Choosing the wrong health insurance policy can be a very expensive mistake. Unfortunately, most people make the decision on premium alone. But premium is only a part of your cost.
There are many terms associated with health-care costs: You have premiums and deductibles, coinsurances and copayments, out-of-pocket limits for individuals and families. It’s no wonder people find it difficult to select the policy that will work best for them in their own particular situation.
It doesn’t have to be so difficult. The various numbers can paint a big picture of health-care costs under different policies.
Choosing Health Insurance Premiums
Health insurance premiums are the costs policyholders pay to the insurance company for having the policy. You agree to pay a certain amount; the insurance company agrees to provide you with coverage. You pay for this coverage, generally either through payroll deduction through your work or directly from your bank.
Health insurance is expensive. Health care is expensive, and the money to pay for it has to come from somewhere.
There are many factors that go into how much you pay in premiums for an insurance policy. There are geographic cost differences, and other factors affecting costs. One of the single biggest factors is cost sharing; how much you pay and how much the insurance company pays. The more the cost-sharing burden is shifted to you, the lower the premium.
If you want the insurance company to pay for it all, it will cost an arm and a leg. If you are willing to share a significant amount of the costs, your premium becomes more manageable.
That’s where many people get into trouble. They select the plan with the lowest premium costs. Then they find they can’t afford to use the plan when they need care. This is a very real and very common problem.
We need to think of our health-care costs not as a premium; we need to think in total. The first big number we need to consider is the policy’s deductible.
Considering Policy Deductibles
The policy deductible is the amount that you pay for health services before your chosen health insurance kicks in. Well-care visits are often outside of the policy’s deductible; the insurer pays for those whether you have reached the deductible of not.
Let’s look at a couple of examples. Let’s say your deductible is $1,500 per year. You would pay for the first $1,500 of your covered health insurance before your insurer starts picking up its share. If, however, your deductible is $5,000 per year you would need to pay $5,000 toward your health expenses each year before the insurance company started paying its share.
That’s a big difference. All other things being equal, the premium for the larger deductible policy would be much lower.
It might seem a lot more attractive. But it also might prevent you from going to the doctor when you know you should.
Once you reach the deductible, you still have costs. You will typically either have a copayment or coinsurance.
Copayments and Coinsurance
Copayments and coinsurance are ways the insurer has you still paying a portion of your costs; they’re a form of cost-sharing. You pay 100 percent until the deductible is met, then you pay at a lesser rate.
A copayment has you pay a specific set amount depending on the type of service. For example, you might have a copayment of $20 for a visit to your doctor or $25 to see a specialist.
Coinsurance is similar, but it is a percentage instead of a flat dollar amount. For example, you might be responsible for 20 percent of the costs for an office visit to your primary doctor or a specialist.
These are an either-or situation. You have one or the other but not both.
Your cost sharing under copayments or coinsurance can be significant. The level of your sharing is also reflected in your premium; policies where you pay a greater percentage for the care you receive will generally have lower premiums. If you select a policy on the basis of premium alone, you can find that you are paying a lot more than you anticipated for your care. Until you hit a limit.
Remember Out-of-Pocket Limits
Polices have maximum amounts you can be required to pay in a policy year. For polices that meet the requirements of the Affordable Care Act (ACA), the out-of-pocket maximum for 2020 is $8,150 for an individual policy and $16,300 for a family policy.
These limits are the total you could have to pay for covered services under the policy. The limits don’t include the cost of your premiums, services or procedures not covered under the policy, or out-of-network expenses.
Even when you have a high deductible plan, there is a cap on your total out-of-pocket expenses. This is designed to help in the event of a big health crisis, as the costs for heart procedures or cancer treatments can easily be in the hundreds of thousands of dollars.
Making a Health Insurance Decision
The cost of the premium is not always a good indicator of health-care cost. For those who are younger and healthier, it may be a reasonable indicator if they don’t have an accident or any health issues. For the majority of the people, who need at least occasional health services, it isn’t that good of an indicator of total costs. For people who need ongoing health services, the cost of the premium is a poor indicator of total costs.
Total costs are the best technical way to approach the problem; anticipate your usage and select the one with the lowest total cost — if only the real world were so easy.
From what has happened health-wise in the past, we can often extrapolate what will happen health-wise in the future. But we should also consider the possibility of something more drastic occurring. We could experience higher health-care needs, which begs the question of how to best manage those costs. We need to consider total costs under a worst-case scenario, not just for business as usual.
Opting for Catastrophic Coverage
There is an option of catastrophic coverage that still meets the requirements of the ACA. People who are under 30 can meet the ACA health insurance requirement with a catastrophic coverage plan.
These plans provide little or no coverage for routine events but are there in the event of a major health event and its potentially catastrophic costs. These plans also qualify for people with a hardship or affordability exemption.
The Bottom Line
In the absence of a sufficient emergency fund or health savings account, we should be giving a policy with higher levels of coverage a serious look. To act in a financially literate manner we need to consider the possible costs and have a means to deal with them should they occur. Perhaps that means a lower deductible or lower copayments/coinsurance until we build sufficient emergency funds.
Health problems do happen; often they are not predictable and not cheap.
We need to be prepared either through insurance or through a combination of savings and insurance. Otherwise we place our financial futures at risk.
Ultimately health-care needs are the biggest single determinant of policy choice — at least they should be. Selecting a policy you can’t afford to use doesn’t really help. But we can move in the direction of choosing health insurance that's best for our needs and managing costs through insurance and savings. But that doesn’t happen unless we make it happen.