If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan.  Stop by the orientation class HERE first for class orientation/overviews and HERE for more information about the website.

Class Objectives: To understand the basic medical insurance terms, learn about types of medical insurance plans and where to obtain medical coverage.
Prerequisites: none
Handout: Medical Insurance Summary
Assignment: Medical Costs Estimator in Excel| Google Docs (previews in lecture material)

CLASS LECTURE

Medical insurance is the one type of insurance that is mandatory by law for every single person living in the United States.  Ideally, with the recent laws that went into effect in 2014, everyone has the ability to obtain coverage and therefore is able to get the medical help they need in times of illness and emergency.  While this is a little optimistic, I believe that making sure that everyone has access to affordable health insurance is a step in the right direction.

As we discussed in our auto and homeowner’s insurance classes, people purchase insurance to shift the risk of the possibility of future financial loss from themselves to an entity (an insurance company).    In return for amounts paid as premiums, one can have peace of mind that an incident of some sort will not cause you to lose a significant investment of cash or assets.  With medical insurance specifically, these big events you are insuring against include major life-threatening surgery, extended illness and especially cancer.

With medical insurance policies, the insurance company is taking the risk that most of the people on the policy will not have any of these major illnesses and they can use some of the premiums from the “healthy” people to pay for the “sick” people, plus make an additional profit.

MY EXPERIENCE WITH THIS INSURANCE

Unlike auto insurance, which I’ve only submitted claims for twice in nearly 15 years and homeowner’s insurance, for which I’ve never needed to submit a claim, my medical insurance gets used all the time.  We are not a particularly sick family, but we are a family with young kids in school and I tend to be a little paranoid sometimes .  We’ve had our share of viruses and minor surgeries, but have been very fortunate to be very healthy overall.

I believe that if I totaled up all the medical premium amounts I’ve paid over the last 15 years and compared it with the total amount that the medical insurance company has paid for my medical bills, I would have a significantly higher amount paid in premiums.  For that I’m grateful, and I hope it always stays that way!  Despite, the high cost of medical insurance, it provides a peace of mind that no matter the problem, I can seek out the best medical treatment that I need for both myself and my family members.  Medical emergencies are just too common to risk being uninsured or underinsured.

As expats, our health insurance covered 100% of all of our medical expenses, which was awesome, but even in the U.S. we’ve been fortunate to always have good health insurance, although generally it has been through high deductible plans and we’ve covered a significant portion of the costs ourselves.  I definitely keep in mind that health insurance isn’t purchased to pay for medical expenses, but to make insure me against a major medical illness that I couldn’t afford to pay.

Two of the biggest benefits that I’ve had from having medical insurance, even before the mandatory requirement in 2014, are that I have not hesitated to go to the doctor or take my kids to the doctor when I’ve been concerned about an illness and I have received discounted rates from my medical providers because of having the insurance.  In addition, I’ve had the peace of mind having preventative care to make sure that if I do end up having an illnesses, it will hopefully be caught early when it is more easily treated.

WHAT DOES THIS INSURANCE COVER?

In order to find out what your health insurance covers, you need to go straight to the source and look through your plan documents.  All major medical insurance companies make this available through an online account.  All medical insurance is required to cover at 100% (meaning no additional cost to you):

• Annual physicals and associated routine blood and urine testing at 100%
• Other adult preventive care & screening listed here (healthcare.gov) at 100%
• Other women preventive care & screening listed here (healthcare.gov) at 100%
• Well-child visits, including immunizations at 100%
• Other child preventive care & screening listed here (healthcare.gov) at 100%

In addition, insurance companies are required to cover pre-existing conditions and the following “essential health benefits” (from healthcare.gov):

• Emergency services, including ambulatory services
• Hospitalizations
• Maternity (pre and post-natal) care and newborn care
• Birth control coverage
• Mental and behavioral services (including counseling, etc.)
• Prescriptions
• Preventive and wellness services
• Laboratory services
• Pediatric services, including dental and vision

Some optional coverages your insurance company may provide include:

• Dental and vision coverage for adults (children are required above)
• Medical management programs such as weight loss, pain control and diabetes

HOW MUCH OF THIS INSURANCE DO I NEED?

There are two different types of medical insurance plans: HMO’s and PPO’s.  The main difference between each plan is that an HMO (Health Management Organization) plan requires you to use in-network doctors and to obtain referrals for specialists, which results in lower premiums and costs overall for you.  In addition, HMO plans generally have a low deductible or no deductible, but have copayments for each visit.   A PPO (Preferred Provider Organization) still has a network of doctors for their customers, but allows a much larger selection and will still generally cover a portion of the costs if you use out-of-network providers.  PPO’s often have deductibles and sometimes copayments as well.

It can be very difficult to decide which plan is best for you, especially if you are searching for insurance plans through the government established health exchanges and have such a wide range of choices.  The factors you need to consider when deciding your medical insurance plan include:

1. The total amount that you expect to pay in medical bills for the year. If you have pre-existing illnesses requiring ongoing care or know that you will be having a child or surgery during the year, you may choose a plan with a lower deductible and/or maximum out-of-pocket amount, even if it has a higher monthly premium.  If you are young, single and overall healthy, you may choose to go with a plan that has a low monthly premium and a high deductible.  Under the cost section below, you’ll find a spreadsheet to help you with this factor.
2. Your choice of doctors and specialists. If you are choosing between a HMO and a PPO plan, as explained above, you will be limited in a HMO plan to in-network doctors and you will have to get a referral in order to see a specialist.  If you already have doctors that you are working with and they are not in network, you may choose a PPO over an HMO for this reason alone.
3. The proximity of in-network doctors and hospitals. Because an HMO has a comparatively small group of in-network doctors and facilities, this may not be the best option for you if it means that you would have to travel a distance to get to them.  In addition, you may choose between a variety of similar plans by different insurance companies that include different doctors and facilities in their network.
4. Your personal financial situation. Inadequate medical coverage could result in significant financial problems, even including bankruptcy.  A Harvard study in the U.S. cited medical reasons as the main cause in over half of bankruptcy cases, even though the vast majority of those people had medical insurance.  You will not be doing yourself a favor by having an outrageously high maximum out-of-pocket amount if there is no way that you could possibly cover the cost in the case of a severe illness.  You should very carefully consider exactly what the insurance covers, your deductible, co-insurance and maximum out-of-pocket amounts, as well as whether you have funded a Flexible Savings Account (FSA) or Health Savings Account (HSA) to help cover medical expenses.

WHAT IS THE DEDUCTIBLE?

There are a few essential terms to know related to medical insurance beyond just a basic deductible term that applies to other types of insurance:

• Copayments – In certain plans, you may have a specific amount you need to pay for each visit, such as $25-50. Having you pay even a small amount each time makes sure for the insurance company that you aren’t unnecessarily visiting the doctor too much (because everyone just loves to go to the doctor right?).
• Deductible – A deductible is the amount that you need to meet before the insurance company will start to pay their portion (except for the items listed above as 100% covered). This applies to a calendar year.  So unfortunately if you had a hospital stay between December and January you would be responsible for deductibles for both calendar years.
• Co-insurance – Co-insurance is the amount or percentage that you are responsible for paying after your deductible is met, usually 10-30%.
• Maximum out-of-pocket – The maximum out-of-pocket amount is that absolute total that you are responsible for paying for an entire calendar year. This is made up of copays, deductible and co-insurance amounts.

To illustrate these terms, assume you have an extensive major surgery.  It costs $30,000 and your insurance policy has a $3,000 deductible after which you have 10% co-insurance and a $5,000 maximum out-of-pocket.  First, of all you should be very glad you have such great insurance!  You would first pay your $3,000 deductible amount, then calculate 10% of the remaining $27,000 ($2,700).  The $3,000 plus the $2,700 co-insurance would total $5,700, but you are limited to having to pay your $5,000 maximum out-of-pocket amount and the insurance company would cover the remaining ($25,000 total).

HOW MUCH DOES IT COST?

There is an enormous range of medical insurance costs, even among employed and self-employed people.  On the health exchanges, monthly premiums range from very little for low-income families to nearly $2,000 per month for those with high incomes.  Generally those with plans provided from their employer may pay less premiums, since the employer often covers the majority of the cost of the insurance premiums as an employee benefit.

If you obtain medical insurance through your employer, you should contact the HR department to research the cost of your various options.  There are generally just a few options to choose from and these changes typically need to be made during open enrollment at the end of each year.

If you obtain medical insurance through the state health insurance exchanges, you will have a huge range of monthly premium options to choose from.  More about this is covered below in the section on “where do I obtain coverage?”

The total amount you pay for medical coverage will include monthly premiums, copays, deductibles and coinsurance amounts. Your homework assignment will be to estimate your annual medical costs using the spreadsheet previewed below so that you can compare plans the next time you need to change coverage.  You should compare your typical or expected annual medical costs as well as a couple other scenarios to the total amount you will pay personally.  This spreadsheet is just a start so that you can then analyze how much you would pay for a variety of different plans which may have different copays (or none at all), different coinsurance percentages and different deductibles.  The health exchange website has a useful tool where you can choose your expected medical costs for each insured member of your family (low, medium or high) and calculated an expected total out of pocket cost based on the different scenarios and the plan you are looking at.

To obtain estimates of the cost of different doctor visits, procedures and prescriptions you will find the following websites helpful:

• Healthcare Bluebook
• Clear Health Costs
• GoodRx

WHERE DO I OBTAIN COVERAGE?

If you obtain health insurance through your employer, you will have a range of time called “open enrollment” in which to make a choice about which insurance plan you would like (if they have more than one option offered).  This generally starts in November and goes through December.  If you have any qualifying life events, you will be able to re-evaluate your plan mid-year, but otherwise you must select your plan during the open enrollment period.  These include loss of health coverage, getting married or divorced, having or adopting a child, a death, a move or certain other major events.

The fairly recent mandate that everyone in the U.S. have health insurance or pay an ever-increasing penalty also came with the institution of health insurance exchanges for people to shop for health insurance.  Even if you are able to obtain health insurance through your employer, you can use the health exchanges to shop for health insurance plans, but it will be more expensive, as you will have to pay the full amounts without qualifying for any premium reductions or credits.  Open enrollment for the health exchanges is from November 1^st to January 31^st.

To see the plans available in your state, start at the healthcare.gov website here.  If your state runs its own exchange it will take you to the state website, otherwise the majority of states still use the federally operated health exchange website.  Here is the direct link to preview the plans outside of open enrollment.

The plans under the health insurance e­­xchange are as follows, with the sharing amounts showed as first how much the insurance company covers and then second how much you are responsible for paying:

• Bronze – 60%/40%
• Silver – 70%/30%
• Gold – 80%/20%
• Platinum – 90%/10%

As you would expect, the bronze plans are the cheapest and the platinum plans are the most expensive per month.  However, a plan with a high monthly premium but a lower deductible and out-of-pocket maximum may cost you less overall if you end up having a significant amount of medical expenses.  It is important to analyze each option in total.  A great thing about this website is that it does have a built in estimator I talked about above where you can select for each individual whether you expect to have low, medium or high medical needs and how many visits and prescriptions they would assume for each.

HOW DO I MAKE A CLAIM?

Generally, the medical provider and the insurance company directly communicate to each other about billing and it is not necessary to submit a claim.  However, there may be special circumstances where you have personally paid a bill and need to submit it to the insurance company for reimbursement.  You can use your online account to submit these claims, which generally just require some basic information and a copy of your medical receipts.

SUMMARY

The key points you should take away from this class include:

• Medical insurance is required by law and with the government mandate also came health insurance exchanges to help people obtain coverage and be able to receive discounts and credits based on their income
• There are many services that your medical insurance is required to cover 100% without you having to pay anything, including physicals and a number of other preventive care services
• Your medical insurance coverage needs are based on how much money you can afford to pay out-of-pocket as well as the status of your personal health, the doctors and hospitals you choose to see and your location.  Be sure to conduct sufficient research to make sure you are getting the best overall policy, not just the lowest premiums.

Additional note: if you have additional questions on medical insurance policies and related items, I’ve found the website verywell.com to be the best resource to find many answers.  Click on the menu button and they have a section devoted to “Health Care”.

EXAMPLE: THE SMITH FAMILY

The Smith family has medical insurance coverage through Jim’s employer.  They have several options during each open enrollment period and can choose between an HMO plan at a lower cost or a PPO plan at a higher monthly premium.  Currently, they have a PPO plan with a monthly premium of $315.  They are happy with this plan because their current doctors are all in-network as is the hospital most conveniently located to them.

Other details of their current medical insurance include:

• Annual deductible: $2,750
• Coinsurance after deductible: 10%
• Maximum out-of-pocket: $5,000

They use the spreadsheet to calculate their annual medical expenses with a low cost scenario below, where they only have minimal doctor visits in addition to their annual physicals and well-child appointments (which are covered 100% by insurance):

Next, they calculate a medium cost situation, where they have a few extra doctor appointments and also a basic outpatient surgery for one of the children (a tonsillectomy).

Under the different scenarios and their current medical insurance plan, they would expect to personally pay the following:

• LOW COST – They would pay a total of $3,780 in premiums plus $990 in medical costs, which would go toward their deductible.
• MEDIUM COST – They would pay a total of $3,780 in premiums plus $2,907 in medical bills ($2,750 deductible plus 10% of the remaining $4,315 in excess of the deductible).
• HIGH COST – They would pay a total of $3,780 in premiums plus $5,000 maximum out-of-pocket costs.  This assumes they had a major illness such as cancer, extended hospital stay or a major surgery.

Based on this analysis, the Smith family may want to consider all of their insurance options, build up their savings and potentially choose a medical insurance plan with lower premiums and a higher deductible, since they are generally very healthy and have minimal expected health costs.

HOMEWORK ASSIGNMENT

At a minimum, you should have a good understanding of your current medical insurance coverage including your current deductibles, copayments and maximum out-of-pocket amounts.

• IMPROVING–Fill out the medical insurance coverage handout below and roughly estimate your annual medical costs.
• INVESTED–Fill out the medical insurance coverage handout and use the spreadsheet to estimate your medical costs for each year.  Research insurance policy options based on expected total costs.
• UNSTOPPABLE–Fill out the medical insurance coverage handout and do a detailed estimate of your expected medical costs, including going through your previous (or current) year of medical expenses.  Complete 3 different scenarios – low costs (best case scenario), medium costs (reasonably expected costs) and high costs (maximum out-of-pocket).  Research insurance policy options based on each.

HANDOUT

Here is a printable you can use to make sure you know and understand your current medical insurance coverage.  You can fill it out and keep it in your medical insurance binder section in your Financial Plan Binder.  Then if you have any questions, you’ll easily be able to see your coverage at a glance.

 What type of medical insurance plan do you have?