Analyzing Health Insurance

Photo by: gwire

For many of us, particularly the self-employed, choosing health insurance can be a difficult proposition.  Laws and rules tend to vary by state, so it is difficult to make general guidelines for buying insurance.  In fact, state legislation is one of the biggest factors in the availability of affordable health insurance in the state.  As such, it’s difficult to write a comprehensive guide to analyzing health insurance, however there are several guidelines that can make it easier.

Do You Need Health Insurance?

The first question many of us ask is:  Do I even need health insurance?  The short answer is “yes.”  Insurance can be a bad deal for us.  Ultimately if the odds weren’t stacked in the company’s favor they wouldn’t be offering the product in the first place.  While this logic may be true, the real reason we buy insurance is to offload catastrophic risk.  We don’t want to have our lives ruined if we get a serious illness, so it makes sense to protect ourselves from such a fate.

That’s an important point to remember when you’re making decisions about your health insurance.  You’re not buying health insurance because you want every medical procedure to be free.  You’re buying health insurance because you don’t want to be ruined.  If you’re paying $300 per month so that you can get a $100 doctor visit for free, you’re not doing yourself any good.  We’ll look at this more closely when we start crunching numbers.

Should You Buy Through Your Company

Another thing to remember about health insurance is that even if your company offers a health plan, you don’t have to buy through them.  Health insurance when offered through your company is a “group” plan.  While there are many nuances, ultimately the group plans often subsidize the more expensive members of the group with the premiums of the less expensive members.  Companies that pay the entire premium are becoming rarer each year.  Thus there is a decent chance that you could actually get better health insurance more cheaply from an external source if you are young and in good health.  It’s worth checking this out before you sign up for your company’s policy.

Doing the Math

The details of plans are largely determined by State regulations; an example like the following can give some insight into how to determine the desirable variables when you make a purchase.  Some health plans I’ve investigated recently have the following variables:

• Monthly Rate – The amount you pay monthly for coverage.
• Deductable – The amount you have to pay out of pocket before the coverage kicks in.
• Coinsurance Amount – The percentage the insurance will pay once the deductable is met.
• Out of Pocket Maximum – The most you would have to pay on your own in any given year.  This is often the deductable plus some fixed amount.

Now looking at the two most expensive versions of 75% coinsurance, we see the following information:

Plan A
Monthly Payment: $178
Deductable: $500
Out of Pocket Max:  $3,500

Plan B
Monthly Payment: $128
Deductable: $1,000
Out of Pocket Max: $4,000

In analyzing these two plans an interesting comparison arises.  If you look at Plan A, the absolute worst-case scenario is that in a year you pay $2,136 in premiums and $3,500 out of pocket, for $5,636.  For Plan B your worst-case scenario is $1,536 in premiums and $4,000 out of pocket for $5,536.  These numbers are very interesting because essentially for Plan A you are paying more for worse coverage.  While there are a few scenarios where you might have a better cash flow situation, essentially your maximum benefit in Plan B is $100 more than Plan A.  That doesn’t even take into account the possibility that you don’t go to the doctor at all, or very little, and pay $600 less in premiums on Plan B instead of Plan A.

This is just one example of the kind of situational analysis you should do on health insurance.  Think about the various situations and see what kind of benefit each plan would give you.  Don’t assume that more insurance is always better.  Also don’t forget to include the cost of the premium when determining the benefits.  Just make sure you wrap your head around what you’re really buying before you commit.

2 Responses to “Analyzing Health Insurance”

1. Equity Sweat says:

   June 1, 2009 at 10:14 pm

   Most people get WAY too much insurance. They forget why they are buying it and just start thinking about trying to make their medical expenses $0. That pretty much results in just paying your worst-case medical expenses up front. Insurance is for disasters, not for convenience.

2. GaryS health insurance California says:

   November 26, 2009 at 5:30 pm

   All the health insurance information you can possibly get is valuable.
   You might not use all of it, but everything has a purpose. Not only
   should you figure out which health insurance you need, but you also
   need to know what health insurance you should stay away from