By In Uncategorized

Picking a Health Plan, Part 1: How to Weigh Premium and Deductible When Picking Your Health Insurance Coverage

The average person spends less than 15 minutes per year researching and selecting a health plan. Dang! That’s not much time to spend on something that’s worth $20,000 or more per year for you. But we get it. We’re all busy. This piece is the first in a series on what factors to consider when making health insurance coverage choices. We’re right at the top, with premium and deductible.

Premium

For a lot of people, evaluating a health plan choice starts and stops with the premium. In the absence of other ways to look at it, our minds default to thinking of it like any other monthly expense. The difference is that with most monthly expenses, you’re either paying for services already rendered (electric, cable, rent), or you’re paying down something (car, mortgage). With a health insurance premium, like other insurance, you’re paying for what you might need and/or use in the future.

The other difference with employer-offered coverage, and probably the one that keeps us from looking too hard at the choice, is that it’s coming straight out of our paychecks, so it can feel like nothing at all. But it’s always something.

With that said, the premium is and always will be the main consideration when making health coverage choices. You can understand it, so you look at it somewhat on its own. If I pick the PPO, it will cost me $200 per month, whereas if I pick the HDHP, it will cost me $125. We’ll get into more detail on the real costs and benefits of these two plan types beyond the premium, but for now you can see the simple math that our minds will gravitate toward.

But, as we know when we become more mindful of our expenses is that a health insurance premium is just one of many expenses to consider. Just like your transportation expenses are not just your car payment (if you have one), they are also gas, maintenance, parking, etc. — your premium is just one of many components of your health expenses to consider, and one that is rarely as straightforward as it may appear.

Be sure that you’re not just doing the math on the difference in premiums but rather you’re considering all factors before you commit to a health insurance plan.

Deductible

The deductible used to be an afterthought for employer-based health insurance. They were all relatively low, or at least low enough that it didn’t mean a ton of money either in premium savings or what you might end up paying for your health expenses if you chose one plan over another. But deductibles have gone up nearly 300% in the past decade, averaging nearly $1,200 now and much higher, like $5,000-$10,000, for high-deductible health plans.

That means that you can save money in monthly premium. My old company had an HDHP with a $5,000 deductible that had a $1 per month premium for single coverage, compared to the PPO for about $50 per month. But you may end up spending a LOT more if you end up in the instacare or emergency room.

Why? Because this part of health insurance works just like your car or homeowner’s/renter’s insurance: you have to meet your deductible before your insurance starts paying for most things.

Example: Let’s say you elect the $1 HDHP my company offered instead of the $75 PPO. With the $1 plan, doctor visits cost me $150 each and I get charged for any additional services or prescriptions at full (negotiated) price as well. With the PPO, I have a $30 doctor visit copay and 50% coinsurance (see below for definitions of both). If I get sick and have to go to the doctor three times and pick up two prescriptions, here’s what my healthcare costs might look like for the year:

HDHP PPO
Premium (annually) $12 ($1 x 12) $600 ($50 x 12)
Doctor Visits (cost x 3) $350 $90
Prescriptions & Tests $450 $125
Total costs for the year $812 $815

You see how close the costs can end up being in those two cases. That’s not by accident. Insurance companies have complex actuarial models that make sure they’re not giving away more than they can afford. So you should make sure you’re not giving away more than you can afford, either.

Ah, but here’s the caveat about deductibles: If you have an HDHP with health savings account (HSA), and you’re using that HSA as an investment account — which you definitely should if you have the means — then you’re working with different math anyway.

Here’s what that same scenario would look like with a maxed-out HSA:

HDHP PPO
Premium (annually) $12 ($1 x 12) $600 ($50 x 12)
HSA contribution (maxed out) $3,450 ($287.50 x 12) $0 (no HSA)
Doctor Visits (cost x 3) $350 $90
Prescriptions & Tests $450 $125
Total costs for the year $4,262 $815

So now, if you have a spender’s mentality, or if you’re working on paying debt down before building retirement income up, the PPO looks quite a bit better, dollar for dollar. But if you have the FI mentality, you know that the majority of that $4,262 is being invested and will increase in value over time. Plus, HSA funds are pre-tax, so it looks like less coming out of your paycheck and also, when you use it to pay medical expenses, it goes 15-25% further because it’s tax-free dollars you’re using.

The lesson with premiums and deductibles is that it’s not a clear-cut, dollar-for-dollar choice. You need to weigh your choices with your means and financial goals to get to what’s right for you. But be careful also to not just pick the cheapest plan offered to you, because it could bite you if you’re just getting going with a FI, saver’s mindset.

With that in mind, our Part 2 of this series will focus more on components of your health plans that drive utilization costs — i.e. if and when you have to go to the doctor, what components of your plan should you know about and how should those components weigh on your choice of plans during open enrollment.

Stay tuned!

A note to our readers: The Benefits of FI is a blogging community established for sharing information for entertainment purposes. In no way should the content on this site be interpreted as providing financial advice. We post the information — it’s up to you to use that information as you see fit. By using this site, you are acknowledging that you have read our privacy policy and that, if you choose to leave comments, you will comply with our rules for sharing your own thoughts. Thanks for reading!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.