Are You Making Any of These Four Mistakes during Open Enrollment?

Open enrollment should be viewed like an annual physical: a time to take stock of where you've been, where you are now, and where you're headed.

Many employees dread open enrollment. It's a time that they must make myriad decisions about products that they struggle to understand. They have to figure out how to access the portal online and scroll through decision after decision. They usually minimize their expenditure of time and energy by simply renewing their current coverage.

Unfortunately, that's one of the four big mistakes that many workers make. The effects of these mistakes aren't always obvious. Workers aren't thrown in jail for lapses in judgment that cost them money (nor would this concept make a compelling spin-off to the Law & Order franchise). They don't receive a report card that reflects the financial effects of their choices. Their mug shots aren't placed in their company's wall of shame as a warning to other workers not to mimic their behavior. But they don't take full advantage of the opportunity that open enrollment affords them.

Let's examine four common mistakes that often lead workers to make what economists call suboptimal choices.

1. Not Framing the Open-Enrollment Opportunity Properly

To many workers, open enrollment is a time to "choose benefits." With this mindset, they go about looking at each benefit offered and determining whether the cost (premium) is worth the projected benefits.

This approach is far too narrow. And it starts with the vision. Open enrollment is an opportunity not to choose benefits, but rather to manage financial risk. Your employer provides you with money and products to help you manage many risks that you face: The risk that you need medical care that you can't afford on your own. The risk that you'll lose your income temporarily due to a disability. The risk that you'll die, leaving your family without years of an income stream that you would generate if alive. The risk that you won't have enough money to meet your expenses in retirement.

This perspective is important because it helps you prioritize the form of coverage that you choose. Vision coverage, for example, will pay $100 toward new contact lenses for you and your family. But contact lenses are a small, predictable budget item. Perhaps the $200 annual premium is better spent buying enhancing your long-term disability benefit or funding a Health FSA to reimburse a wide range of qualified expenses at a discount. [This isn't a knock on vision insurance, which may well be beneficial.]

2. Mindlessly Renewing Current Coverage

Many workers (82%, according to one recent survey) renew their current plan during open enrollment. That may be the right choice. But we also know from surveys that many workers spend more time surfing for the next series to binge-watch than they allocate to making their benefits decisions.

Perhaps you've heard the adage that a man never steps in the same river twice, because the river has changed - and so has the man. The same situation occurs during open enrollment. Your company may offer the same three plans each year, but the benefits, networks, and cost-sharing may have changed. Those changes may make a different plan a better option for you and your family.

Similarly, you may have changed. Have you received a clean bill of health or a worrisome diagnosis? Are you experiencing discomfort that may indicate an undiagnosed underlying injury, illness, or condition? Have you made substantial lifestyle changes - more activity, better eating, meditation, quit smoking, behavioral therapy, repayment of debt - that have reduced your probable need for care? Or the reverse - have you engaged in activities or adopted behaviors that increase your medical risk?

Your first step in approaching your decision on medical coverage during open enrollment is to assess realistically your own and covered family members' medical conditions and likely consumption of medical care during the upcoming year.

3. Picking the Plan with the Lowest Out-of-Pocket Responsibility

Many workers automatically choose the plan with the lowest combination of deductibles, coinsurance, and copays. In their eyes, the less they must pay out-of-pocket, the better the coverage. Yet many of the same people choose a $1,000 rather than a $500 collision deductible on their vehicle insurance because they want to save money on premiums. They understand intuitively that premium and out-of-pocket responsibility are inversely proportional: the higher the deductible, the lower the premium. And vice versa.

But at open enrollment, they don't see themselves as buying insurance. Instead, they believe that they're buying coverage. From this perspective, the more their medical plan pays for the services that they consume, the better the coverage. The premium is largely hidden as a payroll deduction. They focus on their net paycheck, which is already reduced to include the premium. What's left of their net pay must cover any out-of-pocket medical costs.

That perspective may lead to the wrong plan. They won't feel the direct impact. But every dollar that they spend on additional premiums is a dollar that's not available to fund retirement savings, new energy-efficient windows, or a family vacation. The effect may not be visible, but it will be no less real.

4. Leaving Money on the Table

Employers often provide financial incentives to employees who make certain benefits elections. For example, it's not uncommon for a company to match workers' contributions to their employer-sponsored retirement account, for example a 100% match on the first 3% of pay. Similarly, a company may offer a $750 Health Savings Account contribution to employees who enroll in the HSA-qualified medical plan, which usually has the lowest premium and the highest potential out-of-pocket exposure.

Employees should consider these gifts carefully. Yes, they come with strings attached. But those strings are tied to behavior that may be in your best interest.

The Role of Health Savings Accounts

So, how do Health Savings Accounts figure into this approach to open enrollment? At first glance, the HSA-qualified plan may not look as attractive financially as a plan that offers lower out-of-pocket costs. But it may be the best plan offered:

First, it helps you minimize serious financial risk. Yes, your out-of-pocket responsibility may be high as a percentage of your budget (may family has met about $8,000 of our $12,000 out-of-pocket responsibility this calendar year). But that's a small percentage of what may otherwise be a bill of millions of dollars that a family from my church would have faced without insurance as their daughter was treated in the intensive-care unit of an urban teaching hospital for more 15 months.

Second, your known and expected medical expenses will guide you in determining whether it's the best plan in the new year. If you know that you'll access maternity care or have impending surgery or have been recently diagnosed with a chronic condition that's not yet managed, you may want to spend more in premiums to reduce your out-of-pocket responsibility. On the other hand, if you haven't spent much out-of-pocket in recent years for covered care, you may be better off financially assuming a small portion of the potential financial risk in exchange for guaranteed premium savings. Because you are, in effect, self-insuring (assuming financial responsibility for) more services before insurance begins to reimburse your claims, you become acutely sensitive to prices. When you spend a little time on your insurer's pricing tool (if you don't know where it is, contact customer service), you may see the 500% differences in prices between low-cost and high-cost providers that exist in many geographic markets.

Yes, you want to receive care from the absolute best provider, regardless of price, when you're undergoing neurosurgery or cancer treatment. But you may also conclude that many services are commodities - for example, MRIs, lab tests, diagnostic colonoscopies, or treatment for torn meniscus. When you shop for care, you reap the savings.

Third, your employer may offer you a tax-free contribution to your Health Savings Account if you enroll in the HSA-qualified plan and meet other eligibility requirements to fund the account. That's money that becomes yours the moment it hits your account. No vesting schedule. No requirement that you spend it that year on qualified expenses. That contribution helps offset the higher expenses that you'll incur next year or years from now (balances carry over for future use with no limit on the amount carried over).

The Bottom Line

Don't procrastinate during open enrollment. Don't mindlessly check the same boxes as this year. You're making important financial decisions that may be worth $1,000 or more to you and your family next year. Imagine spending one hour studying your benefits and freeing up $1,000 to contribute to a Health Savings Account or a retirement plan to reduce your taxable income and provide funds for future expenses.

Do the math: One hour and $1,000 "earned." Does your employer pay you anywhere near that wage hourly?

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #HealthSavingsAccount #TaxPerfect