# Selecting deductible & oop max levels

I posted about this back on the AO &, as I recall, the conclusion was that “health insurance pricing doesn’t make sense and you shouldn’t expect it to” and there was also some other explanation that cleared it up (a bit), but I can’t remember what it was.

I am back again to post the question to verify my understanding.

All of these numbers are made up and may not even be legal/permitted but, rather, they’re simply representative in order for me to explain my conundrum.

plan deductible out of pocket max coinsurance annual premium
A 10,000 15,000 0.7 3,600
B 7,500 12,500 0.7 7,200
C 5,000 10,000 0.8 10,800

If I’m doing my calculations correctly, if I have x claims then my total cost (π + oop) under each plan would be…

claims = 1,000
A = 3600 + 1000 = 4600
B = 8200
C = 11800

claims = 26,665
oop = prem + min(oopmax,ded+(claims-ded)(1-coin)))
A = 3600 + min(15000,(10000 + (26665-10000)
(1-.7)) = 18600
B = 19700
C = 20113

claims = 30,000
A = 18600
B = 19700
C = 20800

Am I doing this calculation correctly?
Under what scenario would someone want a low deductible plan if doing so guarantees that they’ll be paying more in total?
What do I not understand here?

Regards,
'###

Your formula looks correct, though I admit I didn’t check the actual math.

There are two questions here-

1. Why are they priced this way in the first place.
2. Why would someone want to buy it when it is more expensive in all cases.

.

1. Is largely due to anti-selection combined with induced utilization. Anti-selection: Sicker people choose lower deductibles. Induced utilization: One example- if going to the ER is only going to cost you \$20 you may be more inclined to do that then if the ER trip will cost you \$1500. If your elective bunionectomy is only going to cost you \$1000 instead of \$10,000 you may be more willing to have that procedure done. Both factors combine to increase the frequency of claims - thus the higher premiums.
2. The higher the deductible and OOP maximum, the more catastrophic the dollar amount can be to an individual. To offset this potentially catastrophic event, these individuals decide to pay a level monthly premium amount to reduce their exposure to high-dollar risk. Even those with known dollar amounts may wish to only pay \$5,000 at the start of the year and spread the rest throughout the year rather than paying \$15,000 up front.

Note that I’ve edited the OP to allow for a better format to present the base information.

One item to take into consideration is your personal cash-flow situation. If you have a considerable savings to account for “sudden large expense incurrence”, the higher-dedt policy would be useful.

Otherwise, you might need the lower-dedt policy.

And as Mayan points out: If you feel that you’re relatively healthy and will not need the coverage (apart from catastrophic type event), then the high-dedt (lower premium) policy would be the best option (least OOP cost if zero losses).

Well, that was awfully nice of you. :toth:

There are also considerations with regard to how the plan treats prescriptions. If your claims are mostly in Rx, and your plan counts “manufacturer coupons” as part of patient spend, rather than as a delay of deductible, then you can actually spend less than oop max, because of the treatment of “manufacturer coupons”. I don’t know if you can know this in advance of choosing a plan though.

Thanks, all. That was quite informative and helpful.

Also, forgot to note that some companies contribute to the HSA that often accompanies high-deductible plans. And that you can contribute tax-free to the account.

And that HSA accumulates over time. And that HSA can get a nice return if invested right. So an analysis of one year might not be how to look at this. I may have no claims for several years, then need a surgery.

Also, I think your annual premium assumptions do not reflect reality. Some other health actuary might be able to provide reasonable ones.

True, but I don’t see how that affects which HDHP I choose…unless you’re saying that the amount the company contributes varies by which deductible that I choose, then, yes, I can see how that would affect it.

I’m afraid I don’t see how whether or not I contribute & accumulate money in my HSA affects the premium/benefit cost comparison. Could you explain your thought further, and, if necessary, bring out the :handpuppets:

That is correct…

…they are for entertainment and illustrative purposes only. Your mileage may vary. Consult your actuary before buying this product.

Just saying it is hard to explain your conclusions when your assumptions are wrong.
I mean, why would Chewbacca want to live on Endor…

Personal contributions are likely to have an impact on your (income) tax liability. I doubt that the HSA would earn interest . . . but rolling over year-to-year can allow you to “save” up the cost of the dedt in the event that hits the :fan:.

My company contributes X to my HSA to be used with the HDHP I have. I cannot add my own money to this HSA, and it caps out at 5X (after which, my company stops contributing). For about 8 years, we didn’t have any OOP expenses (more or less) because of the HSA. It wasn’t until my wife ran into a string of serious medical issues that our HSA has now been depleted . . . I actually had to pay ~\$2,000 OOP for a kidney stone I had while attending a family event away from my home.

However, things have now calmed down, and I’ll get to start building that HSA back up.

Are you sure it’s not an HRA? It sounds like a health reimbursement arrangement, rather than a health savings account. HRAs are solely employer funded, and are not portable. More info on HRAs and info on HRAs and HSAs together.

It might be an HRA. I can’t use it for anything other than OOP costs through the HDHP.

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