Unhealthy Choices

I’M GOING TO SHOW you how to lose money. All you need to do is avoid some simple math, while embracing the widespread but illogical fear of health care costs.

Years ago, I designed employer health plans that gave employees several choices. Each option covered the same health care services. The differences among the options were the deductible, out-of-pocket maximum and premiums. The lower the deductible, the higher the premium you paid. Over time, the plan with the lowest deductible charged higher and higher premiums to the point where it wasn’t a good deal for employees and it was closed to new enrollment.

Nevertheless, many employees wouldn’t change to another option because they had the “best” coverage. It was dubbed the “Cadillac” plan. Actually, they didn’t have the best. When you considered the premiums they had to pay, it was mathematically impossible for them to come out ahead relative to the other plan options. Eventually, we simply eliminated the option because hundreds of workers couldn’t be convinced to drop it.

Overestimating the risk of health care costs is common. Aside from those with chronic conditions, many families go years without incurring expenses that exceed their plan deductible.

Seniors aren’t immune to this fear. Consider Medigap policies. Today, the most popular option is Plan G. Go back a few years and Plan F—which has been eliminated except for those who first became eligible for Medicare before Jan. 1, 2020—was the most popular. The only difference between the two plans is that F reimburses for the Medicare Part B deductible and G doesn’t.

I spoke with a senior who has Plan F and was convinced she had the best plan. I urged her to look at the premium difference between F and G, and compare that with the Medicare Part B deductible.

The Part B deductible in 2023 is equal to $18.83 a month. If the extra she was paying for Plan F relative to G was more than that amount, she was guaranteed to lose money each year. Indeed, when I checked the premium difference, I found that most Plan F premiums were more than $18.83 higher than Plan G. When I explained all this to the retiree, the response I received was, “Plan F works for me.” Result: She’s throwing away $20 to $30 each month.

As a retiree, I can buy dental coverage using a health care reimbursement account that’s funded by my old employer. But when I compared the premiums to the benefits, the coverage wasn’t worth it because it doesn’t cover the most expensive dental care, so I cancelled the policy.

But a friend loves his dental insurance. He pays $50 a month for $1,500 in annual coverage. But his insurance caps the reimbursement for each dental service, plus it only covers routine care, so it’s unlikely he’ll get the full $1,500 benefit. The upshot: Self-insuring is likely a better deal.

My advice: When picking health insurance for 2023, take the time to run the numbers. Remember, premiums are a guaranteed fixed cost—and the most expensive option probably isn’t the best one. Look at your actual spending over the past few years. How often do you and family members actually visit a doctor? You may find your best bet is a high-deductible health plan with its relatively low premiums and the ability to fund a health savings account.

HumbleDollar

12 comments

  1. Would the senior woman with Plan F pass underwriting because she is very healthy or does she live in the couple of states that allow Medigap plan changes without underwriting? What plan are you and your wife have selected – Plan G High Deductible?

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  2. You wrote: “The assumption you make is that people can self-insure when people do not even have a $400 emergency fund.”
    It is more like self-funded since with insurance you share the costs,

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  3. Not sure I agree with taking away the ‘Cadillac’ health care plan because of its price, even though ‘hundreds’ of employees still wanted it. Isn’t the decision theirs to make, and the cost theirs to bear? By taking that plan option away I’m sure those people felt torpedoed by the company, regardless if the decision was made in their best interest.

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    1. It seemed unethical to offer a plan that guaranteed workers to lose money. If there had been any possibility of a positive outcome for the employer we wouldn’t have eliminated it.

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      1. We ended up offering a flat amount for the employer portion of the premiums and let the employees select whatever they wanted since it didn’t cost the company any more or less.

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  4. You keep writing that the Cadillac plans are not cost effective. I think that you are forgetting the purpose of insurance. Insurance is not to pay 100% of your loss or in healthcare for your illness but is to protect against financial ruin. The assumption you make is that people can self-insure when people do not even have a $400 emergency fund.

    I pick the plan that has the most known fixed costs to me. I understand their “rules” on who I can see and when I need referrals. What drugs are covered and where I can get them. I understand the co-pays and any other out of pocket money. It wasn’t until after I picked my plan for 2023 that one of my specialist decided to drop my insurance company but at least I know about it a head of time. It is not like I can do much shopping around for doctor services because you really do not know what they charge until months AFTER the visit when you get the EOB.

    There is a learning curve every time you switch plans and if you do it wrong, it will cost you. I have called Horizon and have gotten wrong answers before too. I have had them reject claims because the doctor was not in network but then I prove to them that he is listed on their own website.

    Since I retired, I have kept a spreadsheet of all my medical expenditures including dental and drugs. I list the “retail” billing charge that only the uninsured pay. What the doctor actually accepted under my plan. What I paid out of pocket including my premiums. (Does not include my company’s part of the premium.) But the combine total premium is in the high $30K range.

    What I found is that I have cost stability. I have paid out between $5.0K to $5.9K out of pocket for all medical expenses and premium for the past 5 years. The billing ranged from $25.5K (in 2018) to $75.9K (in 2021). The first 3 years I might have lost money but boy did I make up for it the last two years. I do have money set aside for medical expenses but it has got to last me the rest of my life. I do not want to forgo a vacation or a house repair because I had to pay out the maximum high deductible co-pay every year because I was too cheap to pay a little more up front in premiums. Premiums for insurance that prevent financial ruin.

    To me, it is like getting a maintenance contract for your HVAC. You get the best that you can afford because when you are freezing you just want it fix and not have to worry about the costs. You could shop around but you’ll be put at the bottom of somebody’s repair list. Meanwhile it is 19 degrees outside (happen to me last year). It is not like shopping on Amazon.

    Humans are irrational and sometimes peace of mind is worth more that a few extra dollars in your pocket. It is not like I can go back to work to pay off a large medical bill.

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    1. No, the point is that premiums are a fixed annual cost. A plan has a maximum out of pocket cost, you don’t want to pay more in premiums than that amount or you lose money even if you have a $1,000,000 in medical bills. In addition, it is very unlikely that most people will reach any OOP maximum in a given year and less year after year.

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      1. So far I have only reached 1/2 of the maximum OOP for a high deductible plan (counting my premiums too). I might have in fact reached my max OOP for last year if I have read the high deductible plans correctly for the ones that were available to me.

        I currently pay a co-pay per visit, not co-insurance (expect for my dental plan, then I pay 20% co-insurance), and no deductibles. That is a big difference. Now it is my understanding when I go on Medicare, I will pay co-insurance under most plans for almost everything unless I get supplemental plans. So buying a supplemental plan is like upgrading your car from a Yugo to at least a Ford. Are Advantage plans Cadillacs in Medicare?

        I guess technically I am paying co-insurance for my drugs too. But that is more to encourage generic over name brand. But some of the plans that are offered to me do not cover one drug that has no generic so I am saving there again. That one drug costs me $400 year under my plan. Otherwise it would cost over $21,000 or until I hit my OOP which might be $6500 (?) for me or $13500 (?) for my me and my wife. Not sure, I don’t have the plan details in front of me. My wife has one insulin drug billed at $9600 / yr but is costing us only $100 / yr. so I believe that we would hit the OOP limits depending on the drug coverage.

        The point is that the premiums are fixed and my more expensive coverage covers more of my annual costs. This may not be the case for a 30 something family worker with less costs per year. I also believe that when I get on Medicare, I will have to pray that I pick the right plan until I learn the new rules of coverage for whatever plan I pick.

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      2. Premiums are not counted as part of OOP for the purpose of comparing a plan vs the fixed cost of premiums and variable cost of health care. You can buy a supplemental plan that covers all out of pocket Medicare costs except Part B deductible. Medicare Advantage is a slippery slope. They have limited networks and most still use deductibles and co pays, but there may not be premiums. The most difficult decision on Medicare is Rx coverage.

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      3. I am aware that premiums do not count toward OOP expenses, but I still paid money out of my pocket for those premiums and I consider them part of my total medical costs. When choosing your total costs, you must consider how much you are paying for a plan as well and for what you get or save from said plan.

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