Tackling Increased Health Care Costs

As we noted, the expected cost increases are two-fold: a reduction in the subsidy for people who receive their health insurance coverage through the ACA Marketplace and cuts to Medicaid. On the surface, that may seem to be primarily a health insurance issue only for certain people, but it is important to understand that the health care system is an ecosystem made up of many interrelated components, and what affects one can affect many. For example, if people decide not to have health insurance coverage, rather than having a larger pool of people to spread out the risk to health insurers, a smaller pool of people can result in insurers increasing their premiums to compensate for the additional exposure. That, of course, is outside of the fact that insurance premiums tend to go up year over year due to inflation and other economic factors. On top of that, having more uninsured individuals has the potential for an increased cost burden on taxpayers to cover health expenses that those people incur, meaning what may seem to affect a smaller number of people can end up affecting most people. Before the government shutdown situation played out, insurance companies were already expecting to increase health insurance premiums by around 18% in 2026. With the expiration of the enhanced subsidies for recipients of insurance through the ACA Marketplace, projected to result in more than a 70% increase in premium cost, that combination would be expected to more than double the premiums for people who receive their health insurance via the ACA. If we assume the projected 18% increase in insurance premiums affected everyone with health coverage, not even considering the other potential consequences discussed, health care expense will likely be taking a bigger bite out of your income.

You can essentially consider your health insurance options falling into one of 4 buckets:

1. Employer Based Coverage

2. Private Insurance Coverage (including through the ACA Marketplace)

3. Medicaid for Lower Income Families

4. Medicare for Retirees

One of the perks many employers provide is covering some of the cost of their employees’ health insurance. As a result, employees often don’t really understand the true cost of the coverage they have. While employers may pay less for coverage due to their size when shopping for health insurance coverage for a group of employees, the insurance companies price their coverage based on the larger risk pool discussed earlier, so the cost of the insurance may only be marginally less than private insurance. However, since the employer is bearing some or much of the cost, the employee pays significantly less out of their own pocket. While it may not be referred to as a subsidy, it amounts to the same thing, in this case with the employer bearing that cost rather than the government offering the subsidy that is ultimately covered by taxpayers. In any case, employer coverage tends to provide increased affordability for working health insurance recipients. The cost of private insurance, on the other hand, is borne by the recipient, and in the case of coverage through the ACA Marketplace, subsidized by the government. Recipients of Medicaid in large part are not required to pay any premiums, although some may pay small premiums or have cost-sharing arrangements. Instead, the cost of coverage for those individuals and families is mostly covered by the American taxpayer. Finally, retirees who are enrolled in Medicare pay premiums for their coverage depending on the type of plan they are in and their income level.

Of course, nobody wants to pay more than is necessary for health care or anything else, and it is a challenge when those costs increase, but it is a reality people will need to work around because in large part, the cost structure is outside of their control. So, how do you build that into your plans so the increases in costs don’t derail your budget? If you are fortunate enough to have employer health insurance, you have the ability to deal with your health expenses on a tax advantaged basis. First, the premiums you pay out of your payroll check are not counted towards your taxable income, and with many plans, you have the option of either a Flexible Spending Account (FSA) or Health Savings Account (HSA) that enables you to withhold money from your paycheck so that you have a bank of funds that can cover the cost of out-of-pocket health expenses. It may seem like a small thing, but if you happen to be in an overall 30% tax bracket, the combined tax savings on health insurance and out-of-pocket expenses could be in the neighborhood of $1,200 per year assuming total costs of $4,000, which is not chump change. Since most people may not notice the tax savings for their health insurance premiums, if we assume 60% of your health expenditures are for out-of-pocket expenses, you would be looking at the equivalent of an additional $720 available to you just because of the tax savings involved with using an HSA or FSA, enabling you to stretch your money farther. If you are still working and must enroll in private health insurance, your options are more limited to affect your budget. In that case, you want to be diligent about the plan you select to ensure it meets your needs, allows you to see the medical professionals you desire to see, and covers the medicine you must take. If you are obtaining your insurance through the ACA Marketplace, while the level of subsidy is decreasing, you still may be able to qualify for some level of relief. A key to maximizing your subsidy is to have good documentation on your expected household income, and if you experience a change in circumstances, like a job loss, you may be able to use a lower income figure to help you qualify. For those eligible for Medicare, there are a variety of choices to make, which we cannot go into here, but those choices, such as choosing a Medicare Advantage Plan, may enable you to reduce your premium costs and/or out of pocket costs.

The bottom line is that like most everything these days, health care costs are on the rise, and it is important to understand what’s coming and how you can control the amount of your own costs the best you can. Don’t complain about what you can’t change, but instead do the best you can with what you have to work with.