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3 Things to Avoid When Trying to Cut Health Costs

If you're looking for ways to trim health-insurance expenses, don't make these mistakes that actually could cost you more money.

Everyone's looking for ways to trim expenses now, and I've been getting a lot of questions from readers about strategies for reducing health-insurance costs. But I've also seen people make big mistakes in an attempt to save money. Avoid the following pitfalls, which can actually end up costing you more money.

1. Focusing too much on premiums. Switching to a lower-premium policy isn't always the best move. You need to look at out-of-pocket costs as well as premiums.

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A low-premium policy with high coinsurance charges for drugs you use or doctors you visit could cost you a lot more by the end of the year. For example, more plans are switching from co-payments (in which you pay a fixed dollar amount for doctor's visits and prescriptions) to coinsurance (in which you pay a percentage of the cost). Most plans have three or more pricing tiers for prescription drugs, charging the lowest amount for generics (such as $10 or 10%) and charging a higher cost share for preferred brand-name drugs, more for nonpreferred brand-name drugs, and even more ($75 or 25% is average) for specialty drugs. If you take expensive medications and the insurer charges a high coinsurance rate, you could pay a lot more money out of your pocket than you would with a higher-premium policy that requires smaller co-pays. Also, some plans charge a fixed-dollar co-pay for hospital stays, while others charge a percentage of the cost or have a separate hospital deductible, which can cost you a lot more.

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The same is true for out-of-network doctors and hospitals. Some of the lowest-cost policies limit the doctors and hospitals you can use. As long as you stick to in-network providers, you can save a lot of money. But you may have a much higher co-payment or coinsurance rate for out-of-network providers or hospitals. Make sure that all the doctors at hospitals you use are covered before switching to one of those plans.

2. Cutting the amount of coverage. Some health-insurance policies charge much lower premiums but also offer much less coverage. Policies that offer maximum benefits of less than $1 million could leave you with tens of thousands of dollars to pay on your own. For example, some policies have low premiums and require small co-payments for doctor's visits, but they cover just $50,000 to $100,000 worth of expenses per accident or illness, which isn't enough to cover most major medical issues. Other limited-benefit policies have low dollar limits for each type of procedure and a lot of exclusions, which could leave you with big bills. When you hear horror stories of people having to pay huge expenses even though they had insurance, they usually had these types of limited-benefit plans.

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A better way to lower your premiums is to buy a high-deductible health-insurance policy that provides much better coverage for major medical issues. You may have to pay $1,000 or more before coverage kicks in, but you'll protect yourself against tens of thousands of dollars in catastrophic costs if you have a major illness or accident.

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If you buy a policy with a deductible of at least $1,150 for single coverage or $2,300 for family coverage in 2009, you'll be able to make tax-deductible contributions to a health savings account (contributing up to $3,000 if you have single coverage or $5,950 for family coverage in 2009). You can then use the HSA money tax-free for medical expenses in any year. If you don't have many medical expenses, the money can grow tax-free for future health-care costs.

3. Assuming that COBRA coverage is the best deal. A lot of people who lose their jobs are attracted to COBRA coverage now, which lets them keep coverage under their former employer's plan for up to 18 months. The economic-stimulus plan provides a 65% subsidy for COBRA premiums for up to nine months for people who were laid off since September. (See Get COBRA Coverage for Less for more information.)

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But after the subsidy ends, the price will jump significantly. The average employer policy costs $4,700 a year for individuals or $12,600 for families, according to the Kaiser Family Foundation, and you'll need to pay 102% of the total cost yourself after the subsidy is over (or if you don't qualify for the subsidy).

If you have any health issues, COBRA may be your best bet. But if you're healthy and live in a state with a competitive health-insurance marketplace (not New York or New Jersey), you could find a better deal on your own. Many healthy people can find an individual policy for $250 a month or less (or $100 a month or less if you're young and healthy), especially if you buy a high-deductible policy with a health savings account. You can get price quotes for individual policies at eHealthInsurance.com or find a local agent at the National Association of Health Underwriters.

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