As a 1099 contractor, you work for yourself. This brings many advantages for you, and freedoms many traditional employees do not enjoy. On the other hand, it usually means that you need to fend for yourself when it comes to health insurance. The options may look daunting–and expensive. Before you dive into a traditional group plan, you should consider all your options. If you are relatively healthy, you can benefit from using a high-deductible health plan, or HDHP. With careful planning, this can save not only on your insurance costs, but your ultimate cost of healthcare as well.
Why Health Insurance Is Expensive
Health insurance companies are for-profit enterprises. While they generally cover health costs up to the contracted amount, they build their pricing so that they can make a profit. Further, plans under the Affordable Care Act require insurers to provide coverage to those with pre-existing conditions at the same cost as for those without. That means that premiums have to be high enough for the company to cover the costs they can expect from those people and still make money.
To make it all work, they set prices with very high profit margins from their healthier customers. If you come in without health problems, your insurance premiums will usually be much higher than what the insurer pays out for your health care. It balances out over the entire group of people covered, but healthier customers bear the burden of paying more for others’ care.
For W-2 employees, the employer usually bears a significant portion of this health insurance cost. As a 1099 contractor, though, you would be foolish not to look for options outside of a typical group policy. The good news? You can save significantly through other health insurance products.
How a High Deductible Health Plan Works
A high deductible health plan provides coverage meant to accomplish two things: cover basic health insurance needs and insure you against catastrophic health problems. Rather than providing coverage for a certain percentage of your costs throughout the year, it requires you to pay for health care costs until you meet your deductible–which according to healthcare.cov may be as high as $6,900 for an individual or $13,800 for a family. The premiums for these plans tend to be much lower than those of more robust group plans, because the insurer does not have to worry about covering as many potential procedures and costs.
That said, the plans typically cover preventative and routine care at 100%. Your annual checkups, children’s visits to the doctor, and basic recommended exams will be covered without having to worry about the deductible. If you are healthy and do not have health issues arise over the course of the year, this will usually mean that when you look at the combined cost of health insurance and out-of-pocket costs, you pay much less for your health care than you would under a group health insurance policy.
Advantages of a Health Savings Account
The HDHP might feel like a gamble–and in a sense, it is. If something goes wrong with your health over the course of the year, you can end up spending a great deal before you reach the end of your deductible. Even if you are healthy when you get your policy, there is no guarantee that an accident or illness will not strike.
This is where a health savings account, or HSA, can make a difference. When you sign up for an HSA, you are paying yourself up front for the cost of health care you may need. When you enroll each year, you have to estimate what your costs will be for health care visits, prescriptions you may need, and any surprises along the way. You then have money in place to cover those costs as they come up, and you gain the same advantage of paying in pre-tax that you do with insurance premiums.
Using an HSA gives you two key benefits over group health insurance policies. First, the money you put in, rather than going to a health insurance company, goes directly to you. You don’t pay someone else to get some of the money back in health care savings, but rather put the money away to pay directly for your care. Second, you gain the ability to roll your money over. While health insurance payments are sunk costs, anything you don’t spend from your HSA remains in your account when the calendar rolls to a new year.
A Combined Health Insurance Approach
An HDHP combined with an HSA can give you tremendous cost savings over group health insurance premiums–after you still usually have to pay 80% of your costs after meeting its own deductible. You pay less in premiums by going with the HDHP, and you have the security of your health savings account for unexpected costs that come in under the deductible.
When you look at your health care costs, you should look not only to your health insurance premium costs, but your overall health care expenditures. A group health insurance cost may feel like a safer bet. If you are healthy with no pre-existing conditions, though, what you are doing is providing safe money to the health insurance company and getting some of it back to pay for your care. You are helping pay for the care others need in the meantime, and taking their costs out of your own pocket.
Some people will benefit more from a group health insurance plan. W-2 employees whose companies pay part or all of the costs do very well, as do those who need a great deal of high-cost care. If you are a healthy 1099 contractor or a self-employed individual, though, you do yourself a disservice if you don’t take the time to compare. The Affordable Care Act has undoubtedly helped many people. For you, though, combining an HDHP with an HSA for your health insurance needs may be a better, more cost-effective solution. Take the time now to see if you can save money on the health care protection you need.