Recently my brother entered the market to purchase health insurance. This is how I explained things to him. After I did, I thought to myself, “How many other people could benefit from this?” – people who may also have entered the market recently, due to unplanned layoffs and such, so here is a posting that hopefully will help others in their search for the right health insurance plan for them.
There are several moving parts to a health insurance policy. The trick is to mix and match them until you come up with the “perfect” plan for your situation. Here in this writing, I will explain the different parts, then give you a scenario to illustrate how they work. Once you understand, the next step is to get quotes from reputable companies, make the necessary comparisons that lead to a final determination, and enroll in a plan.
Why should you get medical insurance? Statistics tell us that over 47% (that’s nearly half!) of bankruptcies are due medical bills. Certainly you don’t want to use up your nest egg to make doctors rich – you want to use it to enjoy yourself in your golden years.
You aren’t sick now. And you probably won’t be sick tomorow.
Never say never. No one ever plans to be sick. (How many of those people in the cancer ward expected to get cancer?) We are human – we can’t know for sure. So we do what is prudent, and that is to protect ourselves from financial ruin from medical bills.
We do that with insurance.
Let’s discuss for a moment what insurance really is. In a nutshell, insurance is transference of risk. For a fee (or premium), insurance companies agree to pay expenses incurred by you in case of loss, whether for an auto accident, a house fire, death, etc. In your case, we’re discussing health, so the insurance company is agreeing – again, for a fee – to pay doctors, hospitals, other assorted caregivers, and pharmacies on your behalf for the care you require in given situations. The risk transferred here is, for you, if you get sick or have an accident, most of your out-of-pocket expenses will be paid by the insurance company. From the insurance company’s viewpoint, that bet is that you won’t get sick or require more care than your premium covers, so they can pocket the difference.
So how does this all work?
There are three major components of health insurance. The first thing you need to select is your deductible. That is the amount of money that you have to pay before the insurance company coughs up a dime on your behalf. This means, if you go to a hospital, you pay your deductible, and then the insurance company pays their portion of the rest.
Secondly, you agree to a co-pay. Co-pays are a little tricky, in that sometimes they are set dollar amounts, and other times they are percentages of the overall total. And to make life more complicated still, the co-pays sometimes are and sometimes not included as part of the out-of-pocket maximum. It just depends on which expense the co-pay is for and how a particular company handles that expense.
Lastly is the out-of-pocket maximum mentioned above. This is the total amount in a given year you are required to pay before remaining expenses are paid by the insurer. Even here, you have to be careful because some companies will pay everything from here on out, while others will still require you to pay co-pays for doctor office visits and other miscellaneous expenses.
And to further complicate matters, there is a lifetime maximum payout that an insurer is on the hook for. The most common maximum is $5,000,000. ( This was done away with by Congress last year.)
Now you have the basics of a policy. Let’s give you an example of how all of this works.
Say you have a $2,500 deductible, an office visit co-pay of $25, a co-pay after deductible of 20%, and a maximum out-of-pocket of $5,000.
Here’s the scenario: You’re playing softball at a weekend outing with your family. Because you were looking at the right fielder retrieving the ball to gauge whether or not you should try for home, you trip over the third base bag and fall on your butt. You get up and brush yourself off, and head for the dugout because you got tagged out while laying in the dirt.
Later, however, you notice that you can’t run without falling, and even walking presents a challenge.
Monday rolls around, and you head for the doctor, who charges you $125. You pay him $25, and the doctor gets the other $100 from your insurer.
The doctor examines your knee and notices it twists in an unusual fashion. He orders an MRI, his staff helps with the referral to the MRI center, you set the appointment, and on Tuesday afternoon, you are on your way to that medical building you’ve seen before but never really knew what it was they did.
You arrive; they put you in the (thankfully open-air, because you’re somewhat claustrophobic!) tube.
But first of course is the dreaded paperwork. Here you hand them your card and they do the processing. If you are lucky, they will bill you for your portion, but often you have to pay your part right then and there. If the MRI costs $1,500, you have to fork over $1,500 or get turned away.
Better take your credit card.
Say the MRI discloses that you have a torn ACL. That’s not something you can ignore. You have to have it repaired. (Well, really, they don’t so much as repair them as replace them. And where do they get the replacement parts? From cadavers! That will make you think the next time you go to a funeral!)
We’re talking surgery, which- even though it’s arthroscopic – is a little scary. We’re talking surgeons, nurses, operating rooms, recovery rooms, anesthesiologists, etc. We’re in the neighborhood of $20,000 for that little faux pas. (All you wanted to do was score the run!)
You’ve been paying nearly $300 a month for your insurance, which seemed like a lot to you. (How much does a doctor make, anyhow?) And, you’re keep hearing that hospitals are cutting back services and/or about to go out-of-business, and now you’re looking at this bill, looking around the hospital and seeing it full of patients, and wondering just how in the world they could not be making a killing?
But they aren’t.
That’s not your problem – at least not today. Your problem is your out-of-pocket expense! Let’s review: $25 for the doctor visit (not too bad). $1,500 for the MRI. OUCH!
You are now at $1,525, and staring at much more.
What was that deductible again?
$2,500. You’re over 60% there! (As if that’s a good thing.) $2,500 minus the $1,525 you’ve already paid. Leaves $975 before the co-pay kicks in.
More math: $1,525 plus another $975 equals the $2,500 deductible. $20,000 – $975 = $19,025 times 20% equals ANOTHER $3,805 OUT OF POCKET.
What was that out-of-pocket maximum again? $5,000? Now you’ve paid the deductible ($2,500) and you owe another $3,805. Since that exceeds your out-of-pocket by $1,305, you will pay an additional $2,500 to reach the $5,000 out-of-pocket maximum.
Your total bill came to $21,625, of which you paid $5,000. The insurance company is out the other $16,625. Your $300 investment looks pretty smart right about now, doesn’t it?
And we haven’t even spoken about follow-up visits, rehab, and the like.
Depending on your adjusted gross income, the $5,000 plus the $300 per month might be partially tax deductible.
So that sums up how a claim would work under these circumstances. I hope it clears up how this works, for those of you lucky enough never to have been in a situation like this before.
What you need to do NOW is figure out how much of the doctor’s visit expenses, how much of the hospital expenses, and how much overall exposure you want to accept. My recommendation, with this and all insurances, is to find out how much it costs for the most complete plan. If you find you cannot (or will not) afford that, then gradually increase your exposures, which in turn lowers your premium, until you find a level where you can sleep peacefully at night.
THEN ACT!
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