Early November means that it is the middle of open enrollment season for those who receive health insurance through an employer. As you sort through the various health insurance options available to you for 2017, the easy choice is to simply keep what you have today. However, if you have ever wondered if there is a better choice that will allow you to maximize points earning, here are a few things to consider.
A caveat before we dive in…
We often let our points and miles hobby (obsession?) cloud our judgement, which can lead to irrational decisions all in the name of maximizing points. However, your health care decisions should first and foremost be based on your specific health and life situation, with absolutely no compromise in choosing what’s “right” in the name of earning points.
Also, the information below is meant to be a broad strategy, as opposed to blanket advice for everyone. Each employer will have nuances in the structure of its health care benefit programs, and I’d recommend that you combine this information with some total health care cost modeling, which looks at both paycheck deductions and out-of-pocket expense for your projected health care utilization.
The main idea here really boils down to this: to maximize your points earning potential, you want to pay less out of your paycheck in exchange for added out-of-pocket (OOP) costs when you see the doctor. Why is that the case? Because if you receive medical insurance through your employer, those deductions are made on a tax-favored basis directly from your paycheck, which means that there is no opportunity to earn points.
However, when you incur OOP costs at the doctor’s office, you spend money in the form of deductibles, copays, or coinsurance. These purchases are really no different than money spent anywhere else, and you have your choice of payment method for those expenses.
Let’s look at two scenarios below which arrive at the same total spend:
A. $4,000 (paycheck) + $1,000 (out-of-pocket) = $5,000
B. $1,000 (paycheck) + $4,000 (out-of-pocket) = $5,000
In both cases, the cost of health care expenses is identical at $5,000. The main difference is that person B has spent less out of their paycheck, in exchange for more OOP liability when utilizing health care services. From a points-earning perspective, person B is better off since they earn more points on the OOP component, ending up with 4,000 points vs. person A’s 1,000.
In other words, all else equal, the OOP portion is where you ideally want to spend your money, in order to maximize the ability to earn points.
So which plan should I choose?
Here’s the tricky part – nobody can predict exactly how many times they’ll need to see the doctor in a given year. That’s the thing about insurance, you don’t need it until you need it. But at the same time, the majority of people are over-insured, meaning that they’ve purchased more insurance coverage than they really need.
While the best choice varies by individual and employer, generally the “best” plan to choose to maximize points earning will be High Deductible Health Plan (HDHP) with a Health Savings Account (HSA). In case you’re not familiar, HDHP’s are as the name suggests, essentially PPO plans with a high deductible. In order to be paired with a Health Savings Account, the HDHP must have a deductible of at least $1,300 for individuals or $2,600 for families, and in some cases can be as high as $5,000.
Even though HDHP’s have a higher deductible, they still provide an out-of-pocket limit which caps your liability in case of a catastrophic event. So conceptually, this is really no different than saving premium on your car insurance coverage in exchange for a higher deductible.
These plans are also known as Consumer-Driven Health Plans (CDHP’s) and are designed to help members become smarter consumers. As a result, employers are typically making these plans the best deal within the overall suite of benefit options they provide.
Using the Health Savings Account
Even if you are already enrolled in an HDHP, that’s only the first step. In order to maximize both the points-earning and tax-favored potential, you will need to leverage the Health Savings Account.
HSA’s are largely analogous to 401k plans – an individual and portable financial account with tax-favored status. Money goes in tax-free, grows tax-free, and comes out tax-free as long as expenses are for qualified health care expenditures, subject to IRS guidelines.
Right now, most people use one of the two methods below to pay for health care expenses:
A: Pay with credit card, pay credit card bill with after-tax dollars
B: Pay with HSA debit card, which deducts pre-tax dollars from spending account
In case A, you’re essentially treating your health care expenses like any other purchase such as a TV or groceries. However, you’re missing out on the ability to pay for health care expenses with pre-tax dollars, which can be upwards of a 40% savings depending on your tax bracket. And in case B, since you’re using pre-tax dollars deducted directly from your health care spending account, you’re missing out on the points-earning potential by not involving a credit card.
What you should be doing is C which combines the two methods above:
C: Pay with credit card, submit expense for reimbursement from HSA account
By first paying health care bills with your credit card, you will earn points as you would with any purchase. However, instead of using after-tax dollars to pay your credit card bill, you can submit your receipts to your HSA administrator, which will then allow you to be reimbursed with the pre-tax dollars from your health care spending account. So you’re getting the best of both worlds – earning points, while paying with pre-tax dollars.
Again, I want to be clear that you should absolutely not be basing your medical selections on the number of points you can earn. However, if you subscribe to the ideas above and are willing to take on more risk in exchange for a lower premium, you can almost certainly increase the points you earn from health care expenses beyond what you’re earning today.