Everything You Need To Know About Choosing Health Insurance
by Erin Schumaker Healthy Living Editor, The Huffington Post
Enrolling in health care is complicated, and according to research, most of us are making the wrong selections -- and taking a significant financial hit as a result.
"Insurance literacy matters a lot," Ben Handel, an assistant professor of economics at the University of California, Berkeley, told The Huffington Post. "People who have less information end up losing quite a bit of money -- sometimes up to thousands of dollars."
Nearly three-quarters of the insurance-buying public falls into this 'illiterate' category. In ongoing research conducted by Saurabh Bhargava, an assistant professor of economics at Carnegie Mellon, and his colleagues, 71 percent of people surveyed couldn't define the basic cost-sharing features of a health care plan, including terms like "deductible," "copay," "coinsurance" and "out-of-pocket max." (Be honest. Do you really know what a deductible is? If not, check out our cheat sheet below.)
What's more, Bhargava's team found that people who didn't understand how health insurance worked picked plans that were worse for them, and tended to overpay for their health care needs.
The biggest mistake? A lot of people believe that the higher tier (read: more expensive) plans correlate to a better quality of health care.
"People choosing the more generous plan thought that plan gave them access to fancier doctors and hospitals," Handel said, a notion that his research found to be patently false.
If you’re a healthy person, but you choose a very intensive plan with a lot of coverage, you’re basically implicitly subsidizing all the sick people.
Instead, the tiers represent the way you'll split costs with your provider, not how luxurious each plan is. "If you’re really healthy, regardless of your income, you might be better off choosing a less generous plan," Bhargava said.
Another big problem is that people prefer paying a predictable premium to paying unexpected out-of-pocket costs, even if it means paying more for their plan in the long run. In Bhargava's study, this meant employees were willing to spend $500 more in premiums to reduce their deductible by $250 -- clearly a bad deal over time.
Ready to take the plunge? Here's what plan you should pick if...
You're a young, healthy person.
If you're young and healthy, you should almost always pick the low-coverage option, Handel and Bhargava said. "In the Affordable Care Act, that would be the catastrophic plan or the bronze plan," Handel said. "In an employer [plan], that would be whatever high-deductible option they’re offering."
The rationale: From a financial perspective, low-tier plans still have reasonably low out-of-pocket maximums, and as a young, healthy person, your chance of hitting that out-of-pocket max -- basically the worst-case scenario -- is low.
Moreover, if you choose a more expensive plan with higher coverage that you don't actually need, you're pooling yourself with the sick people who do need that coverage. That means your premiums, which cover the average costs of everyone enrolled in your plan, are likely to go up over time.
"If you’re a healthy person, but you choose a very intensive plan with a lot of coverage, you’re basically implicitly subsidizing all the sick people," Handel said. "Most people don’t know that. But that’s definitely the case."
That said, before you default to the lowest coverage option, consider the network of doctors included in your plan. If your favorite doctors aren't covered, and you can't stomach the idea of switching providers, it might not be worth paying non-network doctors out of your own pocket just to get lower premiums.
You have a chronic health issue.
Let's say you have diabetes, and know in advance that you'll be using a lot of health care next year. You still shouldn't default to the highest-tier plan. If you're already close to the out-pocket-maximum, you aren't likely to take much of a hit by selecting a plan with a lower deducible. Instead, it might make sense to pick your plan based on whether your doctors are in-network or not.
The rationale: If you have a chronic condition or expect to use a lot of health care, you probably already know which doctors you want to see. So look them up and see which plan covers them, or opt for a broader network in general. PPO plans are usually the more flexible type, with biggest networks.
You're a middle-aged, healthy adult with two kids.
Again, just because you can pay for premium health care doesn't mean you should. People say, "I'm a healthy person, but I want to make sure that my family always has the best coverage on every dimension, so I’m just going to pick whatever the premium option is," Handler explained.
Unfortunately, that's not how health insurance works. If you or a family member on your plan has a chronic condition, or if you anticipate using a lot of health care, by all means, upgrade. But before you do, it's worth comparing your expected health care expenses to each prospective plan's out-of-pocket maximums, as well as researching your provider networks to see if your doctors are covered -- just like you would if you were a single person.
"A lot of times, a wealthy person will say, 'Oh, I don’t really understand insurance, but I know that I want to be able to see the doctors I want to see and I don’t want to get a bill for $200,000,'" Handler said. "They’re really just picking the fanciest thing, and in the process, often losing money by doing so."
The rationale: When you select a premium plan, what you're paying for is additional cost sharing, not improved health care quality. "What should determine whether or not you're willing to pay for the more generous plan isn’t whether or not you want a luxurious health care experience, but whether or not you expect to use a lot of care," Bhargava said.
You're perfectly happy with last year's plan.
Welcome to the financial hellhole that is consumer inertia. If you're like the majority of consumers, you find a plan you like and stick with it without paying attention to rising premiums or coverage changes from year to year. Alas, this set-it-and-forget-it mentally, while common, isn't the most financially responsible.
In 2014, people who stayed in the cheapest and most popular plan saw an average increase in premiums of 9.5 percent, the Upshot reported last year.
"Overwhelmingly, people passively remain in their same plan year to year, even when there are significant changes to plan prices and people’s health changes," Bhargava said. "I think people just don’t recognize that they’re leaving that kind of money on the table."
And even when people do realize they're losing money, these deeply entrenched beliefs are tough to uproot. So difficult, in fact, that Bhargava couldn't convince his own mother to pick a more cost-effective plan.
"I think my mom’s exact words were, 'Well, your research doesn’t apply to everyone,'" he said.
Ready to pick a plan? Ask yourself these three questions about each plan you're considering:
1. What do I expect to pay?
- Your expected costs should basically be a combination of your premium and your anticipated out-of-pocket health expenses.
2. Worst-case scenario, what will I pay? (This is your out-of-pocket max.)
- One plan might have lower premiums, but if the out-of-pocket maximum is astronomical, that's worth considering in your decision-making process.
3. How broad is my provider network? Can I see the doctors I want to see?
- If you have doctors or specialists you can't live without, check and see if the are covered by each plan.
Want to be a savvy health insurance consumer? Here are the terms you need to know:
CoinsuranceThe amount pay after you reach your deductible, calculated as a percentage. For example, if your plan pays 80 percent of in-network surgical services after your deductible, and your deductible is $1,100, you'll need to pay the first $1,100 of the surgery before you start receiving the discounted coinsurance rate of 20 percent.
Cost sharingHow your plan is split between you and your insurer. For you, this means your deductible, copay, coinsurance and out-of-pocket expenses, but not premiums, out-of-network or uncovered health costs. A low cost-sharing plan usually means that the insurer incurs more risk (and you pay more). A high cost-sharing plan usually means that you incur more risk (and pay less).
CopaymentA fixed fee you pay at the end of a doctor's appointment or other covered health service. (You can use your HSA or FSA to pay for this.)
DeductibleHow much you owe for covered health care services each year before your insurance plan starts footing the bill. For example, if your annual deductible is $1,100, you need to spend $1,100 on covered services before your insurance company starts paying a percentage of the cost. Note: Preventative care and routine exams are often covered by insurance companies regardless, so a high-deductible plan doesn't mean you're automatically going to be paying more out of pocket.
FSA (flexible spending account)Pretax money you set aside for health expenses, such as copayments, prescriptions, glasses, etc. This is usually use-it-or-lose-it money, so it's smart to take a look at your health expenses in the previous year and calculate how much you want to put in your FSA accordingly.
HSA (health savings account)Pre-tax money (in most states) you set aside for covered health expenses, such as copayments, prescriptions, glasses, etc. To be eligible for an HSA, you need to have a high-deductible health insurance plan (at least a 1,300 deductible for an individual in 2015). HSAs are different than FSAs because they roll over, so you can essentially turn yours into a medical IRA if you so choose.
Out-of-pocket maximumThis is most you will possibly have to pay -- basically the worst-case scenario -- for health care in a given year. (Keep in mind that some plans have different in-network and out-of-network maximums.) Once you've reached your out-of-pocket maximum (which includes deductibles, coinsurance and copays), your insurance company will pay for 100 percent of your covered health care services.
PremiumThe amount you pay for your health insurance plan. You probably pay this amount directly out of your paycheck every pay period. You should compare the yearly cost of your plan premiums when picking an insurer -- this number adds up.
PPO (preferred provider organization)PPO plans are generally the most flexible variety. You have more in-network options and your plan likely covers a portion of seeing an out-of-network provider. Still, opting for in-network doctors almost always saves you money.
EPO (exclusive provider organization)Similar to an HMO, you must use in-network doctors, but you don't need referrals to see specialists.
HMO (health maintenance organization)Similar to an EPO, you must use in-network doctors and usually need a referral from your primary-care doctor to see an in-network specialist.