Health insurance: Two other numbers to look at

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Most people, of course, have almost no control over their health insurance:  They get what their employer provides (if they have a good job) or else they get nothing.  Whether they pick their own policy or not, the first two numbers everyone looks at are the premium and the deductible.  Well, here are two other numbers that are at least as important.

The premium and the deductible, of course, are very important--those are the numbers that determine whether you can afford the policy and when it starts paying something if you get sick.  

If you think of your insurance as being a sort-of prepaid medical package--you pay a monthly premium and they provide whatever care you need--then the deductible (and the co-pays) are what matter.  If you think of it as insurance though, there are two other numbers to pay close attention to:  the out-of-pocket maximum and the policy limit.

The out-of-pocket maximum

Even after you pay your deductible, your insurance only pays a percentage of your bill.  (It used to be universally 80%.  Now you often see 90% for in-network coverage and 50% for out-of-network coverage, but in policies that you buy yourself, just about any numbers can show up.)

This is all well and good as long as you don't get seriously ill or have a bad accident.  If you do, though, even 10% of your medical care can add up fast.  An extended stay in the hospital--even a short stay in intensive care--can reach hundreds of thousands of dollars.  If that happens, your 10% plus co-pays would be in the tens of thousands of dollars--enough to ruin the finances of many households.

That's what the out-of-pocket maximum is all about.  Once your share of the charges hits the maximum, the insurance should pay the rest.

The out-of-pocket maximum is the single most important number in determining if your insurance is really insurance.  If your finances are such that you could pay the maximum without going bankrupt, then your insurance policy is about the size you need.  If they aren't, then you don't really have insurance at all--you've got one of those increasingly common pre-paid medical packages.  (And you've got a bad one--one that leaves you vulnerable to ordinary bad luck ruining your finances along with your health.)

One other thing to be aware of regarding the out-of-pocket maximum is that it often doesn't apply to out-of-network coverage:  you not only have to pay 50% instead of 10%, but the amount you pay may not count toward the limit, leaving you on the hook for virtually unlimited expenses.

The policy limit

Just like any insurance, medical insurance has a policy limit--the most they'll pay.  When I got my first job, $1 million was common.  Nowadays I see a lot of policies with $3 million or $5 million limits (although I've also seen policies with limits of just $300,000).

A policy limit is necessary for the insurance company in order to be able to calculate how much they're on the hook for--without that information, they have no idea what premium to charge.

The policy limit doesn't come into play very often.  Usually, insurance companies will aggressively deny coverage for expensive stuff right from the start--long before they even approach the policy limit.  But it's always possible to argue about coverage for procedures that the insurance company doesn't want to pay for--you have access to appeals, arbitration, lawsuits.  In the extreme, it's even possible to get the legislature involved, passing laws that require insurance companies to pay for certain things.  That's not true about the policy limit.  Just like with other kinds of insurance, once you hit the policy limit, the insurance company has no obligation to pay any more money.

If your health insurance is to be real insurance--the kind that protects your finances from being ruined by bad luck--then you'll want to pay special attention to the out-of-pocket maximum and the policy limit.  Appropriate amounts for those values will matter far more than the deductibles, co-pays, or even the premiums.

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Guest's picture

Something else I noticed in comparing our old insurance to our new insurance is what specific items or types of care are subject to the deductible and what ones are not.

Our old insurance, everything was subject to the deductible. Our new insurance exempts office calls and lab work from the deductible so those are covered right off the bat. That was a big relief knowing that minor issues might have some coverage right away. I have not checked what else is exempt.

Guest's picture

does anyone know whether 'umbrella' (excess liability coverage) policies can be obtained to cover the excess?

Philip Brewer's picture

Liability policies protect you if you harm someone and get sued, and "umbrella" policies cover the excess over whatever is covered by your homeowners, renters, or auto policy.

I don't know of an equivalent "umbrella" policy for health insurance.  As far as I know, the policy limit in your policy is what you get.

As I say, many policies now cover $5 million in medical expenses.  At that level (even at $3 million), I don't see much point in getting a higher policy limit:  you're so much more likely never to need that much.  Plus, if you do need that much, you're much more likely likely to get screwed out of it by having coverage denied, then by going over the top.  Better to take whatever money might have gone to more insurance, and then save it and invest it yourself.  (Then you can spend it on whatever you need, including uncovered medical expenses.)

On the other hand, if your policy limit is $1 million or less, it'd be worth looking for better insurance.  If you buy your own policy, ask about a better one.  If your employer buys it, lobby for better coverage.

Guest's picture

Your discussion of the out-of-pocket maximum and policy limits is very helpful, but please don't discourage people from knowledgeably exploring individual plan health insurance.

I've been self-employed for 30 years, and had an individual plan all of that time at very reasonable rates (although the rates get pummeled by state politicians who require insurers to add expensive coverage to plans). Currently, I pay a premium of $223 a month for a 55-60 year old non-smoking woman. The policy has a $1,750 deductible, $3,500 coinsurance maximum, $1 million policy limit and 80% coverage within a wide range of participating providers. It's called a "catastrophic plan." It provides no coverage for out-of-hospital meds or preventive care, but covers office visits, etc., and allows me to chose my provider, see a specialist without a "gatekeeper" and choose my own hospitals.

I'm quite happy with it (except for the d**ned politicians' meddling - the policy choices were better and much cheaper 10 years ago before they started poking their noses into it).

Even though the deductible is high, the policy helps pays for itself even if I never go over the deductible, because bills submitted to the insurance company are routinely discounted by 20% to 70% before they are billed to me. What I mean is that, say this year I receive services that would cost me $1,000 if billed privately. Because that is less than the deductible, the insurance company pays nothing, BUT it applies its negotiated discount to the bills, so that when the provider's bill gets to me, it will have been cut by several hundred dollars.

I pay out of pocket (unfortunately with no discount) for my annual checkup (about $200). I pay for my own Celebrex for arthritis (about $150 a year). I am careful not to run to the doctor for every little ache and pain, and do my research online to decide whether I really need to go to the doctor, and whether it makes sense for my first appointment to be with a specialist or my regular family doctor. I get inexpensive flu shots at the local pharmacy, vaccinations at the county health center, check my blood pressure there every few months, get my blood lipids levels checked inexpensively at a local health club, and donate blood, which would flag various ailments.

Obviously, I hold to the insurance model of health insurance. This is similar to the way most of us view our car and homeowner's policies. We don't expect our car insurance to cover oil changes, new tires, car washes, or even a major engine rebuild, nor do we expect our homeowners policy to pay for the yard care, the new roof every couple of decades, or the plugged toilet. Insurance, in this view, is for UNEXPECTED and UNPREDICTABLE events that we cannot reasonably foresee and budget for.

As you point out, there are two views of health insurance, and while my view is one, many people hold to a different one without realizing it, or making a conscious decision to pay for it.

If you believe your health insurance should pay for predictable health events such as annual check-ups, birth control, the minor health mishaps we all have (colds, sprained ankles, and the like), with a very low deductible and low co-pay, then what you are looking for is a pre-paid health plan PLUS insurance, and you will pay through the nose because 1) that is very expensive coverage for the insurance company to provide; 2) the insurance company knows that you will not be making any effort to control your costs; 3) you are asking the insurance company to assume all your risk instead of being willing to share it; and 4) the insurance company recognizes you as one of the "price-insensitive" buyers of their product.

Unfortunately, health insurance illiteracy is probably responsible for at least a quarter of our national uninsured 'crisis,' and many people are overpaying hundreds or thousands of dollars a year for plans that provide more coverage than really needed.

Guest's picture

@ Philip: Thanks for the thoughts on umbrella insurance...I agree with your thoughts on the $5 million. I always enjoy your posts because you look at common things from different angles, a very valuble approach.

@ AnnJo: Tremendous way of thinking about health insurance versus a health plan plus insurance. This insight may actually allow me to think rationally enough to leave traditional employment earlier than I other wise would have.

Guest's picture

AnnJo -

I have similar coverage for my family and, like you, make every effort to keep health costs down.

I also agree with your hypothesis that insurance illiteracy accounts for a good chunk of the cost problem. Unfortunately, I don't see that changing anytime soon.

Your description/explanation is about the best I've seen. Thanks.

Guest's picture

I, like many other worker/slaves, have a combination health plan/health insurance provided by my employer. I've thought that to leave them, I'd need to replace it with a 'Cadillac' plan that cost say $10,000/year. Using the AnnJo approach, I can get a catastrophic insurance coverage which lets say runs me 3k per year. So, now in a good and healthy year, I can reasonably pocket up to 5k of the difference.

Philip Brewer's picture

Thanks, everyone, for all the good comments.

I've written before about only insuring risks (rather than buying insurance to pay routine expenses that you ought to just budget for) here:

The problem with health insurance for the self-employed is not principally the expense (although it is a lot of money--it needs to be right up their in the budget with rent and groceries).  The problem is that, for anyone who becomes sick insurance becomes unavailable.  That transforms the jump from employee to being entrepreneur, freelancer, or semi-retired from a simply lifestyle choice into a huge financial gamble.


Guest's picture

Unclear on what you mean about insurance unavailable to sick. Are you referring to pre-exisiting conditions? Otherwise, wouldn't the insurance cover any new illness or malady that surfaces?


Philip Brewer's picture

The problem isn't coverage when you become sick--insurance usually pays for that just fine.

The problems arise two places:

  1. The first attempt to get insurance after leaving a group policy.  If you've ever been seriously sick, the insurance companies are prone to just deny your application for a policy.  If you've just had one specific thing, they may just deny coverage for that one thing as a preexisting condition--but sometimes it's a huge thing, such as denying coverage for "heart disease" or "cancer."
  2. Renewing a policy.  If you get sick, the insurance company will pay--but very possibly, it will only pay for that year.  The following year they may refuse to renew your policy.  (And, of course, if that happens, no one else is going to want to insure you either.)

These things generally don't happen with employer-provided policies, which are usually set up as group policies where everyone in the group (all employees, for example) is guaranteed coverage.

One big thrust of health insurance reform has been to try to require that insurance companies make group insurance available to groups other than employees, and to mandate larger groups.  (With a small group you have a related problem--one person gets sick, the costs to the group shoot through the roof, everybody healthy enough leaves and gets cheaper insurance, and the old group is left with just a handful of sick people.)

Julie Rains's picture

of insurance coverage, or so that is the idea. I have often heard of HIPAA in relation to privacy but apparently there are also legal protections associated with changing your insurance, specifically relating to pre-existing conditions. HIPAA is a federal regulation but some states, such as mine -- NC, have also adopted additional protections. From what I understand, carrying continuous coverage helps to limit or eliminate exclusions associated with preexisting conditions. It's not a perfect system or solution but it wouldn't hurt to ask your insurance agent or the state's insurance commissioner's office about HIPAA protections.  


Philip Brewer's picture

If you had insurance through your employer, leave the company, and then use your COBRA coverage until it expires (18 months), then insurance companies do have to issue you a policy regardless of preexisting conditions.  However, neither the coverage nor the premiums are regulated.  The result is that you do get insurance, but it doesn't cover much even though it is very expensive.

Also, the HIPAA protections scarcely apply at all to individual policies.  I could have taken advantage of HIPAA (and, in fact, was very much keeping it in mind if I had any trouble getting insurance).  Now that I've taken an individual policy, though, I no longer qualify for HIPAA portability.  If I get sick, I'm vulnerable to my rates soaring or my policy not being renewed.

There's some good information in this article (it talks about individual policies on page 2):

Guest's picture

Thanks Philip, and others, for your insights.
This is somewhat depressing and will likely keep me a wage slave until things change.

Philip Brewer's picture

I'm hopeful that things will change.

The last time there was a push to change the rules on health insurance, many groups lined up against it.  Now, though, I think most of those groups have changed their position.

  • Health care providers opposed reform, because they feared that outsiders would end up deciding what care they could and couldn't provide.  Now that insurance companies do that routinely anyway, I think they'll be in favor of reform.
  • Large employers opposed reform, because they wanted to be in control of what coverage they provided (and paid for).  Now that they find themselves at a disadvantage competing with with foreign companies whose employees have national health coverage, the big employers will support reform.
  • Middle-class workers opposed reform, because they had good, cheap insurance from their employers and didn't want the government to step in and screw things up.  But now that even people with good jobs are seeing their premiums soar and their coverage get squeezed, many more middle-class folks will support reform.

Many people, of course, will always oppose reform for ideological reasons, and many other people will oppose any particular reform because the details of the reform will inevitably produce winners and losers.  But I think the forces for reform have a winning hand this time.

Guest's picture

I agree with Philip that major changes are coming to the health insurance system, but unlike Philip, hopefulness is not the emotion I feel, but glum resignation.

For years, those whose ideology revolts against individualist or free market solutions have been warning that the ship of American health care is sinking and we must pile into the lifeboats, all the while they've been knocking holes in the hull below the waterline. They've done a fair amount of damage, but nothing we couldn't fix if they'd stop trying so hard to sink us. However, it seems likely we'll soon be forced off the ship regardless. As Churchill said, "Democracy is the worst polical system there is, except for all the others."

I had hopes that the failure of socialized medicine in the UK and Canada would be painfully self-evident before we were too fully committed to following in their footsteps, but it looks like we're about a decade too quick.

We are lucky to be a federal system, so many of the worst excesses of government-directed programs have been tested out in some of the states, and seem to be leading to a tiny bit of caution that wasn't there back in the days of Hillary's massive plan. Once the system gets up and running nationally, though, I doubt if that caution will prevail.

Scott, before you abandon your dreams, check into it more thoroughly than a thread by total strangers on a blog. Some insurance contracts are guaranteed renewable as long as the company continues doing business in the state and you pay your premiums. If you are in a state where the politicians are determined to kill the private market, there is indeed risk, but otherwise, the fear of getting non-renewed because you get sick is overblown.

Also, at least a portion of that extra $5,000 you could save should go into a Medical Savings Account, so that when and if you do have a bad year, you're covered (self-covered).

Guest's picture

I will keep the dream alive!

Guest's picture

thank you philip for pointing out the difficulties patients with preexisting conditions can have getting insurance.

I am disgusted by the smugness and lack of empathy on this thread. It's as if some people have never known anyone with an inherited disease or who's been in an accident.

i have a self employed friend with Type 1 diabetes. He is very responsible about managing his condition. He has a terrible time getting insurance and his current plan costs over $1000 a month.

I am very healthy, manage my health well, and rarely need to see a doctor. My insurance costs are minimal too. However, unlike some people, I recognize that my health is pure good luck and not because I am superior to others. I know that fate could change my good luck at any moment.

I guess I differ from most people on this thread because I believe that everyone, especially in a wealthy country, should have the right to have access to health care. Not everyone is as lucky as I to have been born with good health. Aside from the moral aspect of our current system I think it is just a massive drain on the economy.

BTW Canada has a single-payer system not socialized healthcare like the UK. And over 90% of Canadians would disagree with you that their system is a failure. I don't think even 90% of Americans have health insurance to have an opinion on. I currently live in the UK and even with their problems I 've never heard any Brit wish they had American healthcare.

Guest's picture

Aside from those persons who are born with or develop diseases in childhood, there are two types of people who have trouble getting affordable insurance due to preexisting condidtions: Those who choose to wait until they are sick to try to buy it, and those whose insurance is linked to their employment. The latter is a problem that should be corrected legislatively. As for people who wait until they are sick to try to buy insurance, how is that different from someone waiting until their house in on fire before trying to buy homeowners insurance? Isn't that simply greed and irresponsibility?

No, sick people are not all losers who deserve what they get, but confusing the need for charity or a government safety net with the need for massive government changes to a huge section of the economy is dangerous.

The surveys I've seen suggest that more than 30% of Canadians are either somewhat or very dissatisfied with the quality of health care they receive. This compares with about 10% of Americans who are dissatisfied with the quality of their own care.

Where it gets interesting is that Canadians are more satisfied with their "system" even though it works less well for them individually, while Americans are more dissatisfied with their "system" even though it generally works quite well for them individually.

Whenever we find that people's theoretical beliefs are contradicted by their personal observations, an explanation is needed. Unbalanced reporting? Demagogery? Sentimentality? I'm not sure.

To be really blunt about it, though, as much as I might sympathize with your friend with diabetes if I knew enough about his situation, I do not want the quality of my own health care diminished in order to ease his financial burdens. I contribute to charity and I pay taxes for social welfare programs that help people who are unable to pay for their own care, but I am not prepared to sacrifice my health or that of my family for his pocketbook.

Because let's face it, his problem isn't the quality of his health care, but its cost. You left out of your story how much money your friend makes/has, so the fact that he pays $1,000 a month for insurance (and probably uses that much in terms of health services) doesn't tell me that he is in any way rendered indigent by the expense. I'm sure he'd rather have the money for more fun things, but that's not the point, is it?

Health care is a limited resource under any system. Price is one way of rationing it, political control (discrimination, inconvenience, lack of choice, waiting times) is another, but like it or not, health care will always be rationed, just like any finite resource. All political rationing introduces distortions into the system, which grow larger and more onerous over time. I would prefer that political rationing be done only for that relatively small (about 10%) proportion of the population that is truly unable to pay for its own care, rather than for all of us.

As the saying goes, "The inherent vice of capitalism is the unequal sharing of the blessings; the only virtue of socialism is the equal sharing of the misery." And even that virtue is only theoretical, since in all systems, those who are richest will always find a way to get the best.

Guest's picture

Having to closely examine the facts that you relay over that article, I think the great advantage of knowledgeable value on our insurance are the most important thing that we must endure ourselves with. In insurance are made to protect our prior need thus, the cost of their service must always compensate with its worth.