This isn’t what I was planning on posting originally, but it is time for annual enrollment at work. Basically, this is the time to choose benefit elections for 2021 with the most important topic being health insurance. I have spent some time this week with co-workers explaining my process for choosing insurance and thought why not share here too. In my career, I have worked at 3 large companies (all in the same field) and they have had very similar offerings so hopefully this is helpful for someone. My two primary options are a PPO plan and a High Deductible plan which we will just call the HDHP plan for most of this post.
What are PPO & High Deducible Plans?
- PPO = Preferred Provider Organization Plan
- Lower Deductible
- Higher premiums
- Simple doctor visits are paid by copay’s which are a standard amount (ex $20/visit for primary care and $30/Visit for specialists) and insurance pays the rest. For my plan, this amount does not count towards the deductible or max out of pocket.
- After the deductible is met, I pay the co-insurance until the max-out-of-pocket is hit.
- HDHP + HSA = High Deductible Health Plan with a Health Savings Account
- High Deductible
- Lower premiums
- No Copays. Just pay the doctor bill up until the deductible is met, then pay the co-insurance (Normally a fraction of the bill ex 15%) up until the max out of pocket is met.
- My employer also makes an HSA contribution every year for those enrolled in this plan.
Major Concerns When Comparing Plans
While both options seem to get more expensive every year, the price comparison between the two stay relatively similar at my job. Even with that in mind, there are always people in the building that are talking about which way to go. After 5 minutes they normally gloss over and buy the PPO with some excuse such as:
- “I can’t afford the high deductible, that’s a lot of money”
- “If we go to the doctor, I don’t want to have to pay the big bill afterwards, I just want to have the copay”
- “I’ll just go for the PPO because it is the safer option because of X, Y, Z”
There is a fear that the HDHP has a lot of hidden risk and the PPO copay option seems much more palatable.
It seems like there is a push from companies to go towards the HDHP… Why would companies be trying to convert their work force away from PPO?
The assumption is that if employees have to fork over more money when seeing a doctor or filling a prescription, they will have “skin in the game” so they’ll use their health care benefits more selectively and avoid wasteful or unnecessary procedures and drugs. You might put off treating minor ailments like “your achy knee, your cold that won’t go away, or your kid’s earache or sore throat,” says Drexel professor of health management and policy Robert I. Field who is also a lecturer at Wharton.
That makes sense. They are looking at the psychology of having skin in the game as a deterrent to unnecessary medical expenses.
Alright, back to the point.
Let’s go through my logic and math for comparing the two. To tee this up, here is a snapshot of what my options look like.
We will focus on the family plan and In-Network coverage for the sake of narrowing our discussion, but you can do the same math for any of the categories.
Always start with the big 4:
- Annual Premium (this is critical; always convert to annual so that you can see the full cost)
- Max out of pocket
- Company HSA Contribution
First thing to point out is the drastic difference in premiums. The PPO is more than twice as expensive in this scenario. This is money that is GUARANTEED to be spent. If you have $0 in medical expenses you are out $2,000 by selecting the PPO!
The second thing I focus on is accounting for the company contribution to the HSA. This is money that can be used on medical expenses throughout the year. It will also roll over year to year if not spent, and has huge tax advantages. Because this is real money, I credit any company contributions against the premium when comparing plans:
Now we are up to a $3,600 dollar gap between the HDHP and the PPO. Once again, these costs will be occurred even if you never go to the doctor!
Alright, so pretty clear, under the scenario where you never go to the doctor I am much better off using the HDHP. But what about the other extreme, where there are so many medical bills that the “Max-Out-of-Pocket” is met?
Now that is pretty messed up!
Our PPO has a much lower out of pocket limit on medical bills, but when you look at the whole picture it comes up almost $2K behind.
What about all of the noise in between those two extremes? I set up a simulation which reviewed 10,000 scenarios for the following cases. You can see the categories below:
A couple things to note:
- This simulation will only consider in-network care on the family plan.
- For scenarios A & B the PPO has a copay which is less than the doctor bill, but it does not count against the deductible
- Once the deductible is met, the co-insurance kicks in
- Once Max-Out-of-Pocket is hit, insurance covers 100% (except co-pays on PPO)
- This is a full factorial iteration of all 4 categories. There are no probabilities taken into account, so all scenarios are equally weighted
Here are the results:
A – Highlights the gap between the plans on the high ends
B – Highlights the gap between the plans on the low ends
Sorry if you are not familiar with box plots but I like the visual.
This chart doesn’t layout a side-by-side comparison of how each specific scenario compares to each other. It does, however, show the distributions and it is clear that for my health insurance options, the HDHP plan is the way to go for most cases for my company.
I re-ran the simulation with no HSA contribution just to see what would happen if they discontinued in the future and got a much tighter comparison:
This ended up being more technical than I had hoped but the main take away is that you must understand the total cost:
Total Cost = Company HSA contributions- insurance premiums – health care costs
Review the cost of a best-case year (no expenses) and the worst-case year (hitting Max-Out-of-Pocket). If you are in a situation where both of those are in favor of one of the plans available to you, then it is probably a no-brainer. If you are not this lucky, then you will have to account for your health and some probability of your potential expenses. BUT make sure you are looking at how much the TOTAL cost including premiums when calculating your numbers not just the deductible and Max-out-of pocket.
Until Next time, Continue to Choose Beta