The 6 Biggest Factors We Considered When Choosing a Health Insurance Plan

The 6 biggest factors we considered when choosing a health insurance plan

Photo courtesy of hang_in_there

Health insurance. You just take whatever it is that your employer offers, right?

For a lot of people that’s the case, but what if your employer doesn’t offer coverage? Or what if you’re left without an employer?

Well, a couple of months ago my wife and I were forced to figure out how to buy our own health insurance policy (the reason why is a story coming soon). Neither of us had ever done this before, so we had a lot we needed to learn.

And let me tell you, this process is confusing! There are so many options and so many variables that just a few minutes of looking them over can make your head start spinning in about 50 different directions.

But with a little bit of help from an independent health insurance agent and a little bit of number-crunching, we eventually made a decision that we think was the right one for us.

So in case you’re ever in this position yourself and aren’t sure where to start, here are the six biggest factors we considered when choosing a health insurance plan for our family.

First, what were the options?

There were a ton of different options, but for this article I’ll focus on just two. Here are some of the main stats on each:

Plan #1: low premium, high deductible

  • Premium = $702 per month
  • Deductible = $4,000
  • Annual max out of pocket = $12,700

Plan #2: high premium, low deductible

  • Premium = $1,154 per month
  • Deductible = $0 (no deductible)
  • Annual max out of pocket = $3,000

Factor #1: Were our doctors covered?

We love Casey’s doctor. She’s delivered both of our boys and taken really great care of us in some tough spots. Making sure she was covered under the plan was a priority.

We would have been a little more open to changing our sons’ doctor, but we do like the office a lot and definitely preferred to not have to switch.

We also wanted to make sure that we could go to any of the major hospitals without any trouble, particularly the Children’s Hospital.

As for me, I like my doctor but I rarely see him so it didn’t matter to me if I had to switch (it turns out I did).

Both plans covered all the doctors we cared about, so this ended up being a tie.

Factor #2: Were the services we needed covered?

It clearly wasn’t going to be worth choosing a cheaper plan if it didn’t cover the kinds of things we needed.

Casey and the boys have pretty regular visits to see their doctors and the kids get all the typical vaccines that kids are supposed to get. These things needed to be covered.

We have some basic medications we needed to be able to get.

Beyond that, we just wanted to make sure that there weren’t any exclusions for any kind of major care that might come up and cost us big time. Neither plan had any big holes like that, so this again was a tie.

Factor #3: The guaranteed cost

More commonly known as the premium.

I like the phrase “guaranteed cost” instead of premium because I think it better conveys the way you need to consider it. No matter how much health care you consume during the year, that premium will be coming out of your pocket. It’s guaranteed.

Here’s how the two plans lined up in terms of annual guaranteed cost:

  • Plan #1: $702 per month = $8,424 annual guaranteed cost.
  • Plan #2: $1,154 per month = $13,848 annual guaranteed cost.

This was the first big strike against Plan #2. That’s $5,424 extra that we would have to shell out no matter what. That’s some real money!

Obviously there’s more to consider here, but this was a big one.

Factor #4: The maximum cost

Like the guaranteed cost, this one is simple to figure. It’s just the annual premium (guaranteed cost) plus the “annual max out of pocket”.

Here’s how it worked out for our two plans:

  • Plan #1: Annual premium of $8,424 plus annual max out of pocket of $12,700 = $21,124 total maximum annual cost.
  • Plan #2: Annual premium of $13,848 plus annual max out of pocket of $3,000 = $16,848 total maximum annual cost.

This brings up a pretty interesting conundrum. While the guaranteed cost of Plan #2 was $5,424 more, the maximum cost was $4,276 less. That’s a HUGE range! Sounds like there’s a little more evaluation needed.

Before I move on though, I just want to note that this doesn’t consider the possibility of any services that aren’t covered, in which case the out of pocket max would be irrelevant. We didn’t feel like this was a big risk for us given the two plans we were considering so we didn’t worry about it, but your situation may be different.

Factor #5: The likely cost

Okay. So now we have two plans, one with a much higher guaranteed cost and the other with a much higher possible cost. Those are helpful benchmarks but they don’t take into account our specific situation and what kind of care we might actually need.

In order to go one step further, we wanted to think about the types of services we typically use and what those might cost us within each plan.

Now, this step is the most complicated and also the least precise. It involves a decent amount of “what if” thinking, and it also involves an understanding of health insurance terms like deductible, co-pay, co-insurance and the like. I found this resource to be helpful in looking up definitions.

Here are a couple of examples of things we thought about here:

Routine visits

Under both plans, the same preventative care was fully covered at no charge. No advantage either way there.

Labor and delivery

This actually didn’t factor into our decision because we didn’t plan on having a baby in 2014 (we just had one for gosh sakes!). But I’m putting it here because if we knew we were going to have a baby during the year, the costs for those services would have been a big factor here.

ER visits

We’ve actually had a decent number of ER visits over the past couple of years, so this was an important consideration for us.

Our two plans treated the costs for an ER visit very differently:

  • Plan #1: We would have full responsibility for the cost up to the deductible amount ($4,000). After that, there would be a $750 copay for each ER visit.
  • Plan #2: No deductible. Only a $100 copay per ER visit.

So the million dollar question here is how much does an ER visit cost anyways? Who the heck knows the answer to that?

I sure didn’t, so I had to do some research. And the answer I found? It depends. On like a million different factors. Great!

The best answer I found was this article from the Washington Post, which had the following information:

  • Across all conditions, the average ER visit cost $2,168.
  • Across  all conditions, the median ER visit cost $1,233
  • Across all conditions, the cost ranged from $3.50 (what?!) to $73,002.

Because we were protected by our deductible limit and our max out of pocket limit, I wasn’t too worried about the maximum. But even for something as simple as a headache, the maximum charge according to that article was $17,797, so it was clear that while a single ER visit might only cost us a couple thousand it might also easily blow right through our deductible.

So if we were trying to be slightly conservative, here’s how the total plan cost would break down with 1 rather routine ER visit (cost of $2,500). I’m including the premium here so we can start to see how the total cost of each plan is affected:

  • Plan #1: Premium of $8,424 plus a $2,500 ER visit = $10,924 total cost
  • Plan #2: Premium of $13,848 plus a $100 copay for the ER visit = $13,948 total cost

What if we added a second ER visit, this one at a much higher cost of $10,000?

  • Plan #1: $10,924 from before plus $1,500 for the ER visit = $12,424 total cost (remember, we only had to go up to the $4,000 deductible)
  • Plan #2: $13,948 from before plus a $100 copay = $14,048 total cost

Even still, Plan #1 is coming out ahead.

But now let’s get a little crazy. What if we had basically a worst-case scenario and, on top of the two ER visits, we had an inpatient stay with a $100,000 bill? Let’s see how that shakes out:

  • Plan #1: $12,424 from before plus a $1,000 copay = $13,424 total cost
  • Plan #2: $14,048 from before plus a $250 copay = $14,298 total cost

That’s a pretty bad year, and Plan #1 with its higher deductible and higher max out of pocket is still coming out ahead! At this point, the decision seemed pretty clear.

Factor #6: The tax benefits

This was just the icing on the cake. With Plan #1 and its high deductible, we would be allowed to open something called a Health Savings Account (HSA).

The full story on that is the subject of a different post, but basically it allows you to put money into an account pre-tax (like a 401k), and anything spent from the account on healthcare is also tax-free. If you spent the money on anything non-healthcare related, the money would be taxed AND subject to a 10% penalty.

Two other important facts about these accounts are:

  • There’s no requirement to spend the money each year. You can keep it in there as long as you want.
  • If you eventually reach age 65 and still have money in an HSA, you can use it without penalty. It would still be taxed at that point but it would have functioned just like an extra 401(k).

Since you can only open an HSA with high-deductible plans, only Plan #1 had this option. So basically, we could put the premium difference between the two plans into an HSA and the tax benefits would make the effective cost of Plan #1 even lower.

How we made our final decision

At this point I’m guessing our final decision is pretty clear. We decided to go with Plan #1. This came down to a few factors:

  • Plan #1 had a lower guaranteed cost.
  • Plan #1 had a lower likely cost.
  • Plan #1 allowed us tax benefits that Plan #2 did not.
  • Even if the worst-case scenario happened and we were forced to pay the full $21,124 maximum for Plan #1, we could have done it. It would be a little painful, but it wouldn’t put us in any real financial jeopardy.

That last point is the real key. The main point of insurance is to protect you from catastrophic financial situations. To be honest, a couple thousand dollars in annual savings wouldn’t have been worth it to me if the cheaper plan put us at risk of real financial harm.

But we could handle the worst-case scenario of Plan #1 and in all likely scenarios it would cost less. So it was really a no-brainer.

Confusion averted. Health insurance chosen. One more financial hurdle conquered.

Have you ever had to choose between different health insurance plans? What factors were most important to you?

Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!
26 Comments... Read them below or add one of your own
  • Laurie @thefrugalfarmer February 20, 2014

    We generally go with the lowest premium cost plan too, Matt. Because we are fairly healthy and take good preventative measures with our health, we generally don’t go to the doc much, so this has worked out well for us. LOVE your thoroughness here as usual. Great stuff, Matt!

    • Matt @ momanddadmoney February 20, 2014

      I had always assumed that the higher-deductible plan was the better option, but it was interesting to actually run the numbers and see how likely that was to be true. It was really interesting how, even in a year with several bad medical events, the cost for the high deductible plan could still be lower, or at least comparable.

  • DC @ Young Adult Money February 20, 2014

    I really don’t have a choice at my employer. If you were “grade” 25 or below there was an alternative to the HSA, but most people (myself included) are only entry level for about a year. Now I think there are only two choices, and they are both high deductible HSA plans. Needless to say it wasn’t that hard to pick between the two because imo they are essentially the same plan!

    • Matt @ momanddadmoney February 20, 2014

      I didn’t ever have a choice before either. That’s what made this process so confusing!

  • John S @ Frugal Rules February 20, 2014

    We had to go this route a little over a year ago when my employer provided coverage ran out due to me leaving the employer. We ended up going through a broker connection we had and am so glad we did. She basically found the plans that would work best for us and gave us a number of options we could choose from. We went with #1 as well since we’re relatively healthy and covered everything we needed. We wanted the HSA as well, so it only made sense to go that route.

    • Matt @ momanddadmoney February 20, 2014

      The broker was definitely helpful in answering questions and clarifying how the different policies would work. The first list I got had about 15 different policies, each with their own slight tweaks on about 7 different variables. Man was that overwhelming!

  • Michael Solari February 20, 2014

    HSAs are the forgotten investment account! What people don’t realize is that you can open up an HSA at Vanguard as opposed to a bank account. Health care is one of the biggest expenses for people when they are ready to retire (especially if they retire before Medicare). It’s a great way to sock away some cash for future expense.

  • Shannon February 20, 2014

    Thanks for sharing this analysis Matt! It really is confusing and it is not just a simple process of checking boxes anymore. We ended up choosing the high deductible plan because of the premium savings and access to the HSA vs flex spending account to help us with the differences in any given year, and we have been happy with our choice.

    • Matt @ momanddadmoney February 20, 2014

      I’ve never had a flex spending account but that would frustrate the hell out of me. I love that the HSA can just keep rolling over.

  • Andrew February 20, 2014

    My employer really only has one plan…they have some other choices, but they’re really no good. The plan I have is pretty good though so I can’t complain. When I was working at a different job, I just chose the one with the lowest premiums.

    • Matt @ momanddadmoney February 20, 2014

      My wife used to work for the city and she had a great plan at a tiny cost. Gotta love those government perks!

  • Michelle February 20, 2014

    I love how detailed this post is. Health insurance is something that we have been thinking about a lot lately. We have something that is very minimal now (a catastrophic plan) but we may change it. Health insurance is just so confusing!

    • Matt @ momanddadmoney February 20, 2014

      I like the catastrophic plans! Well, at least I like the idea of them. It all depends on the details and your personal situation, but that’s really what insurance is supposed to be. But I agree, it’s incredibly confusing.

  • Ree Klein February 20, 2014

    Wow, Matt, this was great! Last year saw my entry into the land of having to buy my own insurance. I stuck with Anthem Blue Cross because they converted my employer plan over to an individual plan. Knowing the new health care laws would be creating new issues, I didn’t stress over selection too much at that time.

    Enter Dec. 2013 and I started to freak out. My existing plan was to be discontinued and Anthem wanted to stick me in some other plan they dreamed up. My income is very low right now so I checked out the Covered California options. Holy heck…layers upon layers of confusing info.

    I ended up choosing a Kaiser plan and just went to the dr. for the first time yesterday. $40 to walk in the door, $40 lab fee and $18 for a prescription. Don’t know if another bill will follow but that was bad enough. Anyway, it’s time to pull out the pencil and do some level-headed research. You can be sure I’ll test out your filters to see if t I can come up with a better solution.


    • Matt @ momanddadmoney February 20, 2014

      That’s the weird thing about these high-deductible plans. You start seeing the cost of some of these routine things that you’ve never paid for before and it’s a little jarring. In the long run I think that’s actually a good thing, but it’s definitely not an easy adjustment.

  • tonynovak February 20, 2014

    Great post. Most of the people I speak with through OnlineNavigator don’t look beyond #1 and #2 so the lowest priced plan that includes my doctors is usually the one chosen.

    • Matt @ momanddadmoney February 20, 2014

      Well, that analysis would have gotten me to the same place as all of this did, so maybe it’s not such a bad approach!

  • Holly Johnson February 20, 2014

    Since we are not in the preferred income group, we get to choose a high deductible plan with a high premium. Thanks Obamacare!!!

  • Mrs PoP @ PlantingOurPennies February 21, 2014

    We faced a similar choice when picking Mr PoP’s employer plan since he had the choice between several different copay/premium/deductible levels through his employer. So far the high deductible plan (with an HSA) has been a great choice for us, and we have enough saved up in his HSA that we’d be able to cover his maximum out of pocket expenses even if we didn’t have any other cash savings.

    • Matt @ momanddadmoney February 21, 2014

      Awesome! The tax benefits of the HSA are pretty cool. And it’s nice to know that you’re totally covered even in the worst-case scenario.

  • Done by Forty February 21, 2014

    It’s interesting to see that the high deductible plan came out ahead in all those scenarios. It’s great to have consistent data like that. Throw in the benefits of being able to go with an HSA, and it seems like high deductible was the way to go in your situation. Good on you to run the numbers, Matt!

    • Matt @ momanddadmoney February 21, 2014

      Yeah, I was surprised when I actually ran the numbers too. My assumption was that the high-deductible could become more expensive pretty easily, but that’s why you actually run the numbers!

  • Tonya March 5, 2014

    Well that just brought back some painful memories of looking for my own insurance. 🙂 I used a broker too which was helpful navigating those rocky waters. I ended up going with a lower premium/high deductible too. Mine is 5k. Ouch. And if you ask me $266 still feels high even for a premium. Just one more tiny reason I’m considering finding a full time job in my future. Glad you found something that works for your family!

    • Matt @ momanddadmoney March 6, 2014

      Yeah, it’s not a fun process! I think a lot of people get afraid of the high deductible though, and in some cases rightfully so. But on the whole, I’d rather just have the chance of paying more than the guarantee of it.

I’d love to hear from you, please leave a comment