How to Choose A Health Insurance Plan
Every insurance plan has a premium. A premium is the price you pay an insurance company every year for them to cover the risk of you having something bad happen where you need a lot of money to cover a loss. (This could be sickness, a tornado, robbery, car accident, million-dollar pitching arm gets injured, etc.) You’ll pay the premium to the insurance company every year whether you have a claim or not. The insurance company banks on the idea (pun intended) that they’ll pay out less in claims than the money they make from premiums, and they employ tons of actuaries (nerdy math people) who spend all day calculating the odds of a claim and how large it will be to make sure they take in enough money from those premiums to cover all the claims they’re likely to have.
The lowest premiums for health insurance usually will come through your employer. As a benefit, your employer will often pay part of the premium for you, making the insurance plans cheaper than what you could find on your own. The quality of plans offered by employers is different for everybody, however, so don’t be afraid to look at buying it on your own if your employer’s plan is awful (or if they don’t offer health insurance at all).
The second key part of a health insurance plan is the deductible. A deductible is how much money you will have to pay before an insurance company begins to pay for some of the bills. If that number is $2500, that means you will have to pay $2500 worth of medical bills before your insurance company starts to pay any portion of the bills. Keep in mind that this number accrues throughout the year, so you don’t have to hit the deductible each time you have a bill, but only as you combine ALL of your bills for the year.
Once you’ve paid an amount of bills equal to the deductible, the insurance company will begin paying a portion of the bills on your behalf. Often this is 75 – 80%. It will be listed on your plan’s information as coinsurance.
Example: $3000 medical bill $2000 deductible 80% coinsurance after deductible is paid (so you pay 20%) You pay: $2000 + $1000 X 20% = $2200
Another key number to know is your maximum out of pocket. This is the maximum you will ever have to pay in a year for medical bills, excluding the premium cost you pay to the insurance company. Once you reach this limit the insurance company will pay for 100% of your medical costs. This is the most important function of insurance. This gives you your total level of risk if the worst happens and you have an accident or are diagnosed with a rare disease or cancer and suddenly have very large medical bills.
If you have an emergency fund that’s larger than your maximum out of pocket, then you know you can pay for any medical emergency that comes your way. That’s a nice feeling. It means that any medical emergency doesn’t also have the added stress of figuring out if getting medical treatment will mean you’re missing rent this month.
Health Wealth Insurance
Time to look deeper. First, it’s important to understand what health insurance is, and what it isn’t.
At its core, almost all kinds of insurance really serve one purpose: to protect you from suffering a large loss of money due to some event (major sickness, tornado destroys home, car accident, etc.). It does nothing to actually protect you from those things happening, but it protects your finances from being wiped out in case something terrible happens to you. In exchange for this protection, you agree to pay the insurance company a certain amount of money every year, whether something terrible happens or not. This amount is known as your “Premium”, and it could be paid annually, monthly, bi-weekly, or in many different ways. For a healthcare plan provided by your employer, they typically take this premium out of your paycheck automatically for you. But the most important thing to remember is this: health insurance is really wealth insurance.
So what we’re looking at when deciding which health insurance plan to purchase is how much each plan costs vs. how much wealth it potentially prevents us from losing. As you’ll see when comparing plans, a smaller deductible and a smaller maximum out of pocket limit will mean you pay a higher premium. So to choose the best plan for us, we need to look at how much risk I have (how much money will I potentially pay if something bad happens) vs. how much that level of risk will cost me each year (how high are the premiums).
Let’s compare a few plans. I’ve used numbers from my sister’s healthcare options from her employer to give a realistic example.
It’s hard to tell straight off the bat, right? Plan A has the lowest max out of pocket, but Plan C has the lowest deductible. Plan B’s deductible and max out of pocket look really high, but its premium is also really low. Additionally, Plans A and B are eligible for an HSA account and even get a bonus $500 put into them by the employer! It’s clear it’s going to take a little math to figure out the best option here.
By looking at the plan information, we can calculate two important numbers for each plan – her minimum amount paid for healthcare per year, and her maximum amount paid for healthcare per year. Let’s use those two numbers to compare Plans A and B.
Min Paid/yr = Annual Premiums Paid - HSA Contributions from Employer
Max Paid/yr = Annual Premiums Paid - HSA Contributions from Employer + Max Out of Pocket
In Plan A, assuming she goes the whole year without incurring any medical bills, she is guaranteed to spend $1708 every year due to the twice-monthly premium, minus the sweet $500 HSA contribution her employer makes on her behalf. With Plan B she is guaranteed to pay only $244 every year, a $1464 difference! What is that extra $1464 buying you every year? Let’s take a look.
The maximum amount of medical costs she will face a year with Plan A is $5208 (health insurance is really wealth insurance, remember?). With Plan B she may wind up paying $6594 in a year. That means that Plan A gives her $1386 of extra wealth-protection each year if she were to have enough medical bills to reach the maximum out of pocket amount for each plan.
So that means that for paying $1464 extra every single year, she is protected against spending an additional $1386 if something bad happens and she needs a lot of medical care in one year. Your warning bells should be ringing, because that means that if she averages a bad accident every other year she’d STILL come out ahead with Plan B. Now that may well happen, but given that she’s a healthy and active 23 year old woman, is it likely to? No. What’s most likely to happen? Most years she won’t even sniff that maximum out of pocket number and she’ll be $1464 ahead by choosing Plan B. If she took that $1464 and placed it in her HSA, now she’s saving up for any costs that do come up AND her savings can grow with the stock market, tax free! (For more on the awesomeness of HSAs, see this article.) Plus, by not spending that extra $1464 on insurance premiums, she can actually afford to go to the doctor if she gets the flu or an injury, and she’ll be better prepared financially to handle a medical emergency because her stash of savings has been growing and growing.
Now let’s compare Plans B and C. By now you probably don’t even need me to tell you, because you can see it clearly as soon as you look at it. Plan C costs $2492 more than Plan B, and its maximum out of pocket costs are higher than Plan B’s! Many people will look at the lower deductible and spring for that plan because $6350 seems like so much money to pay before receiving benefits, but having the insurance company start paying insurance claims sooner comes with a $2500 price tag, so you can bump up the cost of those covered medical bills every time you look at them.
Again, we’re not trying to make every doctor’s visit “appear” cheap, we’re trying to preserve wealth in case something bad happens.
Some of you may say, “But wait, there’s a point before you reach the maximum out of pocket expense where Plan B becomes more expensive than the others.” You’re right, and for these particular plans that number is about $5,000 worth of medical bills (after insurance negotiates the price down). So she can also look at the plans and figure out if she expects to have less than or more than $5,000 in medical bills in a typical year. Looking in a chart, we can see that there’s only a tiny range of medical expenses where Plan C is the best. Again, in her case, given her age and current health, most years she’ll have less than $5,000 in medical bills so I’d still recommend Plan B.
Health insurance still boils down to a personal decision. What’s right for my sister might not be right for you and your medical situation, but hopefully now you’ll know how to look deeper at the numbers you’re given when selecting a healthcare plan to figure out which plan actually helps you limit risk the best and will save you money over the long haul so when a medical emergency does come, your wallet is prepared for it.