Choosing Health Insurance
 

Over the weekend, Italy voted “no” in a national referendum on constitutional reform.  As a result, Prime Minister Renzi resigned.  Renzigned?  Boom.  Coined it.  Also, Austria held a Presidential runoff election between the Green Party and the Freedom Party, which would kind of be like us here in the US having a runoff between the Green Party and the Libertarian Party.  Not in terms of platform or ideals, but in terms of...overall popularity.  This will be the first time the main parties haven’t held the Presidency since World War II.  So.  Europe (specifically the Eurozone) is a bit of a mess right now (still), and not looking like it’s going to get any better (cue French elections, Italian banking crisis, Greece defaults (again)) in the immediate future.  Which is why we thought this month’s note should look at...that insurance case study we promised last month.

All of the above completely valid things that will cause stocks and bonds to jump around.  But you expect those prices to jump around.  That’s why we strongly recommend that any money you actually need in the next year or two is held as cash.  Of more pressing concern to you and your personal finances is something like insurance, and what that may mean for your budget, debt, and cash flow situation.

Case in point: let’s say you have a $100,000 portfolio.  And of that portfolio, 30% is in international stocks. Generally, the Eurozone makes up 37% of an international stock index.  So, you have about $11,000 in Eurozone stocks.  During the Financial Crisis, from the highest point of 2007 to the lowest point of 2009, those stocks lost 64%.  Let’s say that happens again.  You’re out about $7,000.  Now, how much do you pay a month on health insurance?  Just health insurance.  Not home, not auto, not disability, not umbrella.  Just health.  $300?  $500?  $800?  And what is your deductible on top of that?  $1,000?  $2,500?  $5,000? $500 a month in premiums with a $1,000 deductible puts you at $6,000 - $7,000 (or more, depending on coinsurance).  So a worst-case scenario for the Eurozone has the same magnitude impact as one year of health insurance.  Except that your investment will come back (since those lows in 2009, Eurozone stocks are up 40%), and those health insurance expenses will be there every. single. year.  (And spoiler alert: they don’t get cheaper).

There’s a chance that Republicans will change the Affordable Care Act at some point in the next four years, and if they do we won’t have to think very hard to come up with a newsletter topic that month. (And from personal experience, we hope they do).  But until then, we wanted to walk through some of the ins-and-outs of choosing health insurance with you, so buckle your seat belts and let’s dive right in.


Now where’s Mrs. Frizzle when you need her?

Before we begin: what is the point of insurance?
Answer: risk management.

Insurance is supposed to be there to guard against risks that will either be catastrophic if they occur, or that make you painfully uncomfortable to “self-insure”.  In an ivory tower world, insurance is priced based on the probability of occurrence of the risk being insured.  Flood insurance on the coast is more expensive than flood insurance in the desert.  That’s why health insurance gets more expensive as you get older, and why they’re so concerned about whether or not you use tobacco.  Insurance for just ER/hospital visits (catastrophic coverage) is cheaper than insurance that covers every time you go to the doctor because you woke up coughing and are a bit of a hypochondriac.  You get the idea.

Health insurance in this country is tiered by metals, for some reason - Bronze, Silver, Gold, and Platinum.  There’s also the catastrophic insurance coverage we mentioned above, which doesn’t have a corresponding metal but if it did would probably be “Lead” or “Tin”.  To generalize among the metals, Bronze plans have the cheapest monthly premiums but have the highest deductibles and out-of-pocket costs.  As you ascend the metal hierarchy, monthly premiums increase while deductibles and out-of-pocket costs go down.  Most of the Bronze plans now come with a HSA (Healthcare Savings Account) that let you save up for those increased out-of-pocket costs tax-free. (Side note: many employers will offer some sort of incentive - either through better pricing or HSA contributions on your behalf - for you to choose a lower-cost plan.  Is it worth it?  Let us take a look and we’ll let you know!).

Before he made it big with Needs, Maslow briefly dabbled with hierarchies of other things.  

So, which one is right for you?

Answer: it depends.  How often, on average, have you gone to the doctor the last couple years?  How much were your medical expenses?

There are two main costs to health insurance.  One is the monthly premium, which you pay to have the insurance policy, regardless of whether or not you use it ever.  The second one is the out-of-pocket costs for actually using any healthcare services.  Every health insurance policy has a deductible - the amount you must pay out-of-pocket first, before the insurance kicks in.  After you max out the deductible, some plans will make you pay coinsurance - something like 20% of any costs above the deductible.  Let’s look at an example, taken from real data on plans available through a health insurance marketplace:

Plan A: Nice, polished Bronze plan.  No copay, but a $6000 deductible.
Plan B: Bright, shiny Gold plan.  $25 copay ($40 for specialists, $100 for ER), $500 deductible, 20% coinsurance

Hypothetical situation: A House-style ailment that requires a couple of unnecessary tests to rule out various autoimmune diseases and lots of behind-the-scenes drama to ultimately determine that you have the flu and will get better in a week.  But, this required a trip to your doctor, then a specialist because you didn’t trust your doctor, and then a trip to the emergency room one night because, again, you’re a bit of a hypochondriac. The total for all of this is a theoretical $5900.


 

Under Plan A, you pay $5900, since the full amount is less than your deductible.

Under Plan B, you pay about $1750 - the copays for each visit (PCP, specialist, ER), the $500 deductible, and then 20% coinsurance on the remaining balance after the deductible ($5400).

So, no-brainer.  Plan B, right?  Well maybe.  Because it turns out that Plan A has a $260 monthly premium and Plan B has a $550 monthly premium.

For the mathematically inclined, it’s pretty straightforward to figure out how much you would have to incur in healthcare costs over the course of a year to make Plan B worth it.  In the above example, that number is $4,750. If you think your healthcare expenses will be under $4,750 for the year, Plan A is cheaper.  If your expenses will be greater than $4,750, Plan B is cheaper.

But there’s a wrinkle.  Because we’re talking about personal finance, there will always be an element of personal preference involved.  Plan A is likely cheaper, but you’ll be writing checks for a couple hundred dollars every time you go to the doctor.  Under Plan B, you will generally just be paying $25 or $40 every time you go to the doctor.  And if you have health insurance through your employer and premiums are automatically deducted from your paycheck, Plan B may very well “feel” less expensive to you and cause you less anxiety about affording a visit to the doctor if you need one.

We’re not here to tell you there’s a “right” and “wrong” plan out there.  There are cheaper and more expensive plans that vary depending on how much your medical bills are in the year.  There are plans that have lower monthly payments but unpredictable costs throughout the year and plans that have higher monthly payments with relatively predictable costs throughout the year.  The best one for you and your family is going to be based on a combination of cash flow needs, medical history, and personal preference.

A couple last things to consider on the way out:
 

• Your employer might offer some kind of incentive to get you to use a health insurance that costs them less money.  Some common ones are HSA contributions on your behalf and paying a higher share of the premium on the cheaper plans.  This is worth considering, because sometimes the savings can be substantial.

• If you are young and healthy, chances are you’ve been going with the cheapest health insurance you can get - some sort of Bronze plan.  If you are planning on having a kid in the next year, consider that your medical expenses will be a lot higher than usual.  Most plans now conveniently show an expected cost for a healthy delivery so can easily compare them.  It might make sense to bump up to a Silver or Gold plan rather than just staying in the same Bronze plan you’ve had for the last couple years.

• If you buy insurance through the marketplace and are eligible for a subsidy, make sure you’re getting a Silver plan.  Not only do you get the subsidy on the monthly premium, but your deductible and out-of-pocket expenses end up getting subsidized as well, in a way that they aren’t on Bronze or Gold plans.

____________________________

If you’re reading this, it means you either signed up on the website (thank you!), we signed you up, or one of your awesome friends forwarded this over to you and you should go ahead and sign up yourself for a monthly dose of entertainment and thought-provokingness from the world of personal finance.  If you're still reading this, we appreciate the support but it's the end of the letter...you can stop now.