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:
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.
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?