Choosing health insurance? Here’s what you should know

This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2019 tax year.

Choosing health insurance is one of the most important decisions you make every year.

Your choice of health insurance plan can affect not only your physical health, but financial well-being too. So how do you choose health insurance that you can afford and does everything you need it to do?

Let’s walk through some basics that can help you choose health insurance that’s right for you, including how to get insurance, types of plans, the tax implications of getting health insurance and what to consider when choosing a plan.

Two ways to get health insurance

Most Americans get their insurance through an employer. Under an employer-sponsored healthcare plan, you and your employer share in the cost of the premiums, which can make health insurance much more affordable than if you had to pay the entire premium yourself.

If you’re not eligible to get health insurance through an employer or a spouse’s employer, you may be able to purchase individual or family coverage through the Affordable Care Act exchanges. The ACA created some health exchanges to give coverage to people who weren’t able to get health insurance.

When to buy health insurance

If you start a new job with an employer that offers health insurance, you can begin coverage at that time. Otherwise, you can only enroll in or make changes to your health insurance plan during open enrollment, or if you have a qualifying special life event.

Open enrollment is the time of year when you’re able to switch health insurance plans. The open enrollment period is different depending on how you get health insurance.

Open enrollment for employer-based plans varies by company. You need to check with your company’s benefits or human resources department to find out the exact period for you.

During open enrollment, you can stick with your current health insurance plan or you can switch to another option if it’s available. Even if the options are the same from year to year, it’s still a good idea to review and compare health insurance plans.

Health insurance plans often change their cost structure. For instance, your health plan may increase premiums or deductibles for next year. So, it’s possible you could find a better option by comparing plans.

Plus, our lives change. People get married, have babies, adopt, experience health challenges, make lifestyle changes. A certain plan could have worked for you this year, but you may find that you need a different plan for next year.

Besides open enrollment, the only other time you can change your benefit elections is if you qualify for a special enrollment period. Special enrollment allows you to change health insurance outside the open enrollment period if you experience specific life events, including getting married, having or adopting a child, getting divorced, and losing your job. If a special enrollment-qualifying event happens, you can change insurance outside of open enrollment. Otherwise, you’d have to wait until the next open enrollment period.

Understanding types of employer-based health plans

Multiple types of employer-based health plans are available, but the three most common are preferred provider organization, high-deductible health plan, and health maintenance organization plans.

While all three types of health plans work to help you pay for necessary health care, it’s important to understand how they differ.

Preferred provider organization plans: flexibility, high premiums

According to the Kaiser Family Foundation’s 2016 Employer Health Benefits Survey, about half of people in employer-based health plans have a preferred provider organization, or PPO. These plans usually have the highest premiums, but in exchange for that higher premium, they also offer more flexibility.

PPOs have networks of healthcare providers who participate in their plans. They also allow members to get out-of-network care, usually at a higher price — but still less than what you’d pay out-of-pocket.

Another benefit of PPOs is that you can see a specialist without a referral. But, a PPO could still require a physician to get prior approval for expensive services, such as an MRI. PPOs usually have a lower deductible than a high-deductible health plan, also known as an HDHP. However, a PPO’s deductibles are typically higher than a health maintenance organization’s (HMO) deductible.

You might consider a PPO if:

• You want the option to get care outside of your plan’s network
• You don’t want to get referrals from your primary care physician
• You don’t mind paying extra in premiums to get more flexibility

High-deductible health plans: low premiums, high out-of-pocket costs

HDHPs have increasingly become a popular choice for employers and insurance companies looking to cut healthcare costs. According to the Kaiser Family Foundation survey, they make up about one-third of employer-based health plans.

By its name, you can probably figure out that HDHPs have high deductibles. Much like auto insurance, a high-deductible plan means you must pay a certain amount out of your own pocket first, before your insurance company will begin paying for claims.

For 2019 taxes, the IRS defines a high-deductible plan as one with a deductible of at least $1,350 for an individual plan and $2,700 for a family plan. An HDHP’s annual out-of-pocket maximum is up to $6,750 for individual plans and $13,500 for family plans.

You have more out-of-pocket costs in HDHPs than either PPOs and HMOs. However, HDHPs’ premiums are usually lower, so they’re a low-cost option for people who don’t use healthcare services often.

HDHPs can have health savings accounts (HSAs) linked to the plans. These accounts let you save money pre-tax to pay for qualified medical expenses. You own the HSA, which means you take it with you if you change jobs.

You might consider an HDHP if:

• You don’t use healthcare services often and don’t expect to need healthcare much over the next year
• You would rather pay low premiums with the understanding that you’ll have to pay more for getting healthcare services
• You don’t have a spouse or children who might need healthcare services

Health maintenance organization plans: lower premiums, referrals required, no out-of-network care

HMOs are not as common as they were in the 1990s, but they still account for 15 percent of employer-based health plans, according to the Kaiser Family Foundation survey.

HMOs typically have lower premiums than PPOs, but not as low as HDHPs. Plus, HMOs generally have smaller networks of doctors and hospitals. This means fewer doctors accept HMOs than PPOs. So, in essence, you’re paying lower premiums with the understanding that you don’t have the same flexibility as a PPO.

HMOs often have either no deductibles or much lower deductibles than PPOs and HDHPs.You need to name a primary care physician when you have an HMO. A primary care physician is the person who coordinates your care, which means you need to get referrals from him or her to see a specialist.

These types of plans don’t allow you to get out-of-network care. So, if you do get out-of-network care, you’ll have to pay for the services on your own.

You might consider an HMO if:

• You want to pay low premiums
• You don’t mind getting referrals from your primary care physician
• You’re not bothered by the limitation of staying in-network

Choosing a health plan through the ACA exchanges

If you can’t get health insurance through an employer or your spouse’s employer, you may qualify for a plan through the ACA health exchanges.

The easiest way to get health insurance through the exchanges is to go to healthcare.gov. You can review available plans there. If your state has its own exchange, healthcare.gov will forward you to that site. You can also call 1-800-318-2596.

You need to consider many factors when deciding on your health insurance, but something you won’t have to worry about is what your health plan in the exchanges covers. The ACA has mandated baseline coverage for all qualifying health plans. This means that all ACA plans must cover:

1. Emergency care
2. Outpatient care
3. Hospitalizations
4. Pregnancy and newborn care
5. Mental health and substance abuse services
6. Prescription drugs
7. Rehabilitation services
8. Lab tests
9. Preventive and wellness programs
10. Dental and vision care for children
11. Birth control coverage
12. Breastfeeding coverage

The costs for these services will vary depending on the plans, but you’re assured that all qualifying health plans will cover these services.

The exchanges offer four levels of health plans that are distinguished by the premiums and out-of-pocket costs:

• Bronze — Highest out-of-pocket costs; lowest premiums
• Silver — Lower out-of-pocket costs than Bronze; higher premiums than Bronze
• Gold — Lower out-of-pocket costs than Silver; higher premiums than Silver
• Platinum — Highest premiums; lowest out-of-pocket costs

There is a fifth plan in the ACA exchanges, but not many people are eligible. Some young people and others who meet a hardship or affordability exemption can join a catastrophic health plan. These plans have very low premiums and extremely high deductibles. If you’re eligible for such a plan, the exchanges will provide that as an option once you enter your information during the application process.

Depending on your income level, you may be eligible for premium subsidies if you get an ACA plan. These subsidies make your plan more affordable. We’ll discuss that further in the tax section.

Key factors to consider when choosing a health plan

When choosing a health plan, you need to:

• Make sure your providers are part of the network
• Figure out the right health plan for your situation
• Compare health care costs

Many consumers really dread shopping for health insurance, says Betsy Imholz, special projects director at Consumers Union.

“If there are too many options and variables, it gets extremely hard for people to choose and can result in paralysis in decision-making from cognitive overload,” says Imholz.

The first step is to narrow your choices, she advises. When deciding on the right health plan for you, ask these questions to figure out which is best for you:

• How often do you go to the doctor?
• Do you take costly prescription drugs?
• How much care do you expect to need in the next year?
• Do you have enough money set aside to pay out-of-pocket costs?
• Would you rather pay lower premiums with higher out-of-pocket costs or vice versa?
• How important is flexibility and being able to see a wider network of providers?
• Are your providers in the plan’s network?
• Do you have children or plan on having children who might need regular health care?

Make sure all your providers are part of the health plan’s network. “If there are ‘must have’ doctors or hospitals for you, make sure they are in-network,” Imholz says. Also, it’s a good idea to check to see whether other providers in your area take that health plan, in case you need other healthcare services. You don’t want to get stuck in a situation of driving many miles to get healthcare services.

You can find out this information by going to the insurer’s website and searching for providers in that specific plan’s network. Imholz also suggests calling the insurer and provider to confirm. She says online provider directories are often inaccurate, so it’s important to check with a live person. Please note, there’s no guarantee your physician will accept all plans from the same insurer, so make sure your provider accepts a specific plan by calling.

How to compare costs of different plans

Next, you’ll want to compare costs for each plan. Look at:

• Premiums
• Deductibles
• Out-of-pocket costs (such as coinsurance)
• Copays
• Provider networks

Focusing just on premiums as the deciding cost factor is the most common mistake people make, Imholz says. Instead she advises that people look beyond premiums and also consider shared costs like deductibles, copays and coinsurance.

Imholz also recommends you check on drug formularies, which is the list of medications an insurer will cover and what it will pay for each. In other words, see how much your prescriptions will cost in the different plans. Drug costs often differ depending on which tier the insurer assigns to the medication. For example, generic drugs are typically considered to be on the lowest tier and are therefore the cheapest. New, brand-name drugs are generally on the highest tier. Every insurer creates its own tiers with specific rules and price points.

In addition to costs, Imholz suggests you review each health plan’s quality ratings online. She says many people don’t research ratings before signing up for insurance, but plans differ widely by customer service and clinical measures, such as a plan’s success in getting people preventive care.

Imholz says that some plans, employers and exchanges provide online tools to compare plans. Additionally, as a consumer, you’re entitled by law to a “Summary of Benefits and Coverage,” which is a standardized format that explains what each plan offers. You can request that from your company’s HR department or the exchanges.

How does health insurance affect taxes?

There’s no longer a tax penalty for going without health insurance. The Tax Cuts and Jobs Act of 2017 set the penalty amount to zero.

The ACA also set up a premium tax credit to help people in ACA exchange plans with their premiums and out-of-pocket costs. The IRS lets you use your premium tax credit in advance if you want.

The tax credit is available to people with estimated income between 100 percent and 400 percent of the federal poverty level for your household size.

Outside of the ACA plans, you can also enjoy some tax benefits if you have a high-deductible health plan paired with an HSA through your employer. Money your employer puts into your HSA is tax-exempt, and you can deduct contributions you make to the HSA from your federal income tax. The interest or other earnings from your HSA won’t be taxed. You also may not have to pay taxes on withdrawals made for qualifying medical expenses.

Bottom line

Whether you buy insurance through your employer or the ACA exchanges, you should compare plans to make sure you find the one that fits your situation. Don’t just go with the cheapest premiums. Compare premiums, out-of-pocket costs, benefit designs and provider networks to choose the plan that protects you and your family without breaking the bank.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.