It seems like every year health insurance gets more expensive, and more complicated. During the last 10 years, many employers have shifted to offering health plans that put more onus on you, the employee, to manage your costs and set aside money to pay for health care expenses. These plans can be lower cost to you, and your employer. All this introduces risk to your financial plan because your out of pocket expenses can be more variable.
When you look at your benefits information, you may be overwhelmed with all the numbers and jargon. So how do you choose the right plan for your family? Luckily, there are three steps you can take to clarify your options and help you make the right decision. Let’s assume you have 3 options to choose from. Plan 1 is the typical “Gold” plan with high premiums and lower out of pocket costs. Plan 2 could be a mid-range “Silver” high deductible health plan, or an HMO. Plan 3 in our example is the lowest cost “Bronze” high deductible health plan.
Step 1: Start with the guaranteed annual cost
Every plan will have a premium that will be taken out of your paycheck. Look carefully to see if premiums are shown as per paycheck or monthly in the benefits summary. Depending on how often you get paid, you will multiply by 24, 26, or maybe 12 to get the annual premium cost to you. After you choke on how big the number is, write down this guaranteed cost for each plan. That is what you’re going to pay before you even use the coverage.
Step 2: Figure out the maximum you could pay under each plan
Each plan will have an out-of-pocket maximum (OOP Maximum). Usually (but not always), plans with higher premiums have lower maximum costs out of pocket. Add the OOP Maximum to the annual premium, and that is the maximum you will be forced to pay that year. If everything goes wrong health wise for you and your family, you know you won’t pay more than this total.
Step 3: Estimate your likely spending under each plan
If you were never going to use the coverage, then it is easy to pick the plan with the lowest guaranteed premium in step 1. If everything is going to go wrong every year, then easily pick the one with the lowest total in step 2. For most people, though, their experience each year will be somewhere in the middle.
Some benefits providers have a calculator that says it can help you figure out your likely spend. I haven’t ever found these to be that helpful, but you can try. I usually just look at the last year or two spending for my family under normal circumstances.
There are a handful of prescriptions we always need for chronic conditions and usual seasonal sicknesses. There are always a couple of random doctor visits and some lab work. I look back at my expenses and just pick some round numbers for each type of cost. Write down your premium for each plan, and add in the likely expenses each year and total that up. That is your likely spend for each plan.
Now, this can become complicated. Plans with higher premiums generally come with lower co-pays for these services. Lower premium plans (high deductible health plans, or HDHPs) usually charge you the negotiated rate for services instead of a co-pay. For example, a doctor visit could range from a $30 co-pay under Plan 1 to a cost of $250 under a HDHP. This is the price you’ll pay for the lower premiums.
If you have followed these three steps, you have something like the following example:
For each row, pick the lowest number. As you can see, under the scenario where you use no coverage, Plan 3 is the best for your budget. If everything goes wrong, Plan 2 is the best. Under the likely spending scenario, Plan 3 is the best. What surprises people is that Plan 1 is not the best plan under any of the scenarios, even though that is the plan with the lowest co-pays. Of course, your numbers may shake out differently depending on what your employer offers.
There are 2 kinds of people that Plan 1 can be better for, not financially, but emotionally. If you are the kind of person that hates debating whether to spend hundreds of dollars when you may need to visit the doctor, Plan 1 helps with that. If you are the kind of person that is unable to save on the side for out of pocket costs, then Plan 1 can work for you too.
However, plans like 2 and 3 usually come with the ability to save in the type of Health Savings Account (HSA) that has much better flexibility than the normal flexible spending account (FSA) that comes with plans like 1.
The Last Layer of Complication
Each plan will have language about what services are covered, what the deductible is for individual and family, and differences in how they treat prescriptions. You may see language about whether the deductibles are “embedded” (a lower individual deductible than the family deductible) or not. Some employers add to the complexity of comparing plans by offering incentives to choose one plan over another like contributions to your HSA account for you, or discounts for participation in surveys, fitness programs, etc. That’s why it’s helpful to have someone to help walk you through all of the specifics.
There are going to be gray areas of outcomes during the year where it is impossible to predict which plan will be better financially. There can also be circumstances like your tax situation that can dictate how beneficial some of the tax savings of premiums and specific accounts for healthcare expenses are to you.
Finally, if you’re in a two-income family where both of you have access to company sponsored options (and you have kids too), then there is further analysis needed as to who should be under which plan. Some companies make it cheap to add kids, and some penalize you if you add a spouse who could get coverage elsewhere. It is worth looking at all the options instead of just picking the “safe” plan or the one you’ve been with year after year.
Need help making these decisions? The real financial plans we build with our clients include this analysis. We can help you work through this process during open enrollment or when you get a new job.