A recent New York Times article highlighted the daunting task of picking the right health plan. It’s one of the most maddening and complicated decisions (outside of doing your taxes) that you make on a yearly basis.
Seeking out the best price is smart. But is the lowest price always the best? Or should you pay more, expecting higher quality to come with a higher price? The answer often depends upon a number of factors, and it is sometimes difficult to unravel.
That’s certainly the case in shopping for health insurance. Even in the post-Affordable Care Act (ACA) age, health insurance products are particularly confusing. Most of us simply don’t have the background (or the interest) needed to ask the right questions and arrive at the best decision for our circumstances. Sure, we read, we talk to our coworkers, family or friends. But then it’s up to us to decide.
For some people, the strategy is to choose the least expensive option and then hope they won’t get sick. Others get confused or frustrated trying to figure things out, and choose the most expensive plan to make sure they are covered.
Understanding out of pocket expenses
Typically, lower-priced (premiums) health plans come with higher deductibles, and higher-priced health plans have lower deductibles. What goes into choosing the right plan is determining how much an individual will pay in out of pocket health expenses for a given year. The premiums are paid regardless of the need for healthcare. Therefore, it’s important to understand how much care is expected in any given year to decide on the best plan for your needs.
Before the advent of the ACA, many health plans had holes in their coverage. Particularly when it came to catastrophic events, many Americans ran the risk of going bankrupt. The ACA closed this loophole by setting a maximum out-of-pocket (OOP) cost for an individual of $6,600 for an individual or $13,200 for a family per year.
While still a lot of money, it’s much lower than the six-figure claims many Americans were seeing prior to the ACA legislation. The risk with choosing any plan, then, is not having $6,600 if something catastrophic happens.
Individual case studies
Let’s discuss both ends of the health-plan spectrum, using Ramon, George and Alisha as examples:
- Ramon doesn’t know it yet, but he will soon need major surgery, at a cost of $60,000.
- George expects to have knee surgery this year, which will cost $12,000.
- Alisha is young and healthy, and expects just a few checkups, for a total of $500, with her doctor.
Choosing a lower-priced plan
Let’s first look at the situation where George, Ramon and Alisha each choose a high-deductible, lower-premium plan. The annual premium is $3,000 -- an expense they will pay regardless of any health claims.
This plan has a $3,500 deductible and then pays 70 percent of the costs, leaving the individual to pay for the other 30 percent, known as co-insurance. However, federal law sets an annual maximum for out-of-pocket expenses for each individual, and for 2015, the maximum OOP is $6,600.
Let’s see how overall costs for Ramon, George and Alisha are affected by their choice of plans, given their different expected health expenses.
For each of our three people, the first $3,500 of medical costs is the deductible, and therefore paid by the individual. Ramon has $61,500 of bills left after paying the deductible, and the plan says he is responsible for 30 percent of that amount, up to the maximum OOP of $6,600. Because of the substantial costs involved, he easily hits the maximum. Ramon’s medical cost for the year is $6,600 plus his premium of $3,000, for a total of $9,600.
George’s knee surgery also exceeds his $3,500 deductible. Once that has been paid, he owes another $8,500 of his $12,000 total bill. He pays 30 percent of the amount remaining, or $2,550. His deductible plus his 30 percent co-insurance is $6,050. When added to the premium amount, George pays a total of $9,050 for the year.
Alisha’s medical cost for the year is $500, so she doesn’t hit the deductible or have to worry about the 30 percent co-insurance or the OOP. Her total cost for the year is $3,500, including her premium.
Now let’s compare what would happen if George, Ramon and Alisha each chose a more expensive plan.
The plan in this scenario has significantly higher monthly premiums, coming in at $6,000 per year. The plan has a much lower deductible, at $500, and then pays 90 percent of the remaining costs (co-insurance) up to the $6,600 annual OOP max.
Ramon hits the $500 deductible, after which he owes 10 percent of the remaining $64,500 of expenses, or $6,450. When that is added to the $500 deductible, the amount exceeds the OOP maximum, so Ramon’s responsibility is limited to $6,600. But, with the higher annual premium, Ramon’s cost for the year is higher, at $12,600.
George pays the first $500 of his costs toward the deductible. Then, of the remaining $11,500, he is responsible for 10 percent, or $1,150. Including the deductible, then, he pays $1,650, plus his premium, for a total of $7,650 for the year.
Alisha pays her $500 deductible and doesn’t have any more expenses. Her costs for the year are $6,500, including the deductible and her premium.
So which plan should each employee have picked?
Based on the information here, George’s total annual cost would be lowest with the second option, the higher-premium plan ($7,650 compared to $9,050), so that would be the clear choice for him between these two scenarios. Alisha is clearly better off choosing the lower-premium plan, which would cost her $3,000 less than the higher-premium plan.
Ramon comes out better by choosing the plan with a lower premium. It might seem counterintuitive for someone with very high expenses to be better off financially with a high-deductible plan. But, people with substantial medical costs are likely to hit their annual out-of-pocket maximums, making the high-deductible plan the better option.
Give employees the tools they need to decide.
Ideally, before they decide which plan to purchase, George, Ramon and Alisha would know how much their medical costs will be next year. What if their employer could help them know, with 95 percent certainty, what their costs will be, and what if they didn’t have to be insurance experts to make the best choice?
Employers can enlist a company, like Lumity, to take a hard look at the employee data, map specific needs and diagnose available options, and recommend a plan that will save the company (and employees) money.
Insurance is an important employee benefit. Everyone wants to get the right package. But absent strong data and a great system for analyzing it, getting the insurance package right is hit-and-miss. By shopping smart, you and your employees can be confident that whatever medical situation they face, they will have the coverage they need -- and they won’t overpay for it.
Your employees count on you to give them the best choices, and when you make data-driven decisions, you can.