Pick up any article about employee benefit choices in the post-ACA world and you will hear about how skyrocketing premiums are leading people to buy “skimpier” coverage. As I have said many times, when I get the opportunity to speak to groups about healthcare reform, whether you are getting your information from Fox News or MSNBC, you are probably not getting the most helpful perspective on anything healthcare related.
Case in point: the lack of reporting on how the Affordable Care Act has reduced the decisions about health insurance to three simple questions:
- What network has the healthcare providers I want?
- Who has negotiated the best prices with these providers?
- How do I want to finance my exposure to the first $6,850 of healthcare expenses in any given year?
The first two questions may seem familiar. In fact, the question of provider networks may be the most important question in the future. But for today, let’s unpack the third question. Many people don’t realize that the Affordable Care Act (ACA) has actually simplified the process of choosing a plan. Prior to the ACA, employers and insurance companies had a great deal of flexibility when it came down to what a plan would cover. By eliminating annual and lifetime limits, as well as forcing all plans to standardize on free preventative services such as what “essential health benefits” they cover, all the differences in health plans come down to one factor: how does the plan share the cost of the first $6,850 of expense in a given year?
What is the importance of $6,850? For the plan year 2016, this is the Maximum Out-Of-Pocket (MOOP) that can be charged to an individual. All payments, copays, deductibles and coinsurance accumulate to the MOOP. Sound a little esoteric? Maybe. But as a member of a leading firm in the business of helping employees decide how to optimize their employer’s benefits program, we think this single insight is of incredible importance.
Understanding the health insurance bundle
Most people don’t understand that health insurance is really three things rolled into one. The first thing you get when you purchase health insurance is access to discounted healthcare. The big insurance companies have negotiated significant discounts from doctors, hospitals, and pharmaceutical companies, and your health insurance policy allows you access to these discounts. Only the uninsured pay retail for healthcare.
The second thing you get when you purchase health insurance is protection from catastrophic losses due to medical expenses. This is the insurance part of health insurance. All expenses above $6,850 are covered. A million-dollar claim for transplant services: covered. Heart attack with bypass: covered.
The third component of health insurance is where all the decisions are made: how do you want to finance the first $6,850 of expense or exposure to this expense?
First, you might need to understand how likely you are to consume healthcare in the upcoming year. If you have a medical condition or upcoming procedure, that might be easier. But what about the 50% of the US population who only consume 2.9% of all healthcare? This 50% averages $253 of expenses in a given year. How much should they pay for the exposure to $6,850 of expense? This is the most important question they can ask as they go through open enrollment. All the differences in copays, deductibles, coinsurance percentages and out-of-pocket are ways to divide up the first $6,850 of expense. After that, the plan has to pay; the Affordable Care Act demands it.
The health insurance balancing act
Do you have to then settle for skimpier coverage? Maybe not. We think people should make informed choices about how they want to finance their consumption (or the risk of their consumption) of healthcare. It might be that signing up for exposure to the entire $6,850 is the smartest decision you make. Additional options like Critical Illness, Accident Insurance, and other supplemental health products can also be a means of reducing exposure. We realize health insurance is an emotional topic. Perhaps with a better understanding of the fundamentals, it doesn’t have to be.