How to Pick Health Insurance Plans

Since I am a health economist, friends and family will ask me for advice in picking their health insurance plans. It has become a hobby of mine. This blog posts is a primer on  picking between insurance plans, with the focus on being employer sponsored and Marketplace plans. I have even linked to an Excel sheet where you can put in your plan options to graphically compare them! Economists believe that a graphical answer is almost always the most convincing answer.

The Basics:

Premium: This is what you pay every month regardless of how much medical care you use. With employer sponsored insurance (ESI), the employer generally pays the majority of the premium and your share is deducted from your paycheck. If your employer gave you this compensation in the form of income rather than insurance premiums, it would be subject to FICA and income taxes. If you are getting insurance through the Marketplace, the premiums for plans are based on your location and age, but the federal government gives premium tax credit (PTC) subsidies so that a benchmark insurance plan is a certain percent of your income. The subsidy is based on the second lowest cost silver plan, but it can be applied to any insurance plan. 

Deductible: This is the amount of money you must pay before you access any of the savings from having insurance. If your deductible is $1,000 then you will need to pay for the first $1,000 of doctor bills, lab tests, prescription drugs, etc. 100% by yourself before your insurance starts to chip in. 

Even if the amount of care you use doesn’t get above the deductible region for the year, you still benefited from insurance in a couple of ways. First, you got risk protection. If anything serious were to have happened to you, you would have gotten assistance with those bills. Second, many preventive care services are free even before you hit the deductible. You can see a list of those services here . Additionally, you may have benefited from a negotiated rate between your insurance company and your provider. You are still paying 100% of the bill, but the price on that bill may be lower than what it would have been for uninsured patient. (It is also possible that the negotiated price is not cheaper than paying cash. See this article for more on that).

Cost-Sharing: After you have reached your deductible, your insurance plan starts to split the bills with you. There are two ways of doing this: co-insurance where you pay a certain percent of the bill and co-payments where you pay a fixed dollar amount per bill. An example of co-insurance would be where you pay 20% of the bill and your plan pays 80%. An example of a co-payment would be you pay $25 and your insurance pays the remainder. With co-insurance, the rate is generally the same for all types of in-network medical care. Co-payments depend on the type of care—you will pay a higher copay for an urgent care visit than a primary care visit. Some plans may have a mix of the two. For example, you might have $25 copays for primary care visits but 20% co-insurance on hospitalizations.  

Whether a co-insurance or co-pay model is more generous will depend on the types of care you use. If a doctor visit costs $125, then you would pay the same amount with a coinsurance rate of 20% or a copayment of $25. If the visit was more expensive though, then the copayment would be better. One nice thing about copays is the base price doesn’t matter to you—you know what you are going to pay based on the category. This is particularly helpful in health care settings where it can be very hard to find out the price ahead of time. 

Out-of-pocket maximum (OOPM): This is the most that you personally can spend on medical care for the year. Note that this is on medical care, so it does not include your premium. This amount will be reached by a combination of your deductible and your cost-sharing payments. Once you hit this amount, your insurance pays 100% of your medical bills for the remainder of the plan year. 

How these things work together

 Let’s walk through a mathematical example. Suppose you have an insurance plan with a $100 monthly premium, a $3,000 deductible, a 20% co-insurance rate, and $5,000 OOPM. You are having surgery which costs $20,000. 

Comparing Plans

By walking through this type of calculation for different plans, you can find which plan would be cheapest for that $20,000 surgery. Of course, when you are picking your plan for the year, you don’t know what your total amount of medical needs for the year is going to be. To truly compare plans then, it is helpful to graph what you would pay for any given amount of medical care needed. Yay graphs! 

Below is the graph of the insurance plan from the above example. If you have $0 of medical needs (horizontal axis), you just pay the premium for the year ($1,200 on the vertical axis). If you had $100 of medical needs, you are in the deductible region so you would pay that first $100 yourself. This moves you to $100 on the horizonal axis and $1,300 on the vertical axis ($1,200 premium+$100 for care). Once you get to paying the $3,000 deductible the graph has a kink where instead of a slope=1 (you pay $1 for every $1 of care), the slope becomes 0.2 (you pay 20 cents for every $1 of care). This continues until you have paid $5,000 of medical care and then the slope becomes 0 (you pay $0 for every $1 of medical care). This happens where $3,000+.2(X-3,000)=5,000, and solving for X we get $13,000.

If you plan on having $0 of medical care, Plan A is better because it has the lower premium. Even up to $1,500 of medical expenses, Plan A is cheaper. Also, if you plan on having very high amounts of care you would hit the $5,000 OOPM on either plan, but Plan A would again be cheaper because the premiums were cheaper. In the middle region though, Plan B is cheaper. Which plan is better for you depends on where you expect your medical care to be. 

This was a comparison of two co-insurance plans which worked pretty well. Co-pay plans are not graphable in the same way. Probably the best approach is to give the co-pay plan hypothetical co-insurance equivalents and see how it compares graphically. You could play around with different reasonable co-insurance equivalents and get a sense for which plan is better. Alternatively, you could go to the extremes by bounding the co-insurance equivalent with a very low co-insurance (putting the copay plan in the best possible light) and 100% coinsurance (worse possible light). If we suppose Plan B was a copayment plan, the graph below shows it with a 5% co-insurance equivalent and a 100% co-insurance equivalent. This still shows us that Plan A is better at low levels of care. Eventually the 5% equivalent would hit the OOPM where the 100% co-insurance equivalent has, but that might happen at levels of medical care that are hard to imagine. It is still true that at very high levels of care, Plan A would be cheaper. 

 I have created a template where you plug in plan information. It tells you how much you would pay for any amount of care used under the plans. It also makes graphs! My first step in comparing insurance plans is to make the graphs.

Beyond the Graph

The graphs are super helpful, but some things can’t be graphed. Here are some other things to keep in mind:

Provider Networks:

This is the network of doctors and hospitals within the plan. You can look these up without being a member of the insurance plan, so you can check to make sure a favorite doctor is in the plan you are considering. You could also get a general sense of how broad the network is by looking up how many providers of a certain specialty are in your area on each of the plans. Note, however, that the providers within the network can change during the plan year. 

HMO vs PPO:

With a health maintenance organization, you have a primary care provider (PCP) who is supposed to help coordinate your care. Before you can see a specialist, you need a referral from this provider. Some HMOs don’t cover specialist visits without a PCP authorization and others charger a higher cost sharing if the PCP step is bypassed. In places where PCP shortages are really bad, having an HMO can be a frustrating and time-consuming barrier to care. 

With a Preferred Provider Organization (PPO) your insurance will let you access a specialist without a referral. However, sometimes specialists want a PCP referral, so even if you aren’t on an HMO you might have to go to a PCP first. 

HSAs:

High deductible health plans (HDHPs) are becoming popular and these plans have an important additional benefit: they make the beneficiary eligible for a Health Savings Account (HAS). Contributions to an HAS are not subject to income taxes, and in some cases with HSAs connected to employer plans, contributions aren’t subject to FICA taxes either. People can then take money out to pay for medical related expenses without paying any tax. That would be using the HSA as a clearing account for medical care much like a Health Reimbursement Account (HRA). But unlike the HRA, funds within an belong to the employee and roll over year to year which means these accounts can be more like savings accounts than clearing accounts.  But even better, they can be investment accounts because funds within them can be invested, growing without any tax drag, and then used for medical expenses years in the future. No tax on contributions, no tax drag while invested, and no tax on the way out make HSAs one of the best retirement accounts in disguise. More about this here.

Often, employers will contribute to the HSA each year to offset some of the deductible. When graphing a plan with an HSA contribution, I reduce the annual premiums by the employer HSA contribution amount. The super tax-efficient benefits of the HSA along with an employer contribution often make these plans the best option when I have compared ESI options and there is a HDHP.

Family Plans

This has focused on picking health insurance for one person. It is more complicated if there is more than one person. If you are a married couple with kids, you should think about which spouse’s plan would be better to add the kids too. If you have more than one kid, keep them on the same plan because generally the premiums for 1 kid and any higher number of kids is the same. One thing to keep in mind when looking at family insurance is whether the deductible is embedded or collective, meaning if everyone is working towards their own separate deductible or a pooled family deductible.