Mar 21, 2014
What You Need to Know BEFORE Buying Health Insurance [Part I]:
Health Insurance Basics
HealthCare Education Series written by Net Advisor™
[Preface]. The following is a eight-part series on information to help you understand about health insurance costs, choosing the right plan for you, and how the industry works. The author or NetAdvisor.org® do NOT have any financial interest in any insurance company and do not represent any healthcare provider, insurance company or agent. We are a non-profit organization and we attempt to help provide information to better educate the public interest.
HEALTHCARE. [Part I: “Health Insurance Basics”]. Background. When I was in the insurance business, I would help people with general insurance questions they might not consider. In most cases, I found that people just looked at how much is this policy going to cost, and get me the least expensive one. I would ask (sometimes with humor), would it be OK if the policy left out something that you might need?
My primary business was securities and investing where I had six different securities licenses, including management oversight/ regulatory compliance and three different insurance licenses in case clients needed insurance.
“The purpose of insurance is to protect yourself or family against unforeseeable risk.”
— Net Advisor™ (Yes, I just quoted myself!)
There are several areas to consider before buying health insurance. Buying a cheap policy could end up being the most expensive policy later if you actually need to use it.
First, let’s get familiar with some terms that will come up a lot. You may already know these terms, but two of them (annual deductible and co-insurance) will impact your true costs of having health insurance.
Common Health Insurance Terminology:
- Premium: How much you pay each month to maintain the insurance policy.
- Out-of-Pocket Costs: Costs in which you, not your insurance company will pay.
- Co-pay: How much you have to pay every time you see a provider (MD, DDS, etc). This cost is separate from the monthly premium.
- Contract Rate: An agreement between the doctor/ medical office and the insurance company. We usually have no idea what our part of the bill is until the insurance company said they have paid their part (the contract rate). You could owe up to the balance of the bill, less any doctor write-offs. More on this in parts II and III of our report.
- Deductible: How much you will need to pay out-of-pocket each year before the insurance begins paying.
- Co-Insurance: How much will your insurance pay or more importantly, how much do you have to pay even after you pay your annual deductible? This is probably the most important thing to look at when buying health insurance. Will discuss this more below.
- Rider: Extra benefits that may be available on certain plans, such as dental or vision at an additional monthly cost.
Common Government Health Care Terminology:
- Government Subsidy: The amount of money other working people are having to pay, in order to make something affordable for someone else.
- Affordable Health Care: This is a subjective and relative term generally popularized by political proponents. Whether something is affordable has a lot to do with one’s financial situation. What’s affordable for one person might not be affordable to someone else. Because something is assumed “affordable” does not mean it is better than an alternative.
[1] What to Look at When Buying Health Insurance
Consider your health situation realistically. Are you in good health, do you exercise (regularly), do you eat healthy or is Taco Bell and McDonald’s the stable diet? How many times do you see a doctor per year and for what? Do you take prescription medicine that is necessary for your issue? Are there any pre-existing conditions or a family history that may be a future concern? Do you play sports or are you involved in risky behaviors such as tobacco or drug use, including marijuana?
Age is of course another consideration. If one is older, there is natural risk of potential health issues. Diet, controlled stress, general lifestyle, genetics, etc., all play a part in increasing or decreasing one’s health risk.
[2] USA Medical Costs
Most major medical costs such as an MRI can run $1,000 to $5,000 on a single visit. Mostly likely, in my professional experience, an MRI can cost $1500 to $2700 each visit. A hospital in-patient or out-patient stay can run $1,500 or more per day. This does not include surgery, MRI, serious care, or ongoing care.
In California, there is a government website (PDF example) that discusses average costs for certain surgeries. These surgeries can range from the mid $20,000’s to over $100,000. For other states’ medical costs you might want to try Consumer Health Ratings.com.
A. Catastrophic Plans = Low Monthly Premiums, Higher Deductible and or High Co-Insurance. Target Audience: 18-34+ in excellent health, rarely see an MD, no known family health issue history.
Many states and the federal government have marketed these catastrophic plans to younger and “healthier” people because they think they are “low cost.” The true purpose of these plans is to get young people who have little to no money to pay for older sicker people who have far more financial resources available to them.
You could probably look at plans with lower premiums to keep monthly costs down. However these catastrophic plans pretty much always have high annual deductibles and or high co-insurance. The problem is these plans could be extremely costly if you actually need to use it.
[3] What Are Annual Deductibles?
Deductible: How much you will need to pay out-of-pocket each year before the insurance begins paying.
Let’s say your monthly premium is $47.00. I have never seen a premium this low, but the government thinks premiums can be this low, so for argument’s sake, we’ll ride this fairytale at $47 a month.
Let’s say a very conservative number for an annual deductible is $4,000 on this catastrophic plan. Aside from probably lower co-pays perhaps around $0-125 for basic doctor visits, if you are seriously hurt or need major medical care, be prepared to come up with $4,000 cash for starters.
Real healthcare costs is when you get hit with having to come up with a lot of cash – that big deductible to pay for your healthcare costs, before your insurance starts paying.
If you needed help in say December and the care continued in January, you’ll have to pay up to the annual deductible covering that year in December and then it starts over again January 1st where you pay up to another (in this example) $4,000 toward the new year’s annual deductible. Deductibles reset each year. Catastrophic health plans with low monthly premiums could see more realistic individual annual deductibles in the $6,500 range or higher depending on the plan.
If you have a family plan, you probably have a higher annual deductible which could be $5,000-$12,000 or more per year. See the plan. This could become really costly if you need serious medical attention.
The question is, can you afford to come up with this kind of cash in the event of an emergency or necessary major medical care? If the answer is no, then maybe a higher monthly premium would be better security with a lower annual deductible.
[4] What is Co-Insurance?
Co-Insurance: How much will your insurance pay or more importantly, how much do you have to pay even after you pay your annual deductible? This is probably the most important thing to look at when buying health insurance.
After you have met the annual deductible, there is the next hurdle you have to meet before your insurance kicks in and starts paying the medical bills. This is the co-insurance rate.
Co-insurance has become more common over recent years as insurance companies don’t want to pay the full medical costs. Co-insurance creates a disincentive to seek medical care when you know you will have to pay a large percentage of the bill.
Again, small things such as checkups, common cold, minor issues are probably not a burden for most. It’s when you need real care, is when co-insurance can get costly.
[5] Types of Co-Insurance Plans.
Keep in mind you have to pay the monthly premiums, meet the annual deductible, and then meet the co-insurance rate, before the insurance company starts paying the medical bills. Here are the more common co-insurance rates since the “Affordable Care Act” (ACA) also known as “ObamaCare.”
100/0 Plan. (or no co-insurance). AFTER the annual deductible is met, insurance pays 100 percent of the covered bill, you pay zero percent. These plans cost more, but you have limited your unknown medical cost risk to the annual deductible.
As a professional risk manager, I like the idea of knowing exactly what my maximum risk is going into a financial situation.
These 100/0 or no co-insurance plans were more common before ObamaCare, and are less common since its federal government passage. The costs of these plans are now much higher than they were years ago if you can get one.
Basically what has happened is government and insurance companies want you to pay more for the increasing healthcare costs. As if your monthly premium and annual deductible was not already costly?
90/10 Plan. AFTER the annual deductible is met, insurance pays 90 percent of the covered bill, you pay 10 percent. Unless you have larger cash reserves, I would not want that attacked by a plan that had a co-insurance of 10 percent or more. This is up to your comfort level and your income reserves.
80/20 Plan. AFTER the annual deductible is met, insurance pays 80 percent of the covered bill, you pay 20 percent.
70/30 Plan. AFTER the annual deductible is met, insurance pays 70 percent of the covered bill, you pay 30 percent. This is probably the most common co-insurance plan. It doesn’t mean it’s good, it just means it’s common. I discuss personal financial risk more in Part III of this report series.
60/40 Plan. AFTER the annual deductible is met, insurance pays 60 percent of the covered bill, you pay 40 percent. You get the idea how this works. I’ve seen plans that have lower insurance coverage such as 40/60 co-insurance (Florida for example) where you pay 60% of the covered bill, and the insurance pays 40% – after you have paid your annual deductible unless the plans says otherwise.
For me, these co-insurance plans are extremely risky plans because you have no idea what medical costs you could be looking at in the future, and are blindly obligated to pay up to 60%? No thanks.
Co-insurance also assumes the medical bill was covered by the plan. If the procedure was not approved or covered, you could end up paying the entire bill. The key is to make sure what is covered and get a WRITTEN pre-authorization letter from the insurance company so you know what is covered, by how much and what could be your obligated costs.
Article Series Index:
Part I: Health Insurance Basics
Part II: Choosing a Provider
Part III: HealthCare Planning
Part IV: Risks of Under-Insuring
Part V: The Truth About Health Insurance
Part VI: Navigators (Coming soon)
Part VII: How Your Health Insurance Rates Can Increase (Coming soon)
Part VIII: How to Profit from Your Insurance Company (Coming soon)
original article content, Copyright © 2014 NetAdvisor.org® All Rights Reserved.
Disclaimer: Post intended to be commentary from an insider’s view and based on actual experience working in and out of the industry. Poster’s licenses are currently inactive by personal choice. The information provided herein should not be deemed as specific investment, tax, insurance or legal advice. Rules and laws can change and thus opinions can change without further notice. Individual experiences and situations will vary. All of the data was accurate to the date of this post. Please contact your state or licensed appropriate person for specific advice for your specific needs.
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