Thursday, November 30, 2017

Thinking Out of the Box When Choosing a Health Plan for Open Enrollment

Now that the days are getting shorter and there is a chill in the air, it’s that special time of year when families come together and make their Open Enrollment elections for their health plan. Ok, maybe that’s not your idea of holiday bliss but today we have some tips to hopefully help you think about this annual chore in some different ways.

Last week, my company had our annual conference call where an insurance company rep bewilders us with the various options for next year’s health plans. The one question that never seems to get answered in these meetings is “How do I decide which plan is the right one for my family”? In this article, I will share some of my experience as an Actuary to suggest some ideas that you may not have considered when trying to answer this question.

First, let’s take a quick look at the typical choices offered by most companies. (Your options may vary a bit, but the concepts I will discuss below should still apply.)

1. PPO or HMO – This plan typically has the highest premium (i.e. deduction from each paycheck), but also offers the richest coverage. Many preventative services are covered 100%, and if you get sick or injured you’ll pay just a small percentage of the claims (i.e. medical bills). The PPO is a bit more flexible, while the HMO restricts which doctors you can see. For the sake of this article, we will lump these together since most companies typically offer only one or the other. Also, they tend to behave similarly from an employee cost perspective.

2. High-deductible HSA – This plan has the lowest premium. You then hope that you have a healthy year, because you’ll be on the hook for most costs up to a certain deductible (maybe $5,000). After that, you’re still responsible for a percentage of additional costs up to a maximum out-of-pocket amount. The “HSA” feature sweetens the pot by allowing you to put away tax-free money to pay these costs.

3. Lower-deductible HSA – This plan is similar to the High-deductible HSA, but lowers the risk (deductible and out-of-pocket maximum) in exchange for paying a higher premium. You can think of this as being in the middle of the above two extremes.

If you’re like most people, once your head stops spinning from reading the available choices you put on your accounting hat and try to calculate your best option. Of course, this requires that you accurately guess what your medical expenses are going to be next year. This might be possible if you have some expensive medical condition, or conversely are very young and healthy. But for the rest of us in the middle, this is like walking into a casino where we have no idea what the odds are. In other words – hopeless.

Before pulling out your calculator and getting sucked into this exercise, I argue that you should first think about your values and objectives. (Hint: money is only one of them.) First and foremost, what exactly are you trying to optimize? This comes down to analyzing your personal values, and the answer will not be the same for everyone. Here are a few key areas to think about:

·        Health - Who knew that health would be something to consider when selecting a medical plan? If the most important factor to you is maintaining your health, you should probably go with the PPO or HMO plan. There is a dirty little secret they don’t tell you about High-deductible plans: These plans discourage you from going the doctor. If you don’t believe me, sign up for one for a year and see what happens. When you realize that a trip to the doctor for that sore throat is going to cost you $200, you quickly decide that waiting the extra day to get better doesn’t sound so bad. If your good health is the primary consideration, put away the calculator and take the plan that will give you the inner peace to get yourself treated for every cough, muscle strain, and head cold.

·        Happiness – Studies show that one of the principles of monetary happiness is “Pay Now, Consume Later”. What this means for health plans is that, surprisingly, the HMO or PPO is likely to make you happier over the course of the year than the high-deductible plan, even though it will likely cost you more money in total. First, most of the money is coming out of your paycheck for premiums before you ever see it. Your additional cash outlay is very low. Second, you are achieving monetary happiness as you are “paying now” by deducting the higher premium, so you can “consume later” in the form of your medical claims throughout the year. On the contrary, relationships can be strained by High-deductible plans. Each time a family member incurs a claim in such a plan, with a hefty out-of-pocket cost until the deductible is reached, the employee who signed up for the plan may be asked “why did you sign us up for this stupid plan where we have to keep paying for everything.” The subtlety of the massive premiums that were saved is lost at such a moment.

·        Least Total Expense - Ok, if you are not into behavioral economics you may not be so concerned with the above “Health” and “Happiness” arguments. You just want to know which plan is going to have the lowest cost over the course of next year. The answer is, almost always, the HSA plan with the highest deductible. When I was studying Actuarial Science in college, there were some basic mathematical proofs that demonstrate this. This is especially true if you are a savvy consumer who is willing to shop around for cheaper medical care. And it will also help if your family is not a band of accident-prone hypochondriacs. Yes, there will be years where this option could cost you the most. But that will be offset my many other years where your expenses are low. For the lowest average outlay, go with the High-deductible HSA plan.

·        Lowest Maximum Expense – A different consideration for you might be: in the worst-case scenario, which plan is going to cost me the most? After all, the whole point of insurance is to avoid a situation that will put you out of house and home if someone in your family has a catastrophic event. If this is a real concern for you, you should focus on the “Out-of-pocket limit” for each plan and simply choose the plan with the lowest limit. This will sometimes be the PPO or HMO, and sometimes the HSA plan. Since the answer on this one will vary, you’ll have to check the detail in the particular options offered by your company.

·        Early Retirement – If you are trying to save up for an early retirement and/or like to minimize what you pay in taxes, the HSA plans have a lesser-known benefit that can be enormous. Each year, you can sock away a huge amount of pre-tax dollars in your personal HSA account ($6,900 in 2018). This is on top of the annual 401(k) savings limit ($18,500 in 2018). And you can invest the HSA money in aggressive funds just like you do with your 401(k). This is a massive tax break that should tip the scales for anyone who can afford to go for maximum tax-free savings each year. If you want this tax break and also care mostly about Health and Happiness, go with the Low-deductible HSA plan. Select the High-deductible HSA plan if you just want the lowest total cost without regard to psychological incentives.

Hopefully you now have a more complete picture of some things to consider when making your annual health plan elections. And if you get it wrong, there’s always another Open Enrollment this time next year!