3 Times to Consider Declining Your Employer's Health Coverage

Open enrollment is right around the corner, and with it comes your opportunity to make decisions that could dictate your medical expenses for an entire year. Is considering dropping your employer-provided coverage — medical, vision, or dental — one of the choices you should be thinking about?

First, a disclaimer: We are not suggesting that you should ever go without core medical insurance when you have the opportunity to be covered. Giving up employer-based medical insurance when there is nothing to replace it with is foolish, and we wouldn't want anyone to misinterpret our message. With that said, there are times when exploring options other than the coverage offered in your employer's benefits package can be prudent and even to your budget's advantage.

For decades, conventional wisdom was that if your employer offered you any type of medical, dental, or vision coverage as part of your benefits package, you took it. It didn't matter if it was fully or partially subsidized by your employer, or what was included in the coverage. The only choice you made, in some cases, was which of the coverage options to choose — the deluxe package, the no-frills package, or perhaps something in between.

Enter the age of consistent and significant insurance premium increases. As the focus on reducing employers' medical costs has become one of their primary cost-cutting technique, the cost has been passed on to employees and consumers. Some decry the reduction in employee benefits while others argue it is a good thing that consumers now have more control over their healthcare dollars. Whatever the case, the odds are that you have a higher monthly premium for a medical coverage package that covers less than it did before.

So when is it smart to defy conventional wisdom and go your own way on health coverage? Is employer-provided health coverage always a no-brainer, even when its out-of-pocket cost to you becomes several thousand dollars per year? We answer these questions by outlining three instances, which are becoming increasingly common, when you may want to consider dropping your employer's health insurance as part of your benefits package.

1. You can find less expensive medical insurance on the open market.

Few people actually compare the price of their employer-based health insurance with getting a policy on their own. Now that some lower-cost insurance vehicles are catching on, it is worth doing some price shopping.

High Deductible Health Plans (HDHPs), when coupled with a Health Savings Account (HSA) give consumers a different way of managing their health costs. In exchange for a higher deductible (typically between $1,200 and $2,500), you receive lower monthly insurance premiums and the ability to participate in an HSA. HSAs allow consumers to set aside pre-tax dollars in an account that behaves like a 401k, except instead of using it for retirement it is used for healthcare expenses.

The idea of finding a customized HDHP / HSA combo on the open market might be most appealing for those who work for smaller employers. The Kaiser Family Foundation found that in 2008, one-third of the firms with fewer than 200 employees offered their employees insurance plans with deductibles of over $1,000. When your deductible is already in four figures, you have more to gain and more immediate savings by switching to a good plan that you find on your own.

When should you not opt out of your employer-based medical insurance? First, it probably doesn't make sense to switch just to save just $10 or $20 per month — it won't be worth it. Changing to your own insurance probably only makes sense if you are going to save $100 or more per month on premiums. It depends on your particular situation, but when you are covered by your employer's insurance, you may have a deductible as low as $250 or $500, and copays in the $10 to $20 range. The difference between those deductibles and what you would be responsible for in a HDHP probably offsets the premium savings you would experience in marginal cases. When the monthly premium savings moves north of $100, however, it is worth a second look.

Be sure to look at your and your family's particular insurance usage as well. If someone in the family has a particular condition that is well-covered by your employer-based insurance, such as a therapy or an expensive prescription, you are probably smart to hold on to it as long as you can.

2. Your vision or dental coverage is more than just a few dollars per month.

Vision and dental coverage are sometimes overrated parts of an employee benefits package. While it is great to have these services covered by insurance, it is important to keep in mind that these plans don't always cover much, and usually leave a hefty amount of the medical cost up to the patient to cover anyway.

Take a common dental procedure as a case-in-point. A cleaning and x-rays at a recent dental checkup had a charge of $250. Of that, the patient was responsible for 40%. A second cleaning during the year was $125, for which the patient also paid 40%. Of $375 in total dental charges, $150 of it was borne by the patient and $225 by the insurer.

Given that the insurer only covered $225 of costs, it begs the question of the value that the patient is really getting in return for the insurance premium. Keep in mind that in the examples above, no fillings or other dental work was needed. That could change the equation substantially in either direction, depending on the finer points of the plan. Current benefits studies, such as this one by The Access Project focusing on rural health, found that the out-of-pocket dental expenditures of insured patients and non-insured patients was about equal for similar care, when adding in the cost of insurance premiums.

What about major dental or vision injuries or diseases? Eye or jaw injuries and eye diseases are most often covered by medical insurance, not by your vision or dental. When it comes down to it, vision and dental insurance cover a pretty small slice of all the things that could go wrong with you medically. Similarly, big-ticket items like orthodontia are often covered with low payment caps or not covered at all. If your insurance is the exception when it comes to braces, consider yourself lucky!

Of course, getting preventative vision and dental care can help spot problems early on can help you maintain a higher quality of life. Just remember, you don't necessarily have to have vision and dental coverage to get good vision and dental care. Self-insuring for routine dental care might not be such a bad idea, especially if your insurer burdens you with high premiums. To get even more value, paying for all dental and vision expenses through your Flexible Spending Account (FSA) will allow you to use pre-tax dollars for the care.

3. You have access to less-expensive, high-quality coverage through your spouse or an affiliation.

This may seem like a no-brainer — of course you would use different insurance if it was cheaper and better than what your employer offered you. We've become such a nation of employer-based healthcare benefits, however, that it is worth mentioning.

The most likely place to look for alternative insurance is with your spouse if you are married, or with your partner if your employer's plan offers partner benefits (more than half of all large companies do). Insurance plans offered to employees vary greatly, mainly based on company size but sometimes due to the company's discretion. If you and your spouse are fortunate enough to have your open enrollment periods line up at the same time, make the insurance of selection a joint decision rather than automatically signing up for each respective plan. Some employers will even pay an employee a portion of the money saved on insurance premiums if they forego the insurance plan — but they will often want to see proof that the employee will be covered elsewhere.

When comparing plans, look past the obvious premium differences. A colleague once concluded that she and her husband had pretty much identical health plans based on premiums and out-of-pocket costs. But when studying the fine print, they discovered that his insurance covered a routine therapy that a child needed, while hers did not. That made the value equation tilt strongly in favor of covering the entire family under his plan.

Other places to look for coverage are with Tricare or the VA if you are in the military or a Veteran. These plans often offer excellent coverage, but may require you to use their health facilities if you live near one.

The bottom line: Being your own patient advocate, price-shopping for medical services, and using low-cost generics and walk-in clinics can help reduce your cost of healthcare once you are already sick. Doing your homework during open enrollment, however, may help you score your biggest healthcare savings of the entire year. Take it seriously and do your homework, and you just may find that you can score some major savings for you and your family.

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Guest's picture

My employer coverage was EXACTLY the same (same plan, same cost) as what I already had, but I really wanted to switch to the HSA, so I naturally went with the employer health coverage.

Then I decided to go back to freelancing fullt-ime 5 months later; and now I'm have to redo my health insurance again...I should've just declined it in the first place ;)

Guest's picture

I think it's great that you've raised this conversation, since many people continue to do what they've always done, without questioning the overall value to their family. I would like to raise a couple of issues that I don't think were addressed, that might have some bearing on this decision.

Pre-Existing condition exclusions - largely absent from employer based group coverage, pre-ex is still very much a part of the individual coverage landscape. If you're switching from group coverage to an individual plan, you want to understand these restrictions very carefully to avoid a surprise down the line.

In your example about dental coverage, I would agree that perhaps an individual in that specific circumstance isn't getting much value out of their plan. That said, a lot of dental plans cover preventive care like cleanings and x-rays at 100% and your example doesn't really take into account the value of a plan if someone chips a tooth or wakes up with a toothache and finds they need a root canal and crown. Also, people who have dental plans are much more likely to receive preventive care which can catch things earlier and prevent more painful and comprehensive procedures later (a stitch in time saves nine?)

Domestic partner benefits can be a great way to access coverage for non-married couples, but don't forget to factor in the difference in taxation. An individual accessing benefits at his or her own employer can generally pay for that coverage on a pre-tax basis (if their employer has a Section 125 plan). Purchasing coverage as a domestic partner generally means that you forgo the tax benefits, paying for coverage with 'after-tax' money. OK, if you don't have other options, but this difference may wipe out expected costs savings if you have options at your own employer.

Again, a great topic to spur some thought as we head into the traditional benefits enrollment season.

Matthew McDermott, SPHR
Employee Benefits Consultant
The Landmark Group

Guest's picture
Victor Matson

Great article, but can someone do a piece on Open enrollment? I hear pre-existing conditions are accepted and December is the time to get medical coverage.

Guest's picture

Which is why if i get a full time job, i am sticking with my own health insurance....since jobs sadly don't last very long these days, why not depend on yourself first!

Guest's picture

Make sure you read the fine print on your spouse's health plan. My husbands former employer required the spouse to carry health care through their employer if it was offered. Regardless of the cost to the spouse. When my kids were little, I was not able to find part-time work that did not give me an option to buy into the company health plan, though the company did not subsidize my premium, making the cost on a part-time minimum wage job sometimes larger then my pay check. The added benefit was that I was forced to be a stay at home mom, something I will never regret.

Guest's picture

Yes, I agree. It is crucial to have core health insurance. But it is important to be a smart consumer. I was shocked at how high the deductible was for my group health insurance. I decided to keep my individual insurance. And, I have also decided to pay for my dental and vision out-of-pocket for the very reasons you listed. My visits to the ophthalmologist are covered under my medical insurance, not vision insurance.

Guest's picture

While you make valid points I think number one is a dangerous suggestions. While others mentioned pre-existing conditions, there is also the question of rescission and after the fact underwriting as well as the one question to dread, "have you ever been denied health care coverage before?"

The only time I might suggest going to the open market over a group plan is if the insurance your employer is providing you is in reality just window dressing with little or no coverage. Again that assumes you can read a medical policy and know the differences.

In addition a good group plan will have better prescription drug package than you can get in a one off basis. I will admit I dont know much about HSA's except for a friend of mine that had an HSA, and after his kidney stones passed he was out on the order of $9k in out of pockets.