The average non-elderly family spends 11 percent of their income, or about $8,200 per year, on healthcare, and that doesn’t include employer contributions. For people who are self-employed, don’t have adequate insurance, or have certain health conditions, the cost can be much higher.
Not all Americans are prepared for inevitable healthcare expenses. About 30 percent of U.S. adults don’t have $400 stashed away and would need to borrow money or sell belongings in an emergency. And more than 10 percent of adults end up delaying or foregoing needed care because it’s too expensive.
There are ways for Americans to prepare for inevitable healthcare costs. Start planning while you’re healthy to avoid unaffordable bills in the future.
Choose the Right Health Insurance
The first step is to check your eligibility for Medicaid. Medicaid is a joint federal and state program that offers low or no-cost healthcare coverage to low-income families and other eligible Americans. If you qualify, you’ll have minimal out-of-pocket costs and can potentially save thousands on healthcare expenses. The income limits vary by state, since some states have adopted expanded Medicaid under the Affordable Care Act, while others have not. Some states have also expanded Medicaid coverage to medically needy individuals or others who might not normally qualify.
If you’re not eligible for Medicaid, determine if you have employer-sponsored healthcare coverage and whether it is affordable. If your portion of the premium for a “self-only” plan provided by your employer is less than 9.83 percent of your total household income, you won’t be eligible for a premium tax credit if you opt for Marketplace coverage instead.
If your employer doesn’t offer group coverage or it isn’t affordable, you should shop for health insurance plans through your state’s healthcare marketplace. As you evaluate each plan, consider the following:
- Category: Marketplace health plans come in four metal categories: Platinum, Gold, Silver, and Bronze. These indicate how much of the cost burden you’ll share with the insurance provider. For example, Platinum plans tend to have higher premiums but lower costs when you need care, so they’re a good option for people who expect a lot of healthcare visits each year. A bronze plan may be sufficient if you’re in excellent health, but you should still keep a savings account to cover out-of-pocket costs. If you qualify for cost-saving reductions, you’ll need to choose at least a Silver plan to receive the savings. You can estimate your eligibility for savings here.
- Premium: Your premium is the amount you’ll pay monthly to maintain healthcare coverage. You’ll pay the same amount every month even if you do not need to see a doctor. While you might want to choose the plan with the lowest premium, that will result in higher costs should you need care. That’s because plans with lower premiums tend to come with higher deductibles.
- Deductible: Your health insurance provider won’t start paying covered costs until you’ve met your deductible, which is the amount you’re financially responsible for each year. For example, if your deductible is $3,000, you’ll be responsible for the first $3,000 in healthcare costs each year. However, insurance companies typically pay some costs, like preventative care visits and annual checkups, before you meet your deductible.
- Copayments and Coinsurance: A copayment is a set amount of money you pay to see a doctor or refill your prescription after your deductible is met. With coinsurance, you pay a percentage of each expense after your deductible is met. For example, if your plan has 20 percent coinsurance and you see a specialist that charges $100, you’ll be responsible for paying $20.
- Out-of-Pocket Maximum: This figure is the most you’ll pay in a year for healthcare services. It includes your deductible and copayments or coinsurance, but doesn’t include your monthly premiums. After you’ve paid this amount, your provider will cover all costs for the remainder of the year. When budgeting, the best way to avoid needing to borrow is to keep your out-of-pocket maximum in an emergency fund and budget for your monthly premiums.
Use Tax-Advantaged Savings Accounts
If your employer offers a Flexible Spending Account (FSA) or you qualify for a Health Savings Account (HSA), you can contribute to these plans pre-tax and your distributions won’t be taxed. Money in both accounts can be used for qualifying healthcare expenses. Here’s how these plans work.
HSA
To qualify for an HSA, you must be enrolled in a high-deductible health plan. For 2021, that means any plan with a deductible greater than $1,400 for an individual or $2,800 for a family plan. Your employer doesn’t need to offer an HSA — anyone who qualifies can open one on their own. Individuals can contribute up to $3,600 per year to an HSA, and the balance rolls over into the next year if you don’t use the funds. You also have the flexibility to change your contribution amount at any time.
FSA
To sign up for an FSA, your employer must offer it as part of your benefits package. But there are otherwise no eligibility requirements. Individuals can contribute up to $2,750 per year, and anything you don’t use by the end of the year is lost, unless your employer offers a rollover. Your contribution amount remains fixed unless your employment or family status changes. You’ll also typically lose the money if you change jobs.
Use a Budgeting Strategy
Choosing a strategy that fits your needs can help you budget more efficiently. There are also apps and online tools you can use to keep track of your budget. Consider choosing one of the following strategies:
- Zero-Based Budget: This type of budgeting involves assigning every dollar of income to a particular spending category, ensuring that you have enough leftover for savings. If you don’t use the money allotted for a particular category, you can put it towards savings or another category. Envelope budgeting is a similar strategy that is cash-based; you keep cash in envelopes for each category, and when the envelope is empty, you stop spending in that category.
- 50/30/20 Budget: The idea behind this strategy is that you should put 50 percent of your income towards necessary expenses, 30 percent towards desired expenses like dining out and entertainment, and 20 percent towards savings. Of course, depending on your income, you may need to adjust the percentages. Another version is the 80/20 budget, which works well with the “pay yourself first” strategy of setting aside savings and using the rest for expenses.
To get started with budgeting, you should track your expenses. This will give you a baseline for how much of your income to devote to each spending category. From there, you can look for areas where you may be able to trim your budget, such as cutting down on coffee or alcohol.
Keep Enough in an Emergency Fund
Experts generally recommend keeping three to six months worth of expenses in an emergency fund. But you should also consider your insurance deductibles when deciding how much savings to keep accessible. If you have a high-deductible health plan without an HSA, you should keep at least your full deductible amount in an emergency fund. Also consider your car insurance deductible, potential job loss, and the possibility of experiencing disability.
Take Care of Your Health
In the U.S., the prevalence of chronic disease has been rapidly increasing. As of 20202, about half of Americans now suffer from chronic disease, and it consumes about 86 percent of healthcare spending. The CDC advises that most chronic disease is preventable, and the following lifestyle choices can help you save money on future healthcare costs:
- Quit Smoking: Quitting tobbaco use will reduce your risk of heart disease, type 2 diabetes, lung disease, and cancer.
- Eat Healthy: It’s important to eat a balanced diet of fruits and vegetables, lean meats, whole grains, and low-fat dairy. This will help prevent heart disease, type 2 diabetes, and more.
- Exercise: Regular physical activity is essential to chronic disease prevention. Aim for at least 150 minutes per week of moderate intensity physical activity.
- Avoid Excessive Alcohol: Drinking too much can cause heart disease, high blood pressure, liver disease, cancer, and other chronic diseases. Women should not have more than seven drinks per week and men should not exceed 14 drinks per week. In any day, women should have no more than three drinks and men should have no more than four.
- Get Plenty of Sleep: Adults should sleep at least seven hours per night in order to avoid diabetes, depression, heart disease, and obesity.
- Get Annual Check-Ups: Preventative screenings can help you identify health problems before they become unmanageable and costly.
Frequently Asked Questions
How Much Should I Budget for Healthcare Expenses?
On average, Americans spend about 11 percent of their income on healthcare costs. However, healthcare costs are expected to continue to rise, so you may need more than that in retirement. In 2021, the average 65-year-old couple would need about $300,000 to cover healthcare expenses in retirement, according to Fidelity.
What Is the Income Limit to Qualify for Medicaid?
That depends on your state of residence, but in most states, anyone earning less than 139 percent of the federal poverty level will be eligible.
How Can I Reduce My Healthcare Costs?
There are several ways you can cut down on out-of-pocket healthcare costs, including:
- Choose the right insurance plan: If you anticipate high healthcare costs, opt for a plan with a low deductible. If you’re young and healthy, you may want to choose a high-deductible health plan in conjunction with a health savings account.
- Save on prescriptions: Ask about generics or alternatives, look for coupons from the manufacturer, and order by mail.
- Make your health a priority: Eating right, exercising, reducing alcohol intake, and quitting smoking can all help you avoid costly chronic disease. And getting regular check-ups and screenings can help you catch health conditions before they become unmanageable.
- Maintain a stocked emergency fund: An unexpected medical bill can easily devastate your finances if you’re not prepared. Keep your out-of-pocket maximum in an emergency fund to ensure you’ll have enough to cover an emergency. If you can avoid borrowing, you’ll save money on interest.
The Bottom Line
While everyone hopes they remain healthy, medical costs are inevitable. If you don’t budget for potential healthcare expenses, you could end up facing severe financial hardship. In fact, about two-thirds of Americans who file for bankruptcy report that medical bills were one of the main reasons for needing to file.
Just having health insurance isn’t always enough to protect your finances. You also need to budget for out-of-pocket costs, especially if your health insurance plan has a high deductible. If you don’t currently have a healthcare expenses budget, start by looking at your healthcare costs for the previous year. You should save at least as much as you spent last year for the upcoming year to avoid hardship.
The information contained herein is provided for free and is to be used for educational and informational purposes only. Consult a financial professional for specific help with your situation.