The Emergent Fool

Quest for Insurance Part II: The Coverage

Posted by kevindick in Economics, Government, Health on January 20th, 2010 | View Comments

The trials chronicled in Part I have a happy ending. I eventually obtained an excellent individual plan from Assurant Health. I followed my own advice and got a high deductible plan that covers no primary care. I thought it would be worth comparing to the traditional PPO coverage I had previously.

The table below shows the salient aspects of each plan. To compare apples to apples, I had to estimate the 2010 premiums for the previous plan. I used a 9% increase over 2009, which is what a PricewaterhouseCoopers survey says will be the average for employer sponsored plans. Note that this is less than the 10.8% actual increase my company saw from 2008 to 2009 on this plan.

Insurer	Aetna	Assurant Health
Annual Premiums	$17,593	$7,760
Deductible	$2,000	$10,000
Co-Insurance	20%	None
Out-of-Pocket Maximum	$8,000	$10,000
Office Visits	$35	$0, after meeting deductible
Generic Drugs	$15	$0, after meeting deductible
Brand Name Drugs	$35	$0, after meeting deductible
Lifetime Maximum	$6M	$15M

We see something very interesting here. The annual premium on the new plan is $9,833 less than the estimated annual premium on the old plan. Now, we all get checkups each year. Also, my wife and son have monthly medications they take for allergies. Adding in the copays for those yields extra $500 on the old plan, pushing us to $10,333 more guaranteed expenditures on the old plan than the new plan. Obviously, this excess is more than the new plan’s deductible.

So there’s no way I can loose on the new plan. If we stay healthy, I get to pocket $10,333 minus the cost of routine visits and medications. If something bad happens and someone has a major medical issue, I save at least $8,333 due to the deductible and coinsurance on the old plan. Probably much more due to co-pays for additional office visits and prescriptions, which are not limited by the out-of-pocket maximum. I actually ran the scenarios and there’s no way I don’t save at least $5,000 per year.

Moreover, the new plan is much better at insuring against catastrophic loss. The lifetime maximum is 2.5 times as high. That’s a real selling point for me. I don’t want the plug pulled on my ventilator because my insurance ran out.

How can this be? Why do we even have PPO plans? You may think the tax deductibility of employer-paid premiums is the reason. But this doesn’t explain why employees wouldn’t choose an employer-sponsored version of the high deductible plan. Those are paid with the same pre-tax dollars. (It also doesn’t affect me because I’m technically self-employed and deduct my premiums anyway). It certainly explains why the CEO of Whole Foods is absolutely right to offer his employee’s a high deductible plus HSA plan. It saves everyone money. The math speaks for itself.

The only explanation that makes sense is that people want to spend more on health care when it doesn’t come out of their own pockets. A combination of moral hazard and mental accounting. On the moral hazard front, they go to the doctor more often than they otherwise would because the marginal cost to them is so low. On the mental accounting front, the automatic monthly deduction from their pay is less painful than personally writing checks to pay doctors. But it’s irrational.

Perhaps some marketing wizards should figure out how to pitch high-deductible plus HSA plans in a way that the average person would find attractive. How about an infomercial that promises to save you thousands of dollars every year with a proven system and throws in a set of handy dandy steak knives if you act now?

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"Perhaps some marketing wizards should figure out how to pitch high-deductible plus HSA plans in a way that the average person would find attractive. How about an infomercial that promises to save you thousands of dollars every year with a proven system and throws in a set of handy dandy steak knives if you act now?"

How about, "You get an instant raise."?
Todd White

We ran into the same thing when looking at insuring Dominic. Nancy has a high deductible HSA plan through her work. I think the deductible is $2000, but they give her something like that much in the HSA. I have a Cadillac plan at work that costs $750 a month to my employer ($0 to me). I have to have this plan in order to be seen at Nancy's hospital if I get sick (a huge plus for me in terms of quality of care). It would cost another $750 to insure Dominic (roughly $250 of which my employer would pick up). To add him to her HSA costs about $60/mo to her (I'm not sure how much to her employer). He has his own $2000 deductible and they don't give her any more money in the HSA. Still under my insurance our premiums alone would be $6000/yr out of pocket. Her premiums total $720, plus the $1500 deductible difference. Like your situation, a total no brainer. Past $2000, her plan is every bit as good as mine. But there is something to math here that just doesn't pencil out.
Todd White

I'm trying to make sense out of this from the insurance companies' perspectives. At any level of medical expenses, the high deductible plan is a winner for Kevin as he says. I actually get a lower minimum savings of around $3K at $10K of medical expenses, but the point is still valid. Assuming this is a zero sum game, and the insurance company pays whatever Kevin doesn't, this means that the HD plan is always a loser for the insurance company at any given equal level of medical expenses. Therefore, as Kevin says, the insurance company must be counting on a change of behavior (which makes sense because Kevin's marginal cost on the first $10K is 100% on the HD vs. 80% or so on the PPO). The problem I have is that the shift would have to be very significant, and it would have to occur on expenses greater than $13K. Even if Kevin incurred $0 medical expense on the HD plan, he'd have to incur over $13K on the PPO plan before the insurance company would have been better off writing him the HD plan. Of course, if Kevin incurred $10K of medical expenses on the HD and $13K+ on the PPO, it's the same to the insurance company. So the problem I have is that in order for this to make sense, the insurance company has to expect Kevin to incur over $13K of expenses a year and reduce that by over $3K by switching to the HD plan. However, since the PPO has an out of pocket maximum of $8K, the incentives in the $13K+ range are very similar under both plans. I don't see the shift happening. (Plus at $13K+, you're probably out of the range where incentives have much effect on your behavior anyway.) How can this possibly make sense for the insurance companies?

I suspect that the answer must be that Kevin's family has a lower than average risk. Since the individual policy can price based on risk whereas the company policy cannot, this seems like the only valid explanation. (In which case the comparison is unfortunately no longer valid.) You need a PPO quote from Assurant to compare against.
kevindick

Thanks for the deep analysis Todd.

At 10K of (unexpected) medical expenses, I pay 10K + 7,760 = 17,760 under Assurant. I pay 2K (deductible) + 2K (coinsurance) + 17,593 = 21,593 under Aetna. The difference is 3,833. In my detailed scenarios, I took into account the probable copays and admission fees. They pushed it up to about 5K.

As for the difference in risk underwriting, I actually have some answer from my acceptance letter. One family member was in the "preferred" risk class. One was "standard". Two were "standard" plus extra premiums for pre-existing conditions. In one case, the surcharge was 40%. So I think that the family as a whole was about average.

Baffling, I know. Another possible explanation is that Aetna's overhead is much higher than Assurant's. Or perhaps administering employee-sponsored plans is much more expensive.
Andy Bloch

I had similar problems when my Cobra expired a couple of years ago. I kept getting denied individual coverage for a condition for which I haven't been treated at all in 5 years (it was less than 5 years the last time I tried applying), and I take no prescription drugs. I couldn't even get an HSA-qualified high deductible plan. I don't remember if I tried Assurant. Is your plan HSA-qualified?

Anyone have an opinion on whether one should try to get coverage before or after the possible health insurance changes?
kevindick

Yes, the Assurant plan is HSA qualified.

I recommend getting insurance as soon as possible. This preserves your option value.