Insurance plan selection – Case Study

We will take a real example to understand how to compare health care insurance plans. We will discuss pros and cons of a high deductible plan versus the high premium plan, with lots of pictures.

Today we will analyze why do people take health insurance and do a real life case study requested by one of the readers (we will call her ‘DB’).

Risk ManagementInsurance is closely related to risk. Whenever you face risk, you have 4 options: Transfer, Accept, Reduce, Avoid (popularly known as the TARA model).

For the health care expenses risk, Avoid is not really an option -> Avoid would mean you are dead, therefore there is no risk of incurring health care expenses.

Risk Management Applied to health care (insurance plan selection)So in the health care expenses risk context, the high probability high impact quadrant becomes ‘Transfer’ instead of ‘Avoid’.

And in this post today, we will focus on ‘Transfer’ -> Insurance is a way to transfer the health care expenses risk to the insurer (insurance company). And we buy insurance for events where the impact is high.

Now let us talk about the specific real life case study of a reader (we will call her DB).

When I first started to write the post, I introduced DB first and then the plans. Now I am reversing the order – first let us examine the plans and then examine DB’s specific situation. This way we will be able to understand how to compare the health insurance plans even outside DB’s context.

DB’s health insurance options

The literature that her employer shared with her about the benefits (health insurance plan selection) compared the plans first and then the cost. While I strongly recommend looking at the premiums first.

Why? This way you have at the back of the mind how much is the difference you are going to pay and the annual premium can be compared for each plan feature while reading the plan features.

Here is the insurance premiums comparison, I have highlighted the section applicable to her:

Compare health insurance plan premiums

So the cheapest option is $80 per pay check, next is $120, and the best is $180. (I rounded these numbers so that it makes it easy to do mental calculations, rather than using Excel – if you are a bigger nerd than I am, please use Excel).

For the sake of convenience, let us call those plans as A, B, and C. So,

2016 Consumer Driven Choice Plus Plan – cheapest plan (with the least coverage) is plan A.
2016 EPO Choice Plus Plan – middle plan is plan B.
2016 PPO Choice Plus Plan – most expensive plan (with the best coverage) is plan C.

Now let us look at the plans coverage

Insurance plan coverage optionsFor the purposes of this post, we will compare In-network part of plan A with In-network part of plan C. I am just trying to explain how you should analyze and compare these plans. These are not your plan options, so you will need to do this for your plan options in either case.

Premiums inversely proportional to Coverage

First things first -> plan premiums (cost) is inversely proportional to the coverage (potential benefits). More the premium, more the benefits. Less the premium, less the benefits.

That is the reason you need to think while making a selection. If this was not true, then it would be a no brainer – you would choose the plan with the least cost and maximum benefits.

So, it is a trade off – either you can pay less premiums and hope that nothing major happens throughout the year OR pay higher premiums now so that you are prepared for unplanned health care expenses.

Comparison ‘pre-work’

We would like to compare Plan C v/s Plan A but there is a small problem.

It is not possible to predict the difference in the probability of the following 2 scenarios:

  1. During 2016, you will visit a primary care specialist 4 times in a year, and get admitted in a hospital for 3 nights, and have 2 outpatient surgeries, 1 urgent care visit, and 1 ER visit
  2. During 2016, you will visit a primary care specialist 4 times in a year, and get admitted in a hospital for 3 nights, and have 1 outpatient surgeries, 1 urgent care visit, and 1 ER visit

Plan C has different co-pay dollar amounts for each one of these, so we will have to create a pseudo ‘Copay’ for Plan C. Let us say the pseudo copay for plan C is 5%. (I did some approximate calculations and arrived at this number).

Comparison – Plan C and Plan A

Now we are ready to compare Plan C and Plan A.

Health Insurance Plan A payout

Health Insurance Plan A payout

Health Insurance Plan C payout

Health Insurance Plan C payout

On the left, you will find Plan C payout calculations. On the right, you will find the same details for Plan A.

There are 3 columns – the first column has the total health care expenses you incur for the year 2016. Second column is the copay payments. Third column is what the insurance plan will cover.

Total out of pocket for Plan C is $4,000 (reached at about $80,000 health care expenses).

Total out of pocket for Plan A is $6,850 reached at total expenses of about $35,000.

But we are yet to account for the difference in the premiums ($184 v/s $79 per pay check – total difference for the year = 24 * (184 – 79) = $2520).

Let us take an example: health care expenses of $10,000

Plan C covers 9,500, you pay 500 and you pay 2,520 in additional premiums. So under Plan C, you pay a total of $3,020. Under Plan A, you pay 20% coinsurance, so you pay $2,000 (for the same $10,000 expenses). So you are better off with Plan A.

What happens at $20,000 expenses?

Under Plan C, you pay $1,000 copay and $2,520 additional premium, total $3,520. Under Plan A, you pay $4,000 copay. So Plan C is better.

What happens at $30,000 expenses?

Under Plan C, you pay $1,500 copay and $2,520 additional premium, total $4,020. Under Plan A, you pay $6,000 copay. So Plan C is better.

 What happens at $40,000 expenses?

Under Plan C, you pay $2,000 copay and $2,520 additional premium, total $4,520. Under Plan A, you pay $6,850 copay (although 40,000 *.2 = 8,000, the maximum out of pocket is 6,850). So Plan C is better.

I can give more examples but as you can see, Plan A is better for people who do not expect to have too many health care expenses in the coming year. Plan C proves to be a better option for people who are expecting to have higher health care expenses.

Details about the reader DB

Now a little bit about our reader who asked me for this post, she is:

A female
35 years old
Does not use Tobacco
Is not pregnant
AGI (Adjust Gross Income) – in excess of $200,000
No drugs
No previous history of significant health expenses
No severe family medical history

Assessment of her situation:

She seems to be in close to perfect health, she is young, no previous history, not into tobacco, no drugs, no severe family medical. So she should opt for Plan A because her health care expense for the year are likely not to exceed $17,500 – the approximate amount at which Plan C becomes more viable than Plan A.

Equally important is the fact that her annual income is very high, so she is able to afford the higher maximum out of pocket (Plan A – $6,850 v/s $4,000 in Plan A).

Cheaper plans typically have higher deductibles, co-pays/ co-insurance, and calendar year out-of-pocket maximums.

In her case, with such a high household income, she has the capacity to absorb some healthcare costs in return of reduced premiums. (As we discussed earlier, the difference is (184-79) *2 *12 = $2,520).

HSA

What the pictures I posted did not mention was the possibility of HSA in the high deductible plan (plan A – 2016 Consumer Driven Plus Plan). HSA is usually available along with high deductible (low coverage plans) only.

We will cover HSA in detail some other time, but for now just a summary – by contributing $3,350 to the HSA plan, she will save $1,117 in taxes this year (she is in the 33% tax bracket).

You contribution to HSA is tax – deductible. The withdrawal is tax – free too if the proceeds are used for qualified medical expenses.

What is more mouth watering is the fact that HSA account contributions can be invested in the stock market (usually barring a $1,000 to cover immediate medical expenses).

Disclaimer: By this post, I am just helping you think like I do. Each situation is different. So use your best judgment and tolerance for uncertainty before making your decision.

If you are still reading and understand the basics of probability distributions and expected value, I encourage you to Download my Excel here to examine my advanced analysis.

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