How To Pick A Health Plan When Every Option Looks Worse

Open enrolment lands every November and I have picked wrong twice. Once by taking the lowest premium in a year I knew I had surgery coming, and once by overcorrecting into the most expensive plan and then not going to a doctor for fourteen months.

Both times I made the same mistake, which was comparing the plans on the one number the comparison page puts in the biggest font.

The three numbers, and what each one means

The premium is what you pay every month whether you see a doctor or not. It is the only number that is certain.

The deductible is what you pay yourself before the plan starts sharing costs. A $6,000 deductible means the first $6,000 of covered care in the year is yours, apart from preventive services and whatever the plan covers with a copay before the deductible.

The out of pocket maximum is the ceiling. Once your own spending on covered in-network care reaches it, the plan pays everything else for the rest of the year. That number, not the premium, is the insurance you are actually buying.

Coinsurance sits between the deductible and the ceiling. After the deductible you typically pay a percentage, often 20 per cent, and the plan pays the rest, until the ceiling stops you.

Three plans, three kinds of year

Work the ordinary year row, because it is the one that takes thirty seconds and nobody does. On Plan A, $3,000 of care sits entirely under the $6,000 deductible, so you pay all of it: $1,440 plus $3,000 is $4,440.

On Plan C the deductible is $500, then you pay 20 per cent of the remaining $2,500, which is $500. Your share is $1,000. But you already paid $5,400 in premiums, so the year costs $6,400.

The most generous plan costs $1,960 more in a year with three thousand dollars of medical care in it.

The spread that actually matters

Look at the bottom two rows together. In a quiet year the gap between the cheapest and the most expensive plan is $3,960. In the worst year the gap is $1,040, and it runs the other way.

One thousand and forty dollars.

That is what Plan C is really selling: protection against a catastrophe that Plan A already caps at $9,440, for $3,960 a year of certain money. Once you see the numbers stacked, the high premium plan stops looking like the safe choice and starts looking like a fairly expensive way to shave a thousand dollars off a bad year.

It also means Plan A's real risk is cash flow rather than total cost. The bad year is only $1,040 worse, but it arrives as bills you have to pay in February, and the ceiling protects you from the size of the loss rather than the timing of it.

What the arithmetic cannot see

Do the totals first, then check these, because a plan that wins the arithmetic and fails this list is not a winner.

• Whether your doctors are in network, checked on the insurer's directory for the specific plan rather than the insurer generally, because networks differ between plans from the same company.
• Whether your prescriptions are on the formulary, which is the plan's covered drug list, and at what tier, since a drug on the wrong tier can cost more than the premium difference by itself.
• Whether it is an HMO, which usually requires you to go through a primary care doctor for referrals, or a PPO, which usually does not and costs more.
• Whether you already know something is coming, such as a birth, a surgery, ongoing therapy or a chronic prescription, in which case run a fourth scenario with that specific cost in it.
• Whether family coverage changes the deductible structure, because family deductibles and individual deductibles inside a family plan interact in ways that are never obvious from the summary page.

The subsidy hiding in the cheap plan

A high deductible plan like Plan A will often qualify as HSA-eligible, which lets you fund a health savings account with money that escapes income tax and payroll tax. Many employers also contribute to the HSA if you take that plan.

Both of those belong in the comparison. If the employer puts $750 into the HSA, Plan A's quiet year drops from $1,440 to $690 of real cost, and the tax saving on your own contributions comes on top. That can be worth more than the entire premium gap, and it never appears on the comparison grid because it is administered by a different department.

What to do before enrolment closes

Open the Summary of Benefits and Coverage for each plan, which is the standardised document every plan has to provide in the same format so the plans are genuinely comparable. Find the three numbers.

Then build the grid. One column per plan, one row for a quiet year, one for an ordinary year, and one for a bad year. Use last year's actual spending for the ordinary row, which you can get from your insurer's claims history rather than from memory.

Nine numbers. It takes about fifteen minutes and it turns a decision most people make on vibes and a monthly premium into something you can look at.

And keep the grid. Next November the plans will have changed and your numbers will have changed, but the three rows will be the same three rows, and you will not have to work out what a deductible is again at eleven at night on the day before the deadline.

Two things that quietly move the totals

A premium paid through an employer usually comes out of your pay before income tax and before payroll tax, so a $280 monthly premium costs less than $280 of take home pay. That narrows the real gap between the plans in the table, and it narrows it most for the expensive one.

The out of pocket maximum caps covered, in-network care and nothing else. Care from a provider outside the network can sit outside that ceiling entirely, which is how people end up with bills after a year they believed was capped. Federal protections now cover several of the common surprise billing situations, emergency care among them, but they are specific protections rather than a general rule.

So the ceiling is a ceiling on the care the plan agreed to cover, bought where the plan agreed to buy it. Worth knowing before you treat $8,000 as the worst thing that can happen to you.