Wednesday, April 7, 2010

High Deductible Health Insurance

If you are self-employed, you have to pay for your own health insurance.  The cost of health insurance can increase dramatically as you age.  Eventually, you will be forced to go to a high-deductible plan.  So why not cut to the chase and do it now?

Note:  See also my posting Understanding Health Insurance for more information on this topic.

I have a $10,000 deductible Blue Cross plan, which I am very happy with.  Presently, at age 50, it costs me $199 a month (Blue Cross called yesterday to wish me a happy birthday and raise my rates!). But when I started out at age 44, it was about $100 a month. Either way, it is a very cheap plan.

But wait, you say, $10,000 deductible? That's just crazy! Suppose you get sick?

Well, as I have noted before, you can get cradle-to-grave coverage if you want, but expect to pay about 5-10 times more than I am paying right now. If you want that initial $10,000 covered, it will cost you about, well, $10,000 additional a year. Pretty simple math, eh?

The advantage of having a high deductible plan is that for everyday medical needs, you may get some prescription coverage, and occasional office visits with a $40 co-pay. So for most healthy people, it covers your basic medical needs throughout the year at a pretty low rate.

If you need additional services, you do have to pay a la carte, but the real kicker is, you pay at Blue Cross' pre-negotiated rates, which are generally 30-50% less than what a cash customer pays. By the way, these sort of rates illustrate how elastic medical care pricing is, so never be afraid to ask for a discount if you are saddled with medical bills.

But what happens if you need more medical coverage than that? Well, my experience has been, as a fairly healthy person, that in a bad year, I may run up $2000 in medical expenses - an MRI, for example, or a Colonoscopy.

In situations like these, having a $2000 deductible versus a $10,000 deductible really makes no difference. Either way, I have to pay $2000 in medical expenses. But with the higher deductible plan, I save more than $2000 a year in premiums.

In short, it works out even, if not better. If I go a year without any major medical expenses, the savings in premiums more than covers any deductible payments in other years. Over a period of several years, you will save more in premiums than you will pay in out-of-pocket costs.

And as my 50th Birthday illustrates, as you get older, rates will steadily increase. Actually, they will dramatically increase, particularly when you reach that scary gap between age 60 and Medicare eligibility. During those awkward years, you can expect your insurance premiums to skyrocket, perhaps to over $1000 a month, even for a high deductible plan. For most people, going to high deductible is the only option at that point in time.

So the net result is this: Going to a $10,000 deductible is not something you will never do. It is something you will inevitably do as you get older. That is, unless you are made of money. But if that was the case, chances are you are not reading this blog.

So why not cut to the chase and get the deductible you are going to get at age 60 anyway? The savings in premiums over the years will help offset those staggering costs during those last "gap years" prior to Medicare coverage.

Take the savings in your health care premiums and put them in a savings account. Pretty soon, you'll have that $10,000 in savings, if you need it to make the deductible. Within a few years, you'll likely have tens of thousands of dollars saved.

It is unfortunate, but in the medical care debate, most Americans want all the coverage in the world, but they want "someone else" to pay for it. We demand cheap premiums, but insist that the insurance companies (the bad guys, always) pay for every darned little thing, even our band-aids.

But here's the deal: The insurance companies have to at least break even or make a profit. And the overhead of paperwork they have is staggering. If they pay out $5,000 a year in medical benefits to you, you have to expect them to collect, on average, about $6,000 to $7,000 a year at minimum in premiums, just to cover costs.

Having a higher deductible reduces those costs and thus keeps your premiums low. Insurance is reserved for when you truly would need it - when some catastrophic accident or illness occurs.

And a high deductible has the secondary effect of forcing you to consider cost in your treatment. Yes, you do have treatment options and costs, and can make informed decisions as a consumer. When someone else is picking up the tab, money is no object. As a result, the consumer cares less about the bills, and the practitioner feels emboldened to increase them.

In order to bring some sort of sanity to health care costs, we need to have some mechanism where someone in the chain cares about pricing.

There Ain't No Such Thing As A Free Lunch!