How to Budget for Health Care Costs

The cost of health care is one of the big-ticket items most U.S. households confront regularly. On average, Americans spend $12,914 per year on health care, according to the federal government’s most recent figures from 2021.¹ A dollar figure of that size deserves its own line in the household budget.

There are three types of health care costs to consider when budgeting: fixed costs, routine costs, and the unexpected. The main fixed cost for most households is insurance premiums (more on that later), while routine costs cover those regular checkups and procedures, such as dental cleanings, annual physicals, etc. You can get an idea of those costs in your own household by adding up last year’s spending and tacking on another 10% – roughly the amount health care costs increased in 2020, according to an American Medical Association analysis of government health care spending data.²

 
The unexpected is a tougher item to budget, by definition. One way to approach it is to set aside a monthly amount intended to cover a portion of any expenses not covered by insurance. If you have health insurance through your employer, you may be able to set up a flexible spending account (FSA) that lets you save pretax dollars to address medical and dental costs not covered by insurance. If you buy insurance from a health care marketplace, you can open a health savings account, (HSA), which works similarly. A third option, a health reimbursement arrangement (HRA), is another possibility, but it is only available through an employer. Each of these three plans have annual contribution caps that may change annually.

These accounts can help take the sting out of unexpected expenses and make it easier to create a budget that includes set amounts at regular periods, while giving you a tax advantage. They may also cover some items where insurance coverage can fall short, such as for extra pairs of glasses, medical devices, and more.

Health insurance involves more than a monthly payment for coverage; some expenses related to care are unpredictable, or at least not immediately obvious to those trying to create a working budget for health care. More than nine out of 10 Americans have health insurance, yet one in 10 owes money on a medical bill, and 3 million Americans have medical debt of more than $10,000, according to an analysis of government data by the Kaiser Family Foundation.³

When you’re trying to develop your health care budget, understanding a few terms can help you calculate the real cost of health insurance:

• Premium: This is what most people think about when they consider the cost of health insurance. It’s the regularly scheduled payment (usually monthly) that needs to be made to maintain coverage.

• Deductible: This is the amount the insurer expects the patient to pay every year before the insurance coverage begins to pay benefits. For example, if a patient runs a $5,000 bill at the hospital and their insurance has a $2,000 deductible, the insurer will only process the remaining $3,000. 

• Copayment: This is a fixed amount the patient pays the doctor or medical facility at the time of service. For example, if a doctor’s visit is $100 and the copay is $20, the patient pays $20 on-site and the remaining $80 is submitted by the medical provider to the insurer. 

• Coinsurance: This is the percentage of costs the insurer will cover after the deductible has been met. This can range from 50% to 100%, depending on the plan. For example, on that same $100 doctor’s visit above, if the patient has a plan with 50% coinsurance, the insurer would pay $40 and the patient would owe the doctor the remaining $40. 

• Out-of-pocket maximums: All deductibles, copays, and coinsurance paid through the year are factored toward an annual total. Once that amount is reached, the insurance policy will cover 100% of all subsequent expenses.

Your health care budget should factor in all these costs. When selecting a health plan, consider how the deductible, copays, and coinsurance will affect your overall budget. These items all influence the amount of your premium; usually, the higher those out-of-pocket costs, the lower the premium. A person with a chronic illness may choose to pay higher premiums for a plan with lower deductibles and copays because they will use those benefits, while a healthier, single person may trade off higher deductibles and copays for a lower premium and bank those savings.

Before budgeting for health care, it is useful to take a clear-eyed look at your finances and think about the future. Ask yourself three basic questions:

• What are your health care needs now? A newlywed couple who anticipate having children will have a different budget outlook than a couple in their 60s who will soon become eligible for Medicare coverage. There is a significant cost difference between individual health care insurance, family coverage, and the many options in between.

• How could your needs change? Like the newlyweds, do you anticipate changes in your household? Fertility treatments such as in vitro fertilization can be expensive and are not often covered by insurance. Do you expect to undergo any elective procedures, like vision correction or cosmetic dentistry? You’ll need to budget for those, since they’re not usually covered by insurance. At the other end of the life spectrum, rehabilitation and nursing home care can be a significant expense and could require a different, long-term care policy.

• What could go wrong? Accidents happen. If you have employer-sponsored insurance, can you afford to buy your own if you should lose your job? If you have small children (or plan to have them soon), they are an endless source of doctor’s bills, from routine care to those bumps and sniffles acquired in school. You can’t plan for these events, but you can set aside an amount – in an HSA or FSA, if possible, or just in your bank account – to cover deductibles and copays that would otherwise drain your savings.