Many people choose the wrong plan simply
because it all seems too complicated to understand
The decision, which has enormous implications for our health and
finances, is horrendously complex. And we are universally terrible at it.
People choose plans that don’t fit their situation based on bad
assumptions and predictions, or they don’t choose at all, blindly staying with
what they have done in the past.
Plan materials are littered with jargon like actuarial value, specialty
tiers, coinsurance, out-of-pocket maximums, as well as a word salad of
acronyms—HMO, PPO, POS, PDP and HSA. Only 14% of us are able to correctly answer simple questions about these concepts, and
they are central to choosing wisely.
Then there are the subtleties we’re supposed to understand. For
instance, oral medicines for cancer or multiple sclerosis are covered by a
prescription-drug plan, but infused medicines for the same diseases are by a
medical benefit.
All of this complexity and obfuscation leads to the first basic mistake
many of us make when choosing a plan: We don’t actually choose one.
One study estimates that employees are paying 40% more for their
premiums as a result of inertia (this amounts to $2,400 a year for a family).
The result is that we often choose a pricey, low-deductible plan
that seems to cover every contingency. Such a plan may be worth the extra
spending—often about $800 a year more for a family—if you need broad access,
but most of us don’t.
It is
also important to remember that a less-expensive, high-deductible plan will cover contingencies
that we fear, like shark bites, being hit by falling airplane parts, level 4
NICUs and rare cancer treatments. What it won’t cover
is every provider in your city, and that isn’t a bad thing if some of these
providers are expensive without
being better.
Those who selected one particular employer plan paid over $3,000 more
than the less-expensive option (in current dollars) for an imaginary benefit.
High-deductible plans come with, obviously, high deductibles—typically around
$4,500 for a family. But as we have seen, the premiums might run $3,000 lower
for a family than a preferred-provider organization (PPO) plan, which carries
lower deductibles.
The
high deductible often scares people away, as does the prospect of shopping for
in-network healthcare. But the number to focus on isn’t the deductible—it’s the
premiums. Remember, an HDHP might well save a family as much as $3,000 a year
in premiums relative to a PPO plan, so that is $3,000 toward our $4,500
deductible right there.
Then there is the health savings account, a fund that lets you
contribute pretax money that can be used for healthcare costs and then withdraw
it without a tax penalty. Employees and employers can contribute up to $7,750
to an account annually.
Triple tax benefits
All of this adds up—especially because
you can put HSAs into mutual funds. If your family invests $5,000 a year via an
HSA for the next 25 years, and earns the historical stock-market average over
the past 25 years, you would have $550,000 to spend on your family’s care.
But isn’t it better to put savings into a
401(k)? The HSA offers triple tax benefits—the money that you put in isn’t
taxed, the money grows tax-free, and you don’t pay taxes on it when you finally
use it. The last two aren’t true for 401(k) savings.
Don’t forget the tax savings from putting
money in the HSA. If you’re in the 30% bracket, and you put away $5,000, you
have saved $1,600 that would otherwise have gone to taxes. Once again, this
money would get you a long way toward your annual deductible.
