How to Budget for Health Care Costs

6 Min Read | Published: July 5, 2023

Learn how to plan a budget that covers unexpected health care costs as well as those expected ones, including insurance premiums and deductibles.

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.

Budgeting for 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.