The Lawyer’s Guide to Health Insurance
Executive Summary
The end of the year is usually the beginning of open enrollment for employer benefits. To help lawyers with their employer benefit options, this guide helps explain some of the common insurance types they will see like HMO, PPO, and POS. There is also some information on the different costs of insurance like premiums, deductibles, coinsurance, and copayments. Finally, there are considerations lawyers should know regarding FSAs and HSAs. For many lawyers, their benefits brochure does not go into enough detail to explain these terms, even though they can have a significant impact on a lawyer’s finances. But making medical insurance choices without this understanding can leave lawyers without adequate protection or they may end up paying too much for too much insurance.
Without your health, you have no wealth.
Our health is one part of life that wealth cannot fix. Sure, the wealthy have greater access to healthcare, but even people with a high net worth can lose their freedom to health complications.
Health care costs are the number one cause of personal bankruptcy. One study in 2007 published surprising findings regarding bankruptcies related to medical expenses:
62% of all bankruptcies were medical expense related
Most medical debtors were well educated, owned homes, and had middle-class occupations
75% of medical debtors filing for bankruptcy had health insurance
These surprising statistics may cause you to question the effectiveness of health insurance. But that would be the wrong takeaway. While not all health insurance will protect you from bankruptcy, not having health insurance is more likely to lead to financial problems.
In 2007, roughly 85% of individuals had some sort of health insurance. That means that 15% of Americans without insurance accounted for 25% of bankruptcies related to medical expenses. Compared to 85% of Americans with health insurance accounting for 75% of bankruptcies related to healthcare costs. Essentially, it was twice as likely for an American without health insurance to file for bankruptcy due to medical costs than an American with health insurance.
Due to their high career earning potential, lawyers have even more wealth to lose from medical expenses. To protect themselves from high medical costs and bankruptcy, lawyers should ensure they have adequate health insurance.
So what should lawyers know when making health insurance decisions?
Health Insurance Considerations
The comprehensive health insurance plans offered by employers typically include medical, dental, and vision coverage. Each coverage has unique characteristics and considerations for lawyers to know.
Medical Insurance
Comprehensive medical coverage is often the primary employer insurance decision. Most firms provide multiple options to their employees, but which one is the right choice?
This decision is unique to each person, but there are some key considerations that lawyers should know.
First, there are different types of medical insurance, each with its own set of acronyms:
Health Maintenance Organizations (HMO)
These types of insurance plans are structured to only pay for health care services and professionals in-network. The only exception is typically out-of-network care for emergencies.
Once insured, lawyers are typically assigned a primary care doctor who serves as a gatekeeper for additional services. A lawyer can not go to an in-network specialist without first receiving a referral from their primary care doctor. The gatekeeper can be a downside for some people.
Another consideration is that HMOs are typically built around geographic areas. If a lawyer works remotely and enjoys being mobile, it may mean that they will live somewhere where they do not have access to their network of healthcare providers.
For lawyers who tend to stay in the same area and who appreciate having all of their healthcare providers connected, an HMO can be a health insurance option to consider. HMOs also tend to be the least expensive insurance option for similar coverage.
Preferred Provider Organization (PPO)
PPOs also have in-network healthcare providers, but they are less restrictive than HMOs on who a lawyer can go to for healthcare services. PPOs are the most flexible type of insurance plan.
In-network providers are less expensive than out-of-network providers but insured lawyers who go to an out-of-network provider can still receive a reimbursement from the insurance company after submitting the proper forms and typically paying a higher fee before the appointment.
Unlike HMOs, there is no gatekeeper. If a lawyer receives a recommendation from their doctor for a procedure, they can reach out to any in-network or out-of-network provider.
These plans are better suited for lawyers who value flexibility in their health care. It allows lawyers to choose their doctor or specialist even if they are not in-network.
Point of Service (POS)
POS plans are a hybrid between an HMO and a PPO. These plans will still require you to have a primary care physician who will act as a gatekeeper.
To see a specialist, a lawyer will still need a referral from this physician.
The difference from the HMO is that insurance will still pay for out-of-network referrals if they come from the gatekeeper.
Like a PPO, a POS will also provide cheaper medical services for lawyers if they use an in-network doctor.
Cost considerations
When lawyers compare the insurance options, the type of insurance is just one factor to consider. Cost is another factor. Some cost considerations a lawyer should be aware of are:
Premium
The monthly premium is the cost to keep the insurance valid for the lawyer. Premium payments do not count toward service costs. Instead, premium payments keep the insurance coverage in place. If a lawyer does not make their premium payment, coverage is terminated.
Deductible
The deductible is the amount that the insured lawyer will need to pay on their own before insurance starts paying too.
If the lawyer has a $1,500 deductible, they will need to pay $1,500 out of pocket before insurance will pay for any medical services.
The exception to this is some preventive services and annual checkups. Lawyers should look at their plans to see if these services are covered before meeting the deductible.
The deductible also affects the premium cost. A higher deductible means a lower monthly premium, while a lower deductible means a higher monthly premium. For lawyers who anticipate having high medical expenses in a given year, the insurance company begins making payments sooner for low deductible plans. If a lawyer has a sufficient emergency fund, they can save money through lower monthly premiums because they have enough money to cover a higher deductible plan.
The amount paid that counts towards the deductible resets each year. If a lawyer meets the deductible in one year and then has a medical procedure scheduled in the next year, the insurance company will not begin to pay in the following year until the lawyer pays enough to match that year’s deductible amount.
Copayment
The copayment is a fixed fee you pay for a healthcare service at the time of service. The copayment might be something like a $30 copayment for a primary care visit. In most cases, the copayment does not count towards the deductible.
Coinsurance
Coinsurance is different from a copayment because coinsurance is not a fixed fee. Instead, coinsurance is a percentage of the cost of healthcare that an insured lawyer must pay after they have met their deductible.
If an insurance plan has a $1,000 deductible and a 10% coinsurance payment for surgery, a lawyer who has a $2,000 surgery will pay $1,100 for the surgery. This example assumes the lawyer has not made any medical payments towards the deductible before this surgery. $1,000 of the cost is out of pocket and counts as the deductible. After meeting the deductible, the lawyer will be responsible for 10% of the remaining $1,000 in cost for the surgery.
Out-of-pocket maximum expenses
The out-of-pocket maximum expense differs depending on the type of insurance plan a lawyer selects. Typically this amount is the maximum amount of money a lawyer will pay in a year for medical expenses.
The out-of-pocket maximum expense is the maximum amount of medical costs a lawyer will pay out-of-pocket between deductible, copayments, and coinsurance payments. Premiums do not count towards the out-of-pocket maximum. The out-of-pocket maximum is also typically only for in-network costs. Some insurance plans will also have an out-of-network out-of-pocket maximum, while others will not have a maximum for out-of-network expenses.
Take time to understand how the insurance plan calculates the out-of-pocket maximum.
Additional Considerations
Beyond costs and the type of insurance offered, there are a few other health insurance benefits to be aware of when selecting from an employer plan.
Health Savings Account (HSA)
A health savings account is only available to health insurance plans considered High Deductible Health Plans (HDHP). In 2021, if a health insurance plan has a deductible for an individual above $1,400, it is an HDHP.
The HSA can be a great financial tool for three reasons: investable contributions, employer matches, and tax advantages.
First, an HSA is an investment vehicle. Contributions invest similar to a 401(k) or IRA. Investable contributions mean that not only will the HSA grow from contributions. These invested contributions will also compound over decades and provide people with a portfolio of assets specifically for health-related expenses that are much larger than just their total contributions.
Second, many employers offer an employer match for HSA contributions. For lawyers with an HSA, the employer match can boost the annual contributions into an HSA. As shown in a prior blog, a higher savings rate can be a better indicator of future financial success than higher investment returns. Having a higher savings rate applies to the HSA just as much as a retirement account.
Finally, the HSA also benefits from a tax advantage. It is currently the only investment account in the United States that is triple tax-advantaged. An HSA is triple tax-advantaged because contributions are made pre-tax, the invested contributions then grow tax-deferred, and withdrawn HSA funds for qualified medical expenses are tax-free. For lawyers in a top tax bracket, this tax advantage can save quite a bit of money.
Lawyers should know that even if their HDHP does not offer an HSA, a lawyer can still open an HSA somewhere else. But a lawyer cannot open an HSA without an HDHP.
Health Flexible Spending Account (FSA)
The Flexible Spending Account is another healthcare account that lawyers should know. A flexible spending account allows lawyers to put up to $2,750 in 2021 of pre-tax money into the Health FSA. Throughout the year, lawyers can pay medical expenses using the funds in the Health FSA.
Unlike the HSA, these funds are not investable. Instead, FSA funds are “use-it-or-lose-it” meaning that if a lawyer does not use all of the funds in the Health FSA by the end of the year, they will lose the remaining balance.
If a lawyer contributes $2,750 to their Health FSA, but only has $500 in medical expenses for the year, then a lawyer loses the remaining $2,250. There is no way to get this extra money back.
To assist employees who might lose their remaining Health FSA balance, some employers allow a “grace period” where a lawyer has 2.5 months after the end of the year to spend any remaining funds. Employers might also allow you to carry over up to $550 towards the following year’s Health FSA.
In the above example, if a lawyer contributed $2,750 to the Health FSA but only spent $500 in medical expenses, they would lose the remaining $2,250. But in this example, their employer allows them a grace period and a carry-over. In January of the following year, the lawyer incurs a $1,000 medical expense. They can use some of the remaining $2,250 to pay for this expense. Their employer also allows them to carry over $550 into the following year. Since they have no more medical expenses in the last 2.5 months, the lawyer would still lose $700, but the $700 is a lot less than $2,250.
For lawyers, the Health FSA works best if a lawyer has known medical expenses. The IRS publishes a list of medical expenses to help taxpayers understand which costs are acceptable for this account.
An example of using a Health FSA is a diabetic lawyer who has to pay for insulin. Since the lawyer knows roughly the cost of a year’s worth of insulin, they can contribute that amount to their Health FSA to pay for their insulin costs. If they are in the 24% tax bracket, they will save roughly 24% of the after-tax cost of insulin by contributing to the Health FSA and using those funds to pay for the insulin costs.
The Health FSA can be a practical tool best utilized by lawyers who have predictable medical expenses.
Choosing the right coverage for you
Like most parts of personal finance, lawyers will not know which insurance was the right one for them until after the year.
They may expect a year without any medical expenses and select a High Deductible Health Plan with a high max-out-of-pocket cost to save money on their monthly premium before having an unexpected accident that results in expensive medical needs.
Insurance is a tool to transfer risk. For many young and healthy lawyers, a significant risk is a high unexpected medical expense. Therefore, some lawyers may be okay with the lower monthly premium and access to an HSA for a tradeoff that they might have to pay more out-of-pocket for an unlikely expensive medical expense.
Other lawyers may be more comfortable paying higher monthly premiums to have a lower deductible, wider coverage, and lower out-of-pocket maximum. This choice can be valuable for lawyers that:
Do not have enough saved to pay for the out-of-pocket maximum of an HDHP.
Those who know they will have a lot of medical expenses in the next year.
Lawyers that are more conservative from a risk standpoint and enjoy a higher level of protection.
This decision about which insurance to choose is unique to everyone, but here are a few things that every lawyer should keep in mind when making their insurance choices:
It is too risky to avoid paying for any health insurance.
Lawyers should have enough money in the emergency fund to cover at least the deductible and hopefully the out-of-pocket maximum.
If access to a specialist without a referral is important to a lawyer, avoid an HMO plan.
If a lawyer has a specific procedure or medicine they need, make sure a selected plan covers those.
Be aware of costs from both premiums and deductibles. These should not be the only factor to consider, but they are important considerations.
Many young and healthy professionals would benefit from contributing and investing in an HSA. Take advantage of an employer match if available.
Choosing an employer-provided health care plan can be a tough choice to make. Often the decision is not easy to make. Plus, many lawyers do not have access to a second opinion when deciding. Developing Financial offers an employer benefit analysis for all the employer benefit options including healthcare options. If you would like to consult with a professional on which healthcare plan is best for you, schedule a Meet & Confer today.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.