How to Choose a Health Insurance Plan
Health insurance is confusing! Here’s how I chose my current health insurance plan.
(It’s also an example of how graphing can help you simply interpret numbers - so don’t skip over the graphs!)
The whole point of insurance is to deal with uncertainty, also called risk. In the case of health insurance, you’re uncertain about how much medical cost you will incur during a year. Without insurance, price and cost are the same. Everything the hospital receives comes out of your wallet. With insurance, what the hospital receives might be different from what you pay.
So the way to choose a health insurance plan is to compare two numbers - your price versus the total price of care in a bunch of scenarios.
A typical plan includes a few concepts:
- The premium is what you pay even if there are no medical expenses
- Your deductible is how much medical expense you have to pay before your insurance kicks in
- Coinsurance is the percent of medical expense you pay after you “meet” your deductible
- The out-of-pocket maximum is the total amount you could be required to pay in a year (not including the premium)
If you graph the possibilities, each of these concepts appears in the shape of the curve. The figure below shows an insurance plan with a $300 monthly premium ($3600 per year), a $3000 annual deductible, 20% coinsurance, and an out-of-pocket maximum of $10,000.
If you never visit the doctor, you still pay the premium of $3600, on the vertical axis. From $0 to $3000 of costs (on the horizontal axis) the slope of the curve is 1. That’s because you pay the whole cost until you meet the deductible. From $3k to $38k, the curve’s slope is 0.2. Insurance has kicked in and you’re paying 20% coinsurance. After $38k on the horizontal axis, you’ve reached the out-of-pocket maximum and the slope of the curve is 0. That’s $3.6k of premiums and $10k for medical costs. Whew!
So should you buy health insurance? I dunno. Compare the curves and make your own choice. If medical costs are below $7500, skipping insurance will save you money. Above that amount, buying insurance is better.
Assuming you have decided to buy insurance, you’ll have to pick between options. Below are real choices I faced a couple years ago. Notice how one line is lower than the others in all scenarios? It dominates the others. Decision made!
Why would the insurance company offer a plan that is cheaper in all cases than the others? The answer lies in how insurance changes people’s behavior - a topic for a whole other blog. In this case, the plan I chose has a high deductible and steep co-insurance. (It’s bare bones.) Since my marginal cost of visiting a doctor is high, I avoid them when possible, and the insurance company saves $$$.
There are many more complications to choosing health insurance than I’ve included here. Which procedures are covered? What doctors can you choose? If you have a family, there are separate out-of-pocket maximums for each person and the whole plan. But in my meager experience, this explanation covers the most important aspects.