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When it looks like a purchase is going to run me more than a few hundred dollars, the analysis process starts. It is automatic, and I can’t stop it. Some might consider this a telltale sign of a cheapskate. But I know there is a difference between being cheap and being smart with your money.
As a purchase moves into the several thousand-dollar range, a deeper analysis is required. It might even require an excel spreadsheet or two. This assessment should be at the bedrock of any responsible personal finance philosophy. Frankly, when we are spending thousands of dollars on something, we need to make sure we understand the product or service we are buying.
Unfortunately, this analysis just doesn’t happen with most medical insurance plans when they are provided by our employer. We might briefly flip through the hundred-page document provided by the Human Resources department, but we do not go much deeper than that. We tend to trust that our employer is vetting the purchase on our behalf.
Max is here to change that.
Every single year, I carefully read through the specs of my medical plan to make sure I understand what I am getting. Last year, I noted that I could buy a couple of used cars for what was being paid for my premiums and still have a few thousand dollars left in my pocket. This year, I am sticking to just talking about the specific specs of my plan.
If you want to follow along at home, go grab your summary of benefits and coverage. You have a right to this document per the Affordable Care Act.
Premiums
Premiums are the payments made to have health insurance. A membership fee to be dumped into an actuarially sound country club pool that helps pay down your medical bills.
In 2020, the high-deductible health plan (HDHP) that covers me and Mrs. Max Out of Pocket will run $22,450 for the calendar year 2020. These premiums are split between me and my employer. I will pay approximately 22% of the tab and my employer will pick up the remaining 88%. Here is how the split looks in real dollars:
- Max pays $4,950
- My employer will pay $17,500
2020 Premiums = $22,450
This is a 3.85% increase of about $860 from 2019.
My current employer is the first of my career that shares the full premium information. It is nice to see how much money is really exchanging hands on my behalf behind the scenes.
Even though it is just me and Mrs. Max OOP, our plan is still considered a “family plan”. There is not an “employee and spouse only” option. In other words, I pay the same amount as an employee who has a spouse and four children.
Most of my previous employers had three separate premium rates depending on the employee’s situation.
- Employee Only
- Employee and Spouse Only
- Family
Health Savings Account Match
It is important to note here that my employer gives $600 of my premiums right back to me to start the year. This $600 is deposited directly into my health savings account and I can use it to pay down out-of-pocket costs throughout the year. Access to an HSA is one of the perks of having a high-deductible health plan.
This deposit hits my health savings account the first pay period of the calendar year.
Here is where it hit my Health Equity account back in January.
Max Out-Of-Pocket
The very next thing I look at is the “out-of-pocket maximum”. Believe it or not, I prefer to call this the max out-of-pocket. That’s what Michiganders call it at least.
In theory, this is the maximum we would have to pay for covered medical services in 2020. I like to think of it as a bucket. Once the bucket is filled up, I no longer need to pay for medical services and my insurance will pick up the full tab for the rest of the year. This, of course, assumes we follow the sometimes-confusing policies and procedures of my plan, including staying in-network.
My plan sets both Mrs. Max OOP and I up with our own individual max out-of-pocket. In other words, we both get our own bucket to fill up. This helps us mitigate risk and is much like the individual deductible concept.
In 2020, our individual max out-of-pocket bucket is $3,300, for a total of $6,600.
The nice thing about having separate buckets is it helps us further mitigate risk. Although our family max out-of-pocket is $6,600, if one of us has a bad accident, the most we would pay is $3,300.
The max out-of-pocket is an accumulation of out-of-pocket costs like deductibles, coinsurances, and co-payments. In other words, you can generally use ANY of your out-of-pocket costs to fill the max out-of-pocket bucket. So, a $100 co-payment here and a $1,000 deductible there can both be dumped into this.
I tend to consider this the fully weighted “risk” associated with my medical insurance plan. So, between my spouse and I, the most we should have to pay out-of-pocket for medical services in 2020 is $6,600. This is our “health risk”, and it is relatively easy for us to plan for.
Deductible
The deductible is just another bucket. Aside from preventive care, we need to fill this one up before my health insurance starts helping us pay for medical services. In 2020, our family deductible is $3,300.
So, as a family, we are expected to pay the first $3,300 for medical services before our insurance starts paying.
Just like the max out-of-pocket, we each get individual deductible buckets of $1,650. This means if either of us has an issue, our insurance will start paying for our individual services after we pay the first $1,650.
And again, at the risk of being redundant, these deductible buckets are dumped right into our max out-of-pocket bucket.
Coinsurance
Coinsurance is a little more complicated. Once we fill up the deductible bucket, our insurance will start helping us pay for medical services. But there is a catch. They still expect us to pay a portion of the bill until we reach our max out-of-pocket.
In my case, our coinsurance for an in-network provider is 10%.
The coinsurance is generally the portion of the bill I am expected to pay after I reach my deductible. This is usually based on the rate the insurance company will pay the medical provider for the services provided. We often do not know this rate because these prices are negotiated behind the scenes. If I go to an in-network hospital for a diagnostic lipid panel, they might negotiate that bill to $100. Since my coinsurance is 10%, I would have to pay $10.00 of the $100 negotiated rate. Since I already met my deductible, my insurance will pick up the other $90.00.
$100 negotiated rate X 10% coinsurance = $10.00
Along with my $1,650 deductible, that $10.00 will be dropped into my max out-of-pocket bucket.
Co-Payments
My plan does not have any co-payments for medical services, but it does have them for prescriptions. Co-payments typically go hand in hand with office visits in the clinic or visits to the emergency room.
Co-payments are generally “fixed amounts” that are incurred with each visit regardless of what occurs at the visit. I often see $25 co-payments for office visits and $100 co-payments for visits to the emergency room. Once we meet the max out-of-pocket, we no longer need to worry about co-payments.
We are going to stay out of the prescription realm today, but it is important to note that my plan does cover prescriptions and there are co-payments tied to those transactions.
Final Thoughts
This stuff matters. It is part of your compensation package. Taking a few minutes to understand it makes a difference. You can even throw it all into a nicely organized Excel spreadsheet as I did for your viewing pleasure.
Last year I complained a bit about the cost of this plan. This year, I tried to stick to the specs. I still think the fact that these total premiums cost almost double what it cost for us to put a roof over our heads for the entire year is a bit obnoxious. This also represents 44% of our entire 2019 spending on regular life. There are people out there that make less than this for an entire year of work. But I digress. Ultimately, I am thankful to have health insurance.
The specs of my plan are relatively simple to understand, but unfortunately, that is not always the case. Some plans are extremely confusing, so I tend to focus on my premium liability and total max out-of-pocket for the entire year. This gives me a good feel for my worst-case out-of-pocket risk for the calendar year.
$6,600 (max out-of-pocket) + $4,950 (employee premiums) – $600 H.S.A. match = $10,950
Fortunately, we have not had any medical expenses so far in 2020. Hopefully, we can keep it that way.
What’s the total ticket price for your medical insurance premiums?
*I very lightly rounded my total premium figures in an effort to stay anonymous.
Good article. I’m equally befuddled by the fact that people don’t “do the math” when it comes to healthcare. Here’s my annual breakdown for my HDHP:
Employee contributions: $1,620
Employer contributions: $16,128
Total contributions: $17,748
Quite the generous employer subsidy!
Of course we blow through the $5,400 deductible each year. Luckily the deductible has healthcare + prescriptions + mental health bundled into the same deductible, so that helps a bunch.
Ah, you are paying $3,300 less than me annually, but it looks like you have a little more risk (which you meet). How does your max out-of-pocket look again? Either way, that is a nice employer subsidy.
My prescriptions hit my deductible/max out of pocket as well.
Take care, professor.
Max
Max OOP is $1,700 in excess of the deductible, or $7,100 (ignoring premiums).
I’ve created a spreadsheet that compares the different plans available to me: https://www.dropbox.com/s/18mijv340pgxp8m/high%20mid%20low%20deductible%20plans%202020.xlsx?dl=1
I don’t know if I’ve shared it with you before, but it’s the most concise way I’ve seen presented on how to chose between different plans.
* Y axis: total cost to consumer
* X axis: amount of $ spent at doctors
* Y intercept: annual premiums
* Slope of line is 1 until the deductible is hit
* Slope of line is coinsurance amount after deductible
* Slope of line is 0 after OOP max is hit
Thanks for sharing. Here’s the breakdown for my plan:
– Employee premium (employe+spouse+children): $6,000
– Employer contribution: $???
– Heath Reimbursement Account (family): $13,000
– In-network deductibles: $6,500/individual, $13,000/family
– In-network out-of-pocket maximum: $6,500/individual, $13,000/family
You’ll notice that the HRA = In-network deductible = In-network out-of-pocket. If we do everything in-network (which isn’t hard) we pay nothing beyond premium. Out-of-network numbers are all double, but HRA isn’t network dependent.
Every year we evaluate whether we elect for the optional vision coverage during that benefit year or not. Between the eye doctor appointment and what it covers for contacts and eye glasses, it’s usually about equal the premium we pay.
Ah, you are paying $1,050 more than me annually, but you carry a lot less risk.
That’s a nice HRA arrangement you have with your employer. Basically leaves you with no risk, and your employer gets the pick up if you don’t use it. Also, your plan seems simple and easy to understand, something else I like to see.
Unless you are regularly meeting the $13,000 max out-of-pocket, it may be worth hedging and using the HRA to pay down the vision costs. I am sure you have all that figured out, though.
Try to find out what your employer is paying!
Take care,
Max
I poked around and found the Summary of Benefits but still no clue on how much my employer pays.
Between the eight of us, we always hit our max out-of-pocket. But even if we didn’t, I believe it can only be used on medical and prescriptions, and the vision plan doesn’t qualify within the plan. However, we have the FSA option to pay for vision needs, as well as dental and orthodontia.
Max,
Great article and worthwhile addressing these concepts. I think many people overlook the idea of “total compensation.” In my opinion, it’s important to point out that rising health care premiums (at least the portion paid by the employer) also means less direct pay to the employee. The employer-paid premiums are in lieu of increased salary. Linking health insurance to employment started after WWII in America and this historical relic still exists today.
I also think it’s worth mentioning that Direct Primary Care (DPC) may be very beneficial to those with HDHPs ( I have a post on this). It’s a membership model (usually $70-150 per month) and office-based primary care is included within the price. Also, other services have been negotiated ahead of time and prices are transparent. The take-home point is that DPC negotiated prices out of pocket (like a CT scan or seeing a negotiated specialist) may be way cheaper than insurance charged prices which are applied toward one’s deductible.
Keep sharing the knowledge!
Thank Dr. Medimentary – you are absolutely right, rising healthcare premiums eat away at our direct monetary compensation. “Historic relic” – I love that.
The pricing in the DPC model you shared is interesting and could be a good option. I am also curious if you could use HSA dollars to pay into that model. I will have to read up on their ancillary pricing and see how that compares to the traditional setting.
Max
This year is weird since I am on Cobra and Dragon Gal is on an marketplace plan. But in 2019 when we were both on my work insurance we had the following (slightly rounded):
Employee + Spouse Premiums: $5,800
Employer Contribution: $13,800
Total Contribution: $19,600
Deductible: $1,750 Individual / $3,000 Family
OOPM: $5,000 Individual / $10,000 Family
This was not an HSA eligible plan. I benefitted from it in that all of my cancer lab work was covered at 100% (retail price of close to $3,000 per set of labs). I only paid $50 each time I saw my doctor (which was just twice last year).
If Dragon Gal was not on my plan, I would have paid only $1,200 per year and the company $7,200 ($8,400 total). There was definitely a “penalty” for including her on my insurance, but since she wasn’t working, this was the only logical option for her.
I remember you mentioning that on the labs, certainly makes your plan more attractive considering your circumstance. Funny you mention the “penalty” for carrying your wife on the insurance. I took a similar “hit” at my previous employer, but it was still cheaper than if she were to carry herself on her own insurance at the high school she thought for at the time!
Looks like I have everyone beat so far on the OOPM, but my employer is clearly paying for it in higher premiums.
Max