I alluded to this is last week’s Health and Wealth Wednesday post, so I will go more into detail today. If you are going to work and provide your own health insurance, you’re going to need to become a bit of a personal risk manager.
**Disclaimer – I am not a licensed financial planner, accountant, or insurance sales person. I’m just sharing my understanding of what I’ve learned.**
What is “Risk Management?”
Insurance, plain and simple. The mathematical, and statistical process of determining what the risk is of a particular event happening or not happening. You buy insurance betting something WILL happen, the insurer bets it won’t. It’s the gambler against the house. How much risk you are willing to take, or will be allowed to take, drives rates when the market is allowed to function privately.
Want life insurance and you sky dive? That increases your risk of dying, and the insurance goes up. (IF anyone will even write you a policy.) You can find different prices at different carriers, but certain carriers might have a more stable financial history and record of paying claims, thus charge higher rates.
Risk Management and Health Insurance
And health insurance USED to be somewhat like this. Private market driven, rates were determined by all the variables that might increase the likelihood of the patient making a claim. Smoking, overweight, age, child-bearing years, and the dreaded exclusions for pre-existing conditions could all get you stratospheric rates or denied coverage altogether.
Another unspoken factor in the health-insurance mix is malpractice insurance for physicians. While not necessarily related to the cost of individual insurance, this does come into play with the COST of receiving care, as doctors order test after test, prescribe meds, and even do precautionary surgery in order to be able to defend themselves in a potential lawsuit. The blessing of employer-provided insurance comes into play here. With it, we have become very divorced from the true cost of delivering healthcare AND the cost of buying insurance for it.
So, previously, we had a market driven insurance medical insurance process that relied on statistics, patterns, and probabilities to determine risk which drove rate. This left many people unable to access the market for various reasons, mostly because insurers could exclude coverage, or charge high rates when high risk was present. We also had an extremely high level of healthcare consumption driven in part by malpractice fears.
In VERY simple terms, what Obamacare did was to federalize the requirements of what insurers MUST offer. No more exclusions for pre-existing conditions, but also everyone carries coverage for everything. The concept was to spread the wealth, or in this case the lack, across everyone. EVERYONE pays in, and those who need little care make few claims, those who need more care get service.
This means that the insurance companies can’t utilize many of the tools they used in the past to drive individual rates. We are still calling it “insurance” but it’s really a hybrid of something else now. For example, I am 55 years old, and had my tubes tied at 40. Obamacare still requires that my policy cover childbirth.
All services are covered for everyone. The theory is that the pool is thus large enough to cover the higher consumers of healthcare. What varies to the individual buyer is how much of it you pay out of pocket.
Re-Evaluating Your Insurance
Through a quirk of my company’s structure, I got a taste of this in February when I changed positions. In my old job, I had what Obamacare calls a “cadillac” policy. Zero deductible, $20 – $40 copays, $15 for most prescriptions.
The most recent monthly cost on this policy for a family of four was $372/month to me. The company had us pay 25%, so the real policy cost to the company would be 4x what I paid, or about $1488 per month.
The new position did not have as rich a policy. The closest one would cost us $476/month AND had a $1000 per person/$2500 family deductible with a $5000 out of pocket maximum we would pay per year for claims. I looked at the numbers and wondered….what is my WORST case scenario here? How much money would I spend if we had a major claim? SO, I added it all up.
Cost of the policy to me per year $5,712 ($476×12)
Deductible Max 2,500
CoPay Max up to the $5K out of pocket 2,500
Potential Expenditure in one year $10,712
**this premium is about 35% of the policy cost, so buying this on the open market or via COBRA would be approximately $16,320 premium only. Add the deductible and out of pocket max for a potential expenditure of $21, 320 buying this policy myself.
Now compare this to the WORST policy – the one with a high deductible, but a much lower premium. My share is 35% of the total cost.
Cost of the policy to me per year $1,836 ($153×12)
Deductible $2500 ind/$5000 family 5,000
Copays up to $10K out of pocket max 5,000
Potential expenditure in one year $11,836
**Cost of COBRA for this policy is uncertain, but since we were paying 35% of the premium, I am expecting it to come in around $437/month for the family.
REMARKABLY cost similar, in my opinion, to the total risk cost of the higher priced policy. The difference between the top of the line and the bottom choice a mere $1124, IF I have a major claim.
But, my cost of purchasing the insurance to begin with? A whopping $3879 difference that I would be spending, major claim or not.
So, I became our family’s risk manager. I decided that we were a fairly healthy group, and I bet against the house that we would NOT have a major claim this year. We moved to the high deductible policy.
Now, to be fair, we also started paying the premium difference into a Health Savings Account. That way, we have some cash set aside for deductibles this year for any necessary doctor visits.
Bottom line. Do you need to look at this more closely? How healthy are you and how risk averse are you? Could you lower your health insurance costs by taking on more of the RISK? One key to assessing this is attaching a risk value to your financial ability to pay your deductible in full in the event of a catastrophic healthcare need.
Here’s to a healthy year!