If you haven’t heard, outside of college tuition, healthcare prices are the fastest growing prices in America. It is now common for people to become broke from medical debt. A possible link to this trend? Americans overwhelmingly choose their health insurance based on the lowest premium. Choosing health insurance based on the premium is a terrible idea; don’t do this when choosing health insurance. Choosing your health insurance based on the lowest monthly price will cause you to be dead broke one day. Pun intended.
Let’s review some insurance terms:
A (layman’s) primer on health insurance
you have to pay each month
Out of pocket
costs: Any additional costs you have to pay in addition to your premium
type of out of pocket cost that you must pay before your insurance starts
type of out of pocket cost that you must pay after your deductible (usually a
Co-pay: a type of out of pocket cost that you must pay when you visit your
Coverage: What your insurance covers. This can speak to the type of procedures
and/or how much you pay for your insurance.
Problem When Choosing Insurance.
Americans make overwhelmingly make their health insurance choice on one parameter: how much their premium is (the price to have insurance). An excellent example of this is one of my clients named Anne* who is a teacher. Anne would tell me about how screwed up the American healthcare system. Every year, she has to spend over $2000 on health insurance! It is a travesty that teachers are treated like crap.
As I got to learn about Anne, it was very clear being a teacher was not the issue. Making a teacher’s salary along with student loans, she was paying for the cheapest health insurance premium possible which also happened to be a high deductible health plan (HDHP), but saving no money for it. An HDHP is a plan with a high deductible which encourages healthier habits but also tax advantages when utilized with a Health Savings Account (HSA). In return, you have low premiums, but the power of HDHPs are HSAs. HDHPs are coupled with a HSA where you can contribute non-taxed dollars to use for your health needs; after 65 the HSA becomes an additional account for money that can be used for non-health situations.
Unpacking the problem
as an illustration to the larger problem
Anne chose the HDHP when
it came to choosing health insurance for two reasons:
1. She was choosing her health insurance
on the cheapest available premium and nothing else.
2. Her employee-sponsored broker did not
ask the right questions and therefore advised her to buy insurance that was not
beneficial for her.
Unpacking Problem 1
The first problem was Anne. Anne made the same mistake that many Americans are guilty of doing. Her decision was based largely the insurance with the cheapest available monthly premium (or monthly payment). This is expected – money is tight as a young teacher. Due to various medical issues, Anne has outpatient surgery at least once every three years. It was almost cyclical where Anne would finish paying the debt for her last surgery, and she would be due for a new one.
Unpacking Problem 2
The second problem was the
employee-sponsored broker did not ask the right questions. The broker saw
Anne’s age and asked what she wanted (she wanted a cheaper plan). From there,
the broker suggested Anne use an HDHP with a $2,000 deductible and $7,500 out
of pocket maximum (Translation: Anne would pay $2,000 before the insurance helps
pay for anything and the insurance pays for everything else after $7,500). This
makes sense (to some extent) since HDHP plans are best for healthy people who
rarely use healthcare.
The main problem for Anne enrolling into an HDHP is Anne has outpatient surgery at least once every 3 years because of her medical condition. The broker should have never told Anne to enroll in an HDHP plan. Had the broker asked if Anne her income level, if she had any medical conditions, or even followed up by asking Anne had any surgery, he should have suggested a better plan. To be clear, this was an employer-sponsored broker. There is no incentive for the broker to suggest more expensive insurances where the employer has to pay more money. Therefore, it favors the employer more when an employee enrolls in a cheaper health plan. Cheaper plans place more of the risk on the employee. The end result of the broker not asking the appropriate questions left Anne with high medical bills year after the year.
The easy solution to Anne’s problem?
I was given the opportunity to review Anne’s plan offerings by her employer, I ended up asking her questions about her medical usage and her income level. Anne had trouble saving money for an HSA because of student loans and previous medical bills. I recommended Anne a plan that had a $100 deductible plan with a $3,000 out of pocket maximum. Translation: Anne pays $100 before health insurance helps pay for anything and the insurance pays for everything else after $3,000.
The difference in cost to Anne?
Her premium for the HSA plan the employer-sponsored broker suggested was $52/month. The premium for the insurance plan I suggested was $74/month. Anne’s new insurance costs her $264 more per year. Long term, this is a major savings. Why? As expected, Anne had surgery one year after she switched to her higher premium insurance. Instead of the $3,000+ Anne owes on surgery she gets every 3 years, she owed $550 in medical bills – a savings of $1,700+ over 3 years. This is much more doable for Anne and I’m happy to report she is not out of the endless cycles of medical debt she was stuck in for over a decade.
There are some key takeaways from Anne’s story.
1. Don’t always make your choice about the cost of the
You are only setting
yourself up for failure if you do not properly save money. Many Americans
determine what insurance to buy solely on the premium (the amount of money you
pay monthly to have health insurance).
2. Do make your choice about the amount the out of
pocket costs to you and your health.
Don’t be Anne. Consider the out of pocket maximums and deductibles as your factors to your financial decision. Consider your own health. If you have a medical condition that should be a large factor in your decision.
3. If you must rely on a broker, don’t use one
employed by the people helping pay your insurance.
If you must rely on a broker, find one outside of your employer. Independent broker’s make money based on selling you insurance on the commission. Employer-paid brokers are paid by the employer. It is in the broker’s and employer’s best interest to sell you insurance which decreases their financial responsibility. Choosing health insurance is tough. The best way to shop for health insurance is to learn about health insurance yourself.
Kicking off a new
You always hear the typical person saying, “the American healthcare system is screwed up.” The problem with that statement is it is equivalent of someone who says “water is bad for you”. There are portions of the American healthcare system that are good for you. However, used the wrong way can lead to catastrophe. You don’t swim on the deep end of the pool if you don’t know how to swim. You can prevent yourself from a financially catastrophic situation by making the right choices. This series will help you prevent yourself from drowning in medical debt.
Beginning with this article, this will kickoff a series of articles on health insurance which I hope will educate everyone on making a better decision. It will be boring. It will be a slog. Though, after reading this series, you will make better decisions.
*Anne’s name has been changed to protect their identity from you stalkers.
Consult your health insurance broker before making any changes to your health insurance.
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