Russell’s Brief, Opinionated Guide to US Employer-Sponsored Health Insurance

Last updated: Fri Nov 15 2024

As fall turns to winter and the fallen leaves are swept from the ground, employees across California are met with the dreaded open enrollment. Now is the time they must wade through a swamp of murky acronyms and foggy numbers to reach the promised land on the other side, Good Health.

United States health insurance is rightfully considered a confusing mess, but it is not so confusing if you know a bit of vocabulary. Here I will attempt to explain that vocabulary to an assumed audience of “employees choosing between employer-sponsored health plans.”1

For confusing historical reasons, dental and vision insurance is not covered by health insurance. Luckily, the brief, opinionated guide to dental and vision is very brief — if you’re on an employer-sponsored plan, you probably have exactly one option for each.

The Major Terminology You Need To Know

The premium is how much you or your employer will pay per month or per pay period. On many employer-sponsored plans, your employer pays part of the premium and you pay the rest.

The deductible is how much you’ll pay before health insurance kicks in, which resets annually. For example, if you have a $500 deductible and you take a $1000 ambulance ride, then you’ll pay $500 and your health insurance will pay the other $500. If you then take another $1000 ambulance ride in the same year, your health insurance will cover the full $1000, since you’ve already “used up” your deductible for the year.

For some health services, your insurance plan may also require a copayment (aka copay) or coinsurance. This is a payment you make per use that does not count towards the deductible. Copays are flat rate and coinsurance is based on percentage of total price.

On many plans, visiting your primary care doctor or getting a month’s supply of a medication will require a $20 copay. On the one hand, each visit or medication refill will only cost $20! On the other hand, this payment does not count towards the deductible. If you have 10% coinsurance, meanwhile, you always pay 10% of the total cost of treatment, even after you’ve “filled up” your deductible.

Both deductibles and copays/coinsurance count towards the yearly out-of-pocket maximum. This is the total amount you may pay out-of-pocket in a given year; after you’ve hit this limit, your insurance plan will cover everything, even copays and coinsurance. If you have a $4,000 out-of-pocket maximum, then you will only have to pay $4,000 total in healthcare costs over a year; everything past that will be paid by your health insurance.

Most health insurance plans make a distinction between in-network providers and out-of-network providers. In-network providers are heavily advantaged; they usually have lower or no copays or coinsurance. Also, out-of-pocket maximums are usually split between in-network and out-of-network, with the out-of-network maximum being higher. If possible, when seeking healthcare, you should always look up whether a provider is in-network or out-of-network for your plan.

Many plans also have drug tiers that determine how much the plan pays out for different types of drugs or medications. Usually this looks something like:

Types of Plans (aka Even More Terminology You Have To Know)

There’s many delightful acronyms cooked up by the health insurance industry, but if you’re on an employer-sponsored plan, you’re probably choosing between HMO, PPO, and high-deductible plans.

Health maintenance organization (HMO) plans have very strong coverage, but only for one healthcare organization or hospital network; out-of-network healthcare is heavily penalized or not covered at all. Additionally, visiting a specialist on an HMO plan typically requires a referral from a primary care physician.

In the Bay Area, for example, you’ll often see Kaiser as an HMO option; their plans are very robust, but they only cover Kaiser, so you have to make sure you live close to a Kaiser hospital.

A preferred provider organization (PPO) plan is more generic. Coverage is provided for all healthcare, with out-of-network doctors moderately more expensive than in-network doctors. Visiting specialists does not require referrals on a PPO. Usually, when picking employer-sponsored plans, you’ll have a choice between different PPO plans from the same provider, with different balances between deductible, premium, copayment, and so on.

Finally, you may see a high-deductible health plan (HDHP), which is a PPO with especially high deductibles and especially low premiums. If you select an HDHP, you also gain access to a health savings account (HSA), which is a tax-advantaged long-term savings account that you can use towards medical expenses.

HDHPs with HSAs are usually recommended for young, healthy folks that don’t expect to use much medical care. A high deductible doesn’t matter if you’re not using the medical system very much anyway. However, the money in the HSA is yours to keep forever, so any money you put towards the tax-advantaged HSA instead of higher premiums is “free money”. Some employers will even put money in the HSA for you because they save so much on premiums!

Regardless of plan, you may be eligible for a flexible savings account (FSA). This is a tax-advantaged savings account similar to an HSA, but the catch is that you must use any money you put in the FSA by the end of that year (unlike an HSA, which is permanent); on most FSAs, you can only rollover a small amount from year-to-year, if at all. FSAs are only useful if you know in advance that you’ll be paying for specific medical expenses out-of-pocket. For instance, if you know in advance that you’ll need to buy crutches that aren’t covered by your insurance, setting aside money tax-free in an FSA is a good idea.

There’s various other systems like the FSA that you might also have access to, but in my experience the FSA is most common.

Finally, OneMedical (now part of Amazon) is a healthcare startup that runs primary care clinics in many major cities. Confusingly, they accept standard healthcare for in-person visits, but they also sell a membership for online / telehealth access, which some employers purchase in addition to standard healthcare. There’s many other startups that also provide telehealth services; some companies also purchase subscriptions to these services.

Let’s Walk Through An Example

Let’s suppose we have a plan with the following characteristics:

This has a very low deductible but a somewhat high premium (which may be partially covered by the employer). On this plan, if you end up needing healthcare other than a primary care visit, you’ll first have to pay $250 before the health insurance kicks in, as well as 10% coinsurance that doesn’t count towards the deductible (or 30% for out-of-network doctors!).

Normal office visits in-network are only a $20 copay, but that doesn’t count towards deductible, while out-of-network primary care counts towards the deductible and, after that’s used up, requires 30% coinsurance.

However, the max you’ll spend per year in-network is $2,000, while the max you’ll spend per year out-of-network is $6,000.

So, in this plan, if you have a $3,000 dollar in-network hospital bill, you’ll first pay $250 for the deductible, then on the remaining $2,750, you’ll pay $275 for the 10% coinsurance, for a total of $575. That puts you about a quarter of the way to using up the $2,000 out-of-pocket maximum.

When Do I Enroll?

You can only change your health insurance plan during the open enrollment period, which will vary based on your plan. For employer-sponsored plans, the entire company will typically have the same open enrollment period. For instance, your open enrollment might be the first week of December, with new benefits taking effect on Jan 1. The only exception is qualifying life events (QLEs), which allow you to change health plans due to major life events, like getting married or having children.

Thanks to COBRA, if you’re on an employer-sponsored plan and you lose or leave your job, you can maintain your employer-sponsored plan for a year and a half by paying a monthly fee. COBRA is typically very expensive (think $500+ a month) and not recommended if you have another job lined up (your new employer likely has an employer-sponsored plan) or if you’re planning to go independent (you should research individual health insurance plans), but it can be useful if you lose your job unexpectedly.

One extra hack: For most employer-sponsored plans, health insurance terminates at the end of the month, regardless of when you leave your job. So, if you’re voluntarily leaving your job, it’s advantageous to quit at the beginning of the month and get a “free” month of health insurance.

But How Do I Actually Pick A Plan?

There’s a few things to keep in mind while selecting plans.

Usually, premiums and deductibles balance each other out; a higher premium (or monthly cost) means a lower deductible, and vice versa. As with all insurance, this is about risk mitigation.

High premiums are a cost you will definitely pay every month as long as you have the insurance, while the deductible only matters if you actually need healthcare. On many plans, regular preventative care like yearly physicals are fully covered or only require a cheap copay and won’t even touch the deductible. So, if you’re young and healthy, you may struggle to use up even a very low deductible! In that case, picking a low-premium-high-deductible plan like an HDHP is probably a better choice. On the other hand, if you’re older, less healthy, or have multiple dependents, paying the higher premiums in exchange for a lower deductible might make more sense.

If balancing the premium and deductible is too confusing, then look at the out-of-pocket maximum. That’s the most you’d have to pay in a single year (if you use in-network providers). In the worst case, if you’re in a terrible accident, are you comfortable paying that much for healthcare all at once? If not, you might want to pick a less risky plan.

Finally, you need to think about coverage. It’s no good picking an HMO if you don’t live anywhere near that provider’s hospitals. Similarly, if you travel often in the US, a nationwide network might be preferable to a local hospital group’s HMO. If you already have a doctor, you should make sure they’re still in-network when switching plans.

This Is Still Too Confusing

Here’s the bullet point version:

References

Footnotes

  1. Most of this content should apply to individual health plans as well, but I have no personal experience with those. ↩