Take charge of your health care

Employers and Uncle Sam want you to get involved in lowering your health costs. To save money and still get great care, you have to play by new rules.

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By Amanda Gengler and Ismat Sarah Mangla

Jeff Erb has lost more than 100 pounds since January 2007, when he joined an employer-sponsored weight-loss contest, one of many new initiatives intended to enlist employees in lowering health-care costs.
Vertelney's employer switched to a high-deductible health plan, and it's made her life only more complicated. Since she spends a lot on prescriptions, she can't save for future health costs.
The Jeffords' health plan won't cover the first $10,000 of most annual expenses. The good news: Jason's company kicks in $5,800 to a tax-free savings account they can use to cover health-care costs.
Need-to-know terms

(Money Magazine) -- Jason and Jean Jeffords of Bedford, N.H. pay about $240 a month for their health insurance, which they get through the small company that Jason works for. It's a pretty comprehensive package of benefits. Hospital stays? Check. Trips to the E.R.? Check.

There is just one (very big) twist: Their insurance won't pay for most of their medical care until they've met their $10,000 deductible for the year.

Fortunately, Jason's employer will offset that cost by depositing $5,800 this year into his health savings account, or HSA, a special tax-free savings vehicle available to people with certain high-deductible insurance plans. (The company also promises to pick up the other $4,200, if needed.)

The Jeffords, who say they spend about $2,000 a year on care so far, love the deal. If they stay relatively healthy and watch their expenses, the money in their HSA builds and builds. They can use it to cover deductibles, to pay for procedures their insurer won't or, if Jason leaves his company, to pay premiums to temporarily continue with his current plan.

Or they can save it for retirement, in which case an HSA is worth at least as much as a traditional IRA. Their balance is up to $13,000. "If I'd had this plan 20 years ago, I would have been in much better shape financially," says Jason, who is 41 years old.

Lisa Vertelney, 50, of Plymouth, Minn. also has a high-deductible plan with a health savings account. For her it has been a nightmare. Her family deductible is $3,900, and her employer puts only $700 a year into her HSA. Vertelney takes some expensive medications, so all of the money she manages to put into the HSA goes right back out again. Although she's spending money out of pocket, that hasn't freed her from the usual maddening insurance bureaucracy.

"I cannot tell you how many phone calls I have made about reimbursements from my insurer, billing errors and payments not posted toward my deductible in a timely matter," says Vertelney. What's more, she says, the financial burden of meeting the deductible has made it that much harder for her to save for retirement.

For better and for worse, in a few years your insurance plan might look a lot like those of Vertelney and the Jeffords. Employers are desperate to curtail the ever-mounting cost of health care, and they are turning to high-deductible insurance plans to push more of the burden of paying back onto your shoulders. Even if you are still in a traditional plan, you can expect elements of the high-deductible trend to creep in.

Plans are upping the share of costs employees must pay every time they see a doctor or go the hospital. They're loading on incentives for you to seek out the lowest-cost prescriptions. And many employers and insurers have become outright buttin-skies in an effort to keep you healthier. Apparently the size of your waistline isn't your own darn business anymore.

We're entering a new era of health care, in which you'll increasingly be expected to check up on prices and shop around before going under the knife or popping a pill.

You might not like this. (In fact, so many people hate it that Democrats have turned universal health care into a resonant campaign rallying cry.) But you must learn to manage it. How well you understand the new rules - and how well you play by them - could earn you or cost you thousands of dollars. More important, it could mean a lot to your health.

New rule No. 1

Whatever kind of insurance you have, it's now your job to hold costs down.

Health-care spending is rising like a rocket - the government projects it will double in the next 10 years. Employers have been eating most of these new costs, which many economists believe is one reason businesses were relatively stingy with raises in recent years despite strong economic growth.

But employees are paying plenty out of their own pockets too. Insurers' "cost sharing" devices include deductibles as well as co-pays, those flat $25 or $50 fees that nibble away at you, and co-insurance, which is a percentage you must pay of the total cost for any service.

In 2008, according to the human-resources consultant Hewitt Associates, U.S. employees' average out-of-pocket spending is expected to rise 10%, to more than $1,700. (Ouch.)

It could get worse. With the economy slowing, companies are going to be eager to cut their costs. And with nervous workers clinging a little bit harder to their jobs, it will be even easier for firms to trim their benefits.

Take charge. First, if your company offers access to a flexible spending account, make sure you're using it. (Only 35% of eligible people do so.) Yes, dealing with the forms and the human-resources department can be a pain. But it's worth it. If you are in the 28% tax bracket, setting $2,000 aside in an FSA gets you a $560 federal income tax break.

Here's how it works: You make an estimate of what you'll spend on health care for the year, and that money goes into your account without getting taxed. Your employer decides how much you can contribute, with limits usually ranging from $3,000 to $5,000. The money can go to co-pays, your co-insurance costs, eyeglasses, dental care and even, depending on your employer, some over-the-counter drugs.

The tricky part: You must use the money by the end of the year (or at some companies, by March 15 of the following year) or you lose it. So be conservative when you estimate your expenses, especially the first year you try it.

Second, it makes more sense than ever to find out what your medical care will cost - which isn't to say this will be easy. "Compare the information on a box of breakfast cereal with what you know about the quality or price of a doctor or hospital," says Harvard business professor Regina Herzlinger, an advocate of market-driven health care. (Raisin bran wins hands down.)

But big insurers are getting better at sharing information with their customers, and many insurers have online tools that will show you average costs in your area for a procedure (see "Click Here for the Best Care" ).

Finally, get as clear as you can about network rules. Some plans now offer lower co-pays if you use doctors they've judged to get better results relative to the costs. On the other hand, using a provider outside your network may sock you with an even larger bill than you expect.

Generally, when you go out of network, the insurer says it will pay a fixed percentage of the cost. But that cost may be based on what the insurer considers the "reasonable and customary" fee, not what the doctor or hospital actually charges you.

The New York attorney general has alleged that some insurers are using artificially low "reasonable and customary" levels to hold down reimbursement rates. So if you must head out of network, talk to both your doctor and your insurer about the bill you can expect.

New rule No. 2

You can pay a lower premium.

But you'll have to assume more financial risk. High-deductible health plans like the ones Vertelney and the Jeffords have are taking cost sharing to new extremes. For many self-employed people or those without insurance at work, these are often the only affordable option.

High-deductible policies - sometimes called "consumer directed" plans - used to be unusual in the world of big-company group health insurance. That's changing quickly. At almost 10% of large companies, high-deductible plans are the only choice. Millions more people will see a high-deductible plan as one of their options at their next open enrollment. This year at least 40% of big firms planned to offer a policy with a deductible of $1,100 or more, according to consulting firm Watson Wyatt.

Here's what's in it for you: High-deductible plans charge lower premiums. And depending on your plan, you may get one of two tax benefits. With a health reimbursement arrangement, or HRA, your company can give you tax-free money to spend on health care, but it's not yours to keep. You will usually lose it when you leave the company. HSAs, on the other hand, let you build up your own savings. You just have to use it for health care or pay taxes and penalties.

What's the point of these tax incentives? Policymakers are in a panic about rising medical costs and hope that if you have more financial skin in the game, you'll be more careful about how you spend your health-care dollars. This is still a controversial notion.

"The whole idea that people will be able to shop the medical marketplace, fully informed, the way they shop for computers or airlines, is fanciful and won't work," argues Robert Berenson, an M.D. and senior fellow at the Urban Institute.

This much is clear: No matter how much you might try to keep your costs down, the health-care system will always be full of surprises. You can't, after all, shop around in an emergency.

Jack Savage of Middleton, N.H. learned that when he crashed his motorcycle in 2004. The first hospital he was taken to didn't have a working MRI machine, and that meant a second expensive ambulance ride to another hospital. Since he had a $7,500 deductible, he paid for it all.

Take charge. Obviously, switching into a high-deductible health plan can be risky. So what should you consider before you leap?

First think about your overall health. If you take a lot of pills or expect to see the doctor often, the amount you have to spend out of pocket on a high-deductible plan could easily outweigh what you save on premiums. (Unlike some traditional plans, however, all HSA-eligible plans have limits on in-network out-of-pocket costs.)

Most high-deductible plans with HSAs will pay for some preventive basics, such as annual physicals and mammograms, even before you reach the deductible. So a young, healthy person might go a long time before paying for anything. Indeed, one big worry about high-deductible plans is that they'll be too attractive to the healthy - if only sicker people want traditional insurance, those plans could become more and more costly.

You also need to be sure you are financially healthy enough for a high-deductible plan. (Obviously, that's easier if your employer helps with HRA or HSA contributions.) Rule of thumb: Make sure you can pay not only the deductible but any additional co-insurance or co-pays.

And not necessarily for just one year. Say you have an accident in December - after your company's open enrollment has ended - and rack up $5,000 in immediate costs. You may have covered your deductible for the year, but if your physical therapy runs into the next year, you'll have to pay again.

Still, for high-income people who have the savings to handle surprises, a plan with an HSA might be the best retirement vehicle since the Roth IRA. Like 401(k) contributions, HSA dollars aren't taxed when they go in. But they are also tax-free when you spend them on health care. That's huge: You already know you have to spend plenty on medicine in retirement.

Retirees spend an average of $4,300 a year on health expenses, according to the Medicare system. And if you wait until you are 65, there's no special penalty for using HSA money on nonmedical expenses. You just have to pay taxes, as with a traditional IRA.

Whether you join a high-deductible plan for the tax break or simply because you have no other choice, you'll need to be vigilant about costs. (That's the point of these things.) Even though you'll be spending a lot of your own money, you'll still have to deal with your insurer's bureaucracy.

Try to stay in-network because you'll be able to pay your insurer's lower negotiated rate, and out-of-network costs may not count toward the main deductible. And try to negotiate where you can.

"If you have a high-deductible plan, tell your physician that you are paying the bill out of pocket and ask if you can pay a lower rate," says Jim King, president of the American Academy of Family Physicians. He or she may be especially receptive if you can offer to pay on the spot. Of those who negotiate with a doctor, around 60% succeed, according to a Harris Interactive poll.

New rule No. 3

It pays - sometimes in cash - to change your lifestyle.

Jeff Erb of St. Louis used to weigh 288 pounds. His cholesterol was climbing. He took high-blood-pressure medication and suffered heart palpitations. In January 2007, Erb's company, the online brokerage house Scottrade, launched a Biggest Loser-style contest for its employees.

"I didn't think I would be able to do it," says Erb, who is 26. "I have been big since I was five years old." But motivated by a chance to win extra vacation days and money, he started watching his portions and hit the gym three days a week for 45-minute cardio sessions. A year later, Erb has lost a whopping 114 pounds. His team came in second and he won $250. But more important, that list of medical problems has disappeared.

Nearly 75% of big companies plan to dole out financial incentives to their workers to encourage healthy lifestyles, says Watson Wyatt. And it's not just about contests.

Here's a more typical deal: You can nab, say, $100 cash or a $25 lower premium by completing a health-risk assessment, which asks details about you and your family's medical history and current health, such as body mass index, blood pressure and nutrition. The insurer then analyzes it, often along with your claims history.

If you are at risk for health problems, a nurse or "health coach" will help you create an action plan. Simply showing up to that weight-control or smoking-cessation class may earn you another $200. "Right now it is more about participation - going to the weight-management class - not necessarily losing weight," says Alexander Domaszewicz of Mercer, another benefits consultant.

But some companies reward results - $5 for every 1% of body fat shed, for example - and a small but growing number even penalize you for unhealthy behaviors. In fact, 16% of the nation's largest employers now charge smokers more for health insurance than they do nonsmokers.

Take charge. It's swell that your employer wants you to be healthy, but your bosses aren't doing it out of the goodness of their hearts. They want to save money. So don't be afraid to stick up for your rights if the company gets a little too pushy.

For example, let's say your firm offers a $40 lower premium if you have a body mass index between 19 and 26. If getting there requires you to drop 50 pounds, it's unrealistic and unhealthy to do that too quickly. Ask your employer if you can lose that weight, or maybe half of it, over a year. They are required by law to offer an alternative if the incentive is based on an outcome that is medically inadvisable or too difficult for you.

As for those health-risk assessments - what about your privacy? If the form is being collected by the insurance company, the truth is they may already know a lot about you, so there's not much to lose by filling it out.

If your employer or a wellness program they've hired is collecting the form, ask some questions about who will see it. Let's say your boss learns that your family could cost him big money in health-care expenses. It's illegal for him to use that information against you, but it might be hard to prove that that's why you were fired, says Tom Bixby, a health-care lawyer at Neal Gerber & Eisenberg in Chicago. You'll have to weigh this risk against the financial reward the company is offering.

New rule No. 4

It's worth your while to pay attention to those little pills.

The days when you get a prescription and just head straight to the neighborhood pharmacy are fading. Prescription drug spending now makes up 10% of health-care costs - and is rising.

Not surprisingly, health plans are not only pushing you to take cheaper pills, they're increasingly trying to dictate where and how you buy them. At the same time, with costs to consumers zooming, big retail chains have spotted a market opportunity and have dramatically cut prices on some popular drugs.

Take charge. It's tempting to ignore all the mail your insurer sends you about plan changes. But it's worth your time to check out the latest rules on prescriptions. It can save plans money if you buy prescriptions directly through a pharmacy benefits manager. (That's the company listed on your insurance or prescription card.) That's why many plans now penalize you for using a brick-and-mortar pharmacy. A 90-day supply of one prescription may cost $15 less through the mail from the benefits manager.

Plans often charge different co-pays for different pills, so ask your doctor if she is familiar with your plan's rules and is offering you the least costly - but still effective - option.

You may also be able to search your insurer's website to find out whether there are generic or other alternatives to the medication you've been prescribed. (In many plans your pharmacist has to give you a generic unless your doctor indicates otherwise.)

Retailers including Wal-Mart (WMT, Fortune 500) and Target (TGT, Fortune 500) recently began offering many generic drugs for as little as $4. To start comparing prices, go to your plan's website or drx.com to search for the lowest price for your drug and dosage. The sites will list retail prices from brick-and-mortar stores, online sellers like Costco.com and perhaps even your benefits manager.

New rule No. 5

You can get more out of Medicare.

Think your employer's health plan is complicated? Just wait until you hit 65. Medicare has undergone some sweeping changes. In 2006 the system began offering prescription drug coverage - the catch is that you have to choose from among dozens of privately run plans.

You can also opt out of traditional Medicare coverage and join a private Medicare Advantage plan. "There's a lot of choice now, and that's a good thing," says Medicare expert Sarah Thomas of AARP. "But it may be a little overwhelming."

Take charge. Medicare prescription plans have an additional monthly cost on top of the regular Medicare premium. And they don't cover everything: There's sometimes a deductible, as well as the notorious "doughnut hole." For example, you might not be covered after total drug costs hit $2,510, though Medicare will step back in and cover you once you've paid $4,050 out of pocket.

So how do you pick? If you're healthy now and aren't taking a lot of drugs, find a plan with a low premium, suggests Thomas. You can switch once a year. If you do have hefty prescription costs, make sure the pills you take are included on a plan's preferred-brand list.

Medicare Advantage plans replace the Part A and Part B coverage most retirees still use. By joining a private plan, you can pay lower co-insurance fees and perhaps get extras like dental coverage or insurance when you travel abroad. Some plans also include prescriptions. What you may lose: the right to go to any doctor or hospital you want. So if you are considering an Advantage plan, make sure your doctor and preferred hospital are in its network.

If you have significant health problems, watch out for plan restrictions that hit sicker patients harder. For example, some plans have steep co-pays for the first 20 days in a nursing home. A free national program offers one-on-one assistance with Medicare choices - visit shiptalk.org.

Once you figure it all out, don't get too comfortable. As long as health costs keep rising, the rules will keep on changing.

Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.  To top of page

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