COST - How much will I pay in out-of-pocket expenses?
COST – How much will I pay in out-of-pocket expenses?
The most popular way to think about the cost of your health insurance plan is to focus on the monthly premium. This sounds good because you know the fixed costs associated with your plan and can seemingly predict exactly how much you will have to spend for coverage. However, this line of thinking leaves out the most important part by ignoring the variable costs a person might incur each year when they actually use their health insurance and visit their doctor.
To get a complete picture, you should compare a plan’s total expected out-of-pocket expenses, which factor in the possible copayments, coinsurances, and deductibles that you might have to pay for during the year in addition to your premiums. Signing up for insurance and paying your premiums to your insurer is not the only out-of-pocket expense you should expect if you need medical care. Much like car loan payments don’t cover the cost of the gas you need to put in the car, different health insurance plans might require significantly more “gas” than others if you actually want to take your plan out for a drive.
There are two primary things to consider when comparing the cost of two different plans – how much you’ll actually use your insurance, and how much you’ll have to pay in a “worst case scenario.” It is also important to remember that the out-of-pocket maximum does not include premium payments. Here is a quick plan comparison as an example.
|Plan A: Higher Premium, Lower Out-of-PocketIf you have some chronic conditions that require frequent visits to specialists and take some high priced medicines, it will probably end up being cheaper to pay a higher premium for better coverage. Since you’ll be using the insurance often, it is comforting to know you’ll have a low limit on out-of-pocket costs when you actually need care. However, if you don’t end up using your insurance as much as you thought, you’ll be paying significantly more for unnecessary coverage.
|Plan B: Lower Premium, Higher Out-of-PocketIf you are relatively healthy and rarely visit the doctor, a cheap premium with a high deductible makes sense because you want the lowest fixed costs possible. By not seeking medical care often, you can be pretty sure your variable costs will be low. You leave yourself more vulnerable to higher costs if something bad were to happen, like an unexpected emergency room visit or hospital admission, but that is a part of the bet you’re placing on your care.
Now to the fun part – Charts! Woo!
This chart compares the total cost of the healthcare you need with the total out-of-pocket expenses incurred if you were covered under either Plan A and Plan B. Because Plan A has a higher premium, the fixed cost of this plan has a higher floor than Plan B. If you don’t actually need to use the insurance, you will save money by choosing Plan B. The turning point occurs when the two lines intersect, which in this comparison is just over $4,000 in total health expenses. At that point, you’ll be saving money by choosing Plan A, even though the premiums will be more expensive.
Remember that “bet” we talked about earlier between you and your insurance company for who has to pay more of your healthcare expenses? The grey line represents the actual expense incurred to keep you healthy. As you can tell, the insurer is hoping they have enough members incur less than about $7,500 in health expenses each year to pay for the few members who will be extremely expensive to cover. The insurance wants to move that break-even point as far to the right of the chart as possible, while you’re hoping to intersect with their line as close to the left as possible.
Because it is impossible to predict the future and know exactly what services you’ll need, the best way to look at something like this is in terms of a “Best Case” / “Worst Case” scenario.
- In a “Best Case” Scenario, where this person is perfectly healthy and never uses their insurance plan at all, Plan A will be twice as expensive as Plan B ($4,800 vs. $2,400) because the premiums are guaranteed payments regardless of how often you use your insurance plan. Plan A will actually still be more expensive than Plan B, overall, all the way up to the first $4,000 in out-of-pocket expenses. If you are unlikely to have at least $4,000 or more in annual health expenses, it makes sense to pay a lower premium and pay more of your own out-of-pocket expenses. Plan B would be a better choice as long as your expenses were lower than $4,000 during the year.
- In a “Worst Case” Scenario, where this person ends up in the hospital for at least a few days and racks up $50,000+ in medical expenses, Plan B will be up to $2,600 more expensive because there is a higher deductible and out-of-pocket maximum limitation. The ACA put a cap on the out-of-pocket maximum that a patient would have to pay in such a situation, so the out-of-pocket maximum helps provide a safety net to ensure people don’t go bankrupt due to a medical emergency. In this case, Plan A would have better coverage.
These are overly simplified examples, but it shows how the total cost of healthcare for an individual can vary greatly just based on the type of plan they choose. Most likely, you will fall somewhere in the middle of the “Best Case” / “Worst Case” spectrum. The goal is to guess how close you are to one side or the other and how likely it is that you’ll need a high cost service during the year. You obviously can’t plan on having a serious accident, but the closer you get to that tipping point between the two plans, the more you might want to consider increasing your coverage to feel a little more comfortable with your financial risk in such a situation.
Check out our Health Insurance Cost Estimator Tool to help you estimate your anticipated annual costs.