This Q&A column addresses questions from real patients about health care costs. Have your own question? Get your answer here.
Question: I understand the importance of setting aside money for health care expenses, so I'm planning to use a flexible spending account this coming year. The problem is I don't know how much to contribute. How do I begin estimating my costs?
Answer: Flexible spending accounts (FSAs) are a great way to prepare for your coming out-of-pocket health care costs, and they have the added benefit of allowing you to fund them with pretax payroll dollars. But because you typically have to "use or lose" the funds in these employer-offered accounts by the end of the year, you'll want to be cautious in contributing just enough to cover your costs without much excess.
I'm going to walk you through the process for deciding how much to contribute to your FSA at open enrollment time. However, it's important to note that this is not an exact science. It's nearly impossible to know precisely how much you'll need ahead of time. The goal here is to anticipate, as closely as possible, to what extent you'll be making use of your insurance -- and in need of FSA funds.
Make a list of your anticipated health care needs.
Start by thinking through your health care needs for the upcoming year. List any regular prescriptions, anticipated doctor and specialist visits, and any planned procedures, like childbirth or surgery. Also, allot for a few unexpected sick visits, and possibly an emergency room visit (or two), particularly if you have children.
Next, you'll assign dollar amounts, or close approximations, to your medical needs.
Refer to your plan documents when estimating costs. These are available on your insurer's website. If you're signing up for a new plan this open enrollment, the plan documents should be made available through your human resources department.
Use your deductible as a guide.
An estimated 81% of insured employees with individual coverage have deductibles -- more than ever -- and the average deductible is increasing at a rate faster than income, according to the Kaiser Family Foundation. Because you'll have to pay this amount in health care costs before your insurance company starts picking up a bigger portion of the tab, your deductible is a good starting point for your FSA.
It would be great if everyone could set aside their entire deductible amount in their FSA, but that isn't always possible. Some high deductible health plans (HDHPs) come with deductibles of several thousand dollars, and even when your FSA money is coming out of your paycheck a little at a time, not everyone has that income to spare.
Get as close as you reasonably can to setting aside your deductible amount.
If you rarely see the doctor and aren't likely to spend much on health care, you may not meet your deductible at all, so adjust accordingly.
Add copayments and coinsurance.
After you meet your deductible, you'll be responsible for copayments and coinsurance. Copays are fees you typically pay for regular clinic visits, and possibly emergency room visits. For services not covered by a copay, you may be responsible for coinsurance, a certain percentage of the billable costs.
In an example plan with a $1,500 deductible and 20% coinsurance, you'd be responsible for 20% of your medical costs after reaching your deductible.
When trying to determine just how much your health care for the year will cost, you can use what you know about the fees at your regular doctor's office, but also a price comparison site like Healthcare Bluebook. Remember, these are estimates only, and don't sweat it if you have to do a little guesswork.
Estimate and add prescription drug costs.
Monthly prescription costs can add up throughout the year. Total up your prescription copays for the year, budgeting for a possible round of antibiotics, in case you or a family member get sick.
Allocate for unexpected costs and emergencies.
This part of estimating your annual health care costs gets tricky. It's hard to plan for what you can't predict. If you're generally healthy and rarely visit the doctor, you can be conservative. However, if you have a chronic condition or young children, it would be smart to budget in a few unplanned doctor's visits, and possibly a hospital stay. Use last year's expenses as a guidepost here.
Plan for a surplus.
Because most FSAs are "use it or lose it" accounts, you may find yourself at the end of the year with unused funds in your account. Have a plan in mind should this happen, so you're not scrambling to spend as the final days of the year tick by.
Options for unused FSA funds include such things as Lasik eye surgery, non-cosmetic dental care, dentures, chiropractic care, acupuncture, diabetic supplies and smoking cessation aids.
Note: Some FSAs have a grace period or the ability to roll over as much as $500 to the next year. Check with your employer for your plan specifics.
Rinse and repeat.
Every year, track where your FSA funds go. Whether you ended up with unused funds or not enough in the account, you'll want to use what you've learned to get closer to hitting the mark the next year.
Flexible spending accounts are a great way to budget for health care expenses while reaping tax benefits. Getting as close as you can to your actual costs for the year will make paying for medical care easier throughout the year.