Navigating Rising Healthcare Costs

As a certified financial planner and someone who reports on personal finance, I often find myself pondering ways to manage soaring healthcare expenses. It seems that for many employees, health insurance remains a primary benefit, yet not everyone takes the time to choose the right plan, according to recent surveys.

A survey by the Employee Benefits Institute, which included over 2,000 respondents in the fall of 2024, found that nearly one-third of participants spent less than 30 minutes selecting their health insurance plan for the upcoming year.

Interestingly, about 48% of millennials reported selecting a health plan “blindly,” simply because they didn’t fully understand their options. This was highlighted in another JustWorks survey that involved nearly 4,200 adults in the U.S.

With healthcare costs on the rise, making an ill-informed choice can lead to considerable expenses. Companies expect health planning expenses to increase by 9% come 2026, based on responses from a June survey that involved 121 large employers covering 11.6 million workers.

For 2024, employers are estimated to cover 75% to 85% of healthcare planning costs, as revealed by a Kaiser Family Foundation survey of 2,100 companies. Workers, on the other hand, are responsible for the remainder, mainly through insurance premiums and out-of-pocket expenses.

However, as costs rise, companies may pass more financial responsibility onto their employees, which was noted in a Mercer survey of around 700 organizations.

Preparing for Open Enrollment

With open healthcare enrollment approaching this fall, it’s crucial to prepare. A significant challenge in selecting health insurance is anticipating future medical needs. Though predicting the future is tricky, looking back at past medical expenses can help.

A few years back, I started keeping track of my annual out-of-pocket medical expenses—co-payments, prescriptions, and even over-the-counter items. Admittedly, this task isn’t particularly exciting, but it serves two important purposes during open enrollment:

• To find the most suitable health insurance plan
• To determine how much I should set aside in my Flexible Spending Account (FSA)

This compilation of expenses can also come in handy during tax season, especially in terms of itemizing medical expense deductions, even if that applies to only a fraction of filers according to IRS data. It’s worth noting that unreimbursed medical expenses must exceed 7.5% of your adjusted gross income to qualify.

Paying for Health Coverage

Typically, you have two payment approaches when it comes to health plans: pay higher premiums upfront or choose a plan with higher deductibles, where you pay more later once care is utilized. By keeping detailed records of your healthcare expenses, you can discern which option might be more affordable for you moving forward.

If you’re generally healthy and don’t often seek medical care, a plan with higher deductibles might save you money. Preventive services, for instance, tend to be covered at no cost before you hit your deductible.

However, if you anticipate needing multiple treatments or surgeries, considering a plan with a higher premium and lower deductible may be more financially sensible.

Coverage for Deductibles

No matter which health plan I choose, I always strive to cover my deductibles and other out-of-pocket costs using my FSA. Utilizing pre-tax contributions allows me to save on eligible medical expenses, co-payments, and deductibles.

The downside is that FSAs operate on a “use it or lose it” basis, meaning you have to spend the balance before the year ends, so it’s wise to monitor your expenses closely.

In 2024, the average household contribution to an FSA was around $2,250, with expectations that 77% of participants would have spent their balances by November.

Utilizing Health Savings Accounts

Before joining a large organization, I spent six years freelancing, which meant I contributed to a health savings account (HSA). HSAs function somewhat like an emergency fund for medical expenses and have the added benefit that the balance rolls over each year, unlike FSAs. If you can invest the money, your HSA can offer long-term growth.

This account also comes with three significant tax advantages: pre-tax deductions on deposits, tax-free growth of funds, and tax-free withdrawals for qualified medical expenses. According to a survey, around two-thirds of businesses offered investment options for HSAs, although only about 18% of participants chose to invest their balances, reflecting a slight decline from the previous year.