I established a conceptual base in Part 1 and 2 of this series, but that’s not the whole picture. Healthcare is real. These aren’t just concepts floating around in the ether. They exist here, in the world, and change in response to various factors.
Through an extended example, I’ll show how these concepts interact with each other. Hopefully, you’re able to use it to develop a healthcare shopping strategy that’s right for you.
So, consider that it’s the new year, and time to choose a new health plan.
Do I Really Need Health Insurance?
By now, you’ve noticed how insanely expensive all of this is, and you may be wondering: “What’s the point of even having insurance if they’ll always find a way to keep me on the hook?”
You still need it. Allow me to explain.
There are three starting conditions: personal wealth, the deductible, and the state of your health.
If you’re young and healthy – the primary goal is to minimize the premium payment. You’re young, so you probably can’t afford much. For you, insurance is more of a prevention against catastrophic events. It’s unlikely that you’ll pay anything towards your deductible since routine medical visits are covered under co-pay agreements. If, by chance, you are injured: expect to pay 100% of the treatment cost out-of-pocket. Even if you broke your arm, and it cost $2,000 to treat, you still probably saved money in the long run by making cheaper premium payments.
On the other hand, healthcare pricing is absolutely out of control in the United States. It’s the kind of place where a burst appendix can mean literal bankruptcy. Because without health insurance, every provider is considered “out of network,” and they’ll bill you as much as they possibly can, sometimes for services and products you never actually received. If you’re not conscious: who’s to say what really happened to you in the treatment room, other than doctors and accountants?
So it’s better to select a very affordable plan with a huge deductible than to go without altogether since you can still access an insurer’s negotiated rates. Remember those? An insurance company negotiates, in advance, how much they’ll pay a provider for a particular service. An insured patient at an in-network practice will not need to pay more than the negotiated rate, often a discount of around 90%.
So assume that we’re considering an in-network provider situation in this scenario.
Scenario:
Current Status:
I pay a $500/month premium for a policy with the following characteristics:
Deductible: $2000
Co-Insurance: 20%
Out-of-pocket Maximum: $5,000
First Event:
In January, I notice an irregular mole. I visit a dermatologist to have it removed and biopsied. Because I haven’t yet met my deductible, I have to pay $150 for a visit out of my own pocket.
Current Status:
Deductible: $150/$2,000
Out-of-pocket Maximum: $150/$5,000
Total Medical Bills: $150
Total Cost to me, for the year:
+ $6,000 ($500 x12 months) of premiums
+ $150 (medical expenses)
= $6,150
Second Event:
In June, I have a heart attack. I make it to the emergency room in time and survive. The bill for the hospitalization, ambulance, diagnostic exams, and medication comes out to $2,850. Of that bill, I’m required to pay $1,850 towards the deductible, since I already paid $150 towards it in January. From there, I’ll owe an extra 20% of the difference as co-insurance. Since the original bill was $1000 over my deductible, that’s $200 more I owe for the services.
I’ve now met my deductible and paid $2,200 towards my out-of-pocket maximum. My insurance company has now paid $800 of my medical expenses.
Current Status:
Deductible: $2,000/$2,000
Out-of-pocket Maximum: $2,200/$5,000
Total Medical Bills: $3,000
Total Cost to me, for the year:
+ $6,000 (premiums)
+ $2,200 (medical expenses)
= $8,200
Third Event:
In August, I have another cardiac episode. This time, it’s much worse. I need emergency bypass surgery. I spend another week recovering in the hospital, and the bill comes out to $30,000.
It hasn’t been a good year…
Since I already met my deductible, the 20% co-insurance means this stay would cost me $6,000. But since I’ve already paid $2,200 towards my out-of-pocket maximum of $5,000, I’ll only need to pay $2,800 to cover these costs. Because I’ve now met my out-of-pocket maximum, the insurance company pays the remaining $27,200.
Current Status:
Deductible: $2,000/$2,000
Out-of-pocket Maximum: $5,000/$5,000
Total Medical Bills: $33,000
Total Cost to me, for the year:
+ $6,000 (premiums)
+ $5,000 (medical expenses)
= $11,000
Fourth Event:
Disaster strikes again. In December, I fall off a ladder and break my leg – a severe, compound fracture, racking up another $10,000 in medical bills. But because I already met my out-of-pocket maximum in August, I don’t have to pay anything now. My insurance pays the entire $10,000.
Current Status:
Deductible: $2,000/$2,000
Out-of-pocket Maximum: $5,000/$5,000
Total Medical Bills: $43,000
Total Cost to me, for the year:
+ $6,000 (premiums)
+ $5,000 (medical expenses)
= $11,000
So over the course of a year, I spent $6,000 on health insurance and $5,000 on medical expenses, for a total of $11,000. But my insurance company spent $38,000 (That’s $800 + $27,200 + $10,000) on my medical expenses. Financially, it was worth having insurance. My wallet is hurting, but at least I have something left. I’d be a lot worse without it. Because if I didn’t have any, it’s not like I’d be on the hook for just $38,000. Remember: that’s the sum of negotiated rates.
Without insurance, I’d owe something closer to $350,000. And you better believe they’re coming to collect. They’ll garnish my wages, seize my assets, and send me straight into bankruptcy.
That’s why you need insurance.
