributions are not taxed. They receive tax-free growth on investments. And they’re not taxed when used for health care expenses,” says Ryan McCarty, C.F.P. He’s a financial planner at McCarty Money Matters.

“The HSA is more powerful than an IRA/401(k) when it comes to saving on taxes,” McCarty says. As such, he encourages people to contribute as much to their HSA as their budget allows. There are yearly limits to what you can contribute. In 2024, you can put up to $4,150 in an HSA. If you have a family, you can contribute up to $8,300.

HSA funds roll over from year to year, so if you don’t need it one year, you have it for the next. You can treat an HSA like a supplemental retirement account and save it for health care expenses in retirement. But you don’t have to wait until retirement to use it. You can use your HSA money anytime without penalty. But McCarty warns that you can use the money only for health care expenses.

“For people of generally good health, the combination of lower premiums [with a high-deductible plan] and tax-advantaged savings means that HSAs can be a viable choice,” says Anderson.

Questions about HDHPs or other types of health insurance? Explore your plan options now, or contact a licensed insurance agent at 1-844-211-7730 to discuss them further.

How can I use a Flexible Spending Account (FSA)?

Another savings option is a Flexible Spending Account (FSA). It’s a type of tax-advantaged account that can be used to pay for medical expenses. But it has some key differences from an HSA:

An FSA is available only on group insurance plans such as those you get through your employer.
Your employer owns the account, not you.
You could lose any money you don’t spend at the end of the plan year, depending on the rules your employer puts on the plan.

How much money do I need to save for medical expenses?

In an ideal world, everyone would have an emergency fund with enough to cover 3 to 6 months’ worth of expenses, McCarty says. It’s also a good idea to have money set aside for unexpected medical expenses. McCarty recommends having at least enough set aside each year to cover your deductible. If you can, it’s even better to save enough to cover your out-of-pocket maximum.

To really get the most bang for your buck, open an HSA if you qualify. “It technically costs you more to use traditional savings over your HSA for medical expenses, because of the tax savings,” McCarty says. Of course, the trade-off is that you might spend more on health care services under a high-deductible plan.

Sources:

Centers for Medicare and Medicaid Services. “National health expenditure fact sheet.” December 13, 2023. Retrieved from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet

Healthcare.gov. “How HSA-eligible plans work.” Retrieved from https://www.healthcare.gov/high-deductible-health-plan/hdhp-hsa-work-together/ Accessed March 4, 2024

Healthcare.gov. “Protection from high medical costs.” Retrieved from https://www.healthcare.gov/why-coverage-is-important/protection-from-high-medical-costs/ Accessed February 8, 2024

Healthcare.gov. “Using a Flexible Spending Account.” Retrieved from https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/ Accessed February 8, 2024

Healthcare.gov. “Your total costs for health care: premium, deductible and out-of-pocket costs.” Retrieved from https://www.healthcare.gov/choose-a-plan/your-total-costs/ Accessed February 8, 2024

Internal Revenue Service. “Publication 502 medical and dental expenses for use in preparing 2023 returns.” December 21, 2023. Retrieved from https://www.irs.gov/pub/irs-pdf/p502.pdf

Internal Revenue Service. “Publication 969 Health Savings Accounts and other tax-favored health plans for use in preparing 2023 returns.” January 5, 2024. Retrieved from https://www.irs.gov/pub/irs-pdf/p969.pdf

UnitedHealthcare. “Announcing 2024 IRS HDHP and HSA limits.” June 28, 2023. Retrieved from https://www.uhc.com/agents-brokers/employer-sponsored-plans/news-strategies/announcing-2024-irs-hdhp-and-hsa-limits

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