This article is general information, not insurance, medical, legal or financial advice. All dollar figures below are hypothetical, chosen to make the arithmetic easy. They are not real prices, and real costs vary widely by place, plan and person.
The cheapest premium is rarely the cheapest plan. Health insurance has several kinds of cost, and a budget has to cover each of them. Fitting a plan to a budget means asking two questions: what can you pay every month for certain, and what could you pay in a bad year?
The costs that make up the total
A plan’s yearly cost to you is built from a few pieces:
- The premium, paid monthly whether or not you use care.
- The deductible, the amount you pay for covered services before the plan starts sharing costs. Plans differ on which services the deductible applies to.
- Copays and coinsurance, your share when you use care. Our article on copay and coinsurance explains how a flat fee differs from a percentage.
- The out-of-pocket maximum, a yearly ceiling on what you pay for covered, in-network care. After you reach it, the plan generally pays covered costs for the rest of the year.
For more on how these pieces work together, see the article on premiums and costs. Note that the out-of-pocket maximum usually excludes the premium, and often excludes out-of-network care and services the plan does not cover.
A worked example with hypothetical numbers
Suppose two plans, labeled clearly as made-up:
| Plan A | Plan B | |
|---|---|---|
| Monthly premium | 300 | 450 |
| Deductible | 4,000 | 1,000 |
| Out-of-pocket maximum | 8,000 | 5,000 |
First, yearly premiums. Plan A is 300 times 12, which is 3,600. Plan B is 450 times 12, which is 5,400.
Now consider two scenarios.
A light year with little care. Suppose you use almost no covered care. You pay only the premium, so Plan A costs about 3,600 and Plan B about 5,400. Plan A is cheaper by 1,800.
A heavy year. Suppose you need enough care to hit the out-of-pocket maximum. Worst case under Plan A is 3,600 plus 8,000, which is 11,600. Worst case under Plan B is 5,400 plus 5,000, which is 10,400. Here Plan B is cheaper by 1,200.
Neither plan is better in every year. Plan A is cheaper if you stay healthy, and Plan B is cheaper and more predictable if you have a major event. The question is which risk you are better able to carry. Real plans have many more details, such as copays that apply before the deductible, so use the real figures from the plan documents.
Look at the worst case, not just the likely case
A common mistake is budgeting only for an ordinary year. A useful exercise is to add the yearly premium to the out-of-pocket maximum. That figure is roughly the most you would pay for covered, in-network care in a year (not counting out-of-network care and excluded services). Then ask whether your household could realistically find that money, from savings or credit, without serious trouble.
If the worst case is unmanageable, a plan with a higher premium and a lower ceiling may fit better, even if it strains the monthly budget a bit. If your savings could handle a high deductible, a lower premium may make sense, particularly if you expect to need little care. Neither is automatically right.
Check what your care will actually look like
Predicting use is imprecise, but some reasonable inputs are:
- Regular prescriptions, which tend to be steady costs. See the article on medication-driven plan choice for details.
- Planned care, such as a scheduled procedure or a pregnancy.
- Ongoing conditions that need frequent visits.
- Routine care that may be covered with no cost to you. Plans often cover some preventive services in full, though what counts as preventive varies.
If you rarely use care and have no planned needs, a lower premium may fit. If you expect regular care, a plan with higher premium and lower cost-sharing may total less.
Ways to reduce the burden
Depending on where you live and your situation, there are a few possibilities.
Financial help with premiums. Some places offer income-based premium help through a health insurance marketplace, and some offer cost-sharing reductions that lower the deductible and copays for eligible people. Whether you qualify depends on local rules and your income, so check the official source rather than assuming.
Employer contributions. If an employer plan is available, the employer’s share can make it cheaper than shopping alone. Compare what is taken from your paycheck for each tier of coverage.
Tax-advantaged accounts. A health savings account, available with certain plans, lets you set aside money for medical costs under specific rules. A flexible spending account works differently and is generally employer-offered. Neither lowers your bill directly; they help you pay costs in a particular way. Our article comparing HSA versus FSA covers the difference.
Public programs. If your income is low, a government program may cost little or nothing. Programs differ by location.
Watch for plans that look cheap
A very low premium can come with limits. Some plans cover less, impose caps on certain benefits or exclude pre-existing conditions. Short-term plans are one example, often meant as temporary coverage with narrower protection. Reading what is excluded matters as much as the price, and the article on coverage exclusions explains what to look for.
A simple budgeting routine
- Decide the most you can pay each month without strain.
- Decide the most you could realistically pay in a single bad year.
- List the plans you can access, and for each find the premium, deductible, copays and out-of-pocket maximum.
- Calculate a light-year cost and a heavy-year cost for each.
- Check networks and drug lists, since an out-of-network doctor can undo the math.
- Choose the plan whose worst case you could manage and whose usual case fits your monthly budget.
Costs and rules change each year, so repeat the process at every enrollment. If something does not add up, ask the plan or a licensed professional before you commit.