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I am evaluating new medical plans, and I'd like to figure out a formula that will give me some idea of the potential benefits of one vs another vs another.. etc..

I have these variables:

  • Cost Per Year ($)
  • Deductible ($)
  • Co-Insurance Rate (%)
  • Maximum Out of Pocket ($)

My thinking is, if you take all these into account then given $X in medical services, It will cost me $Y per year (including my premiums, deductible, co-insurance portion up to the OOP Max). I could then Apply this formula to a range of potential costs. Such that if I know i'll spend $2500/yr on medical costs what will be my effective costs vs if i'm going to spend $5000 or $30,000, etc..

Of course this doesn't take into account fuzzier benefits, like if preventative care is 100% but regular care is 80%.. or drug costs, so those are factors i'll have to just take into account ad-hoc. Also, let's ignore pre/post-tax issues and assume OOP expenses are paid with an HSA or FSA

I'm having some difficulty figuring out a formula to use for this. What formula would help me calculate the benefits of each plan?

Given:

1100/yr in premiums, $1000 deductible, 80% co-insurance, and $2500 Out of pocket max

vs

$3100/yr, $750 Deductible, 90% co-insurance and $2000 OOP Max.

Let's calculate based on a spread of medical costs ranging from $1000-$30,000 in $1000 increments.

Any suggestions?

  • I am very interested in how people answer this one. – MrChrister Oct 17 '12 at 4:44
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    I assume this is for the US, and if so, please add the united-states tag; the answers would be very different for many other countries. Some things you might want to include in your calculations (and your question above) are: your age and general current health, and geographical and provider coverage. Many insurance plans have Preferred Providers, hospitals and doctors whose charges are paid at higher rates than "out-of-network" providers. People have been known to choose Plan A over Plan B because Plan A has their favorite Doctor C as a Preferred Provider while Plan B does not. – Dilip Sarwate Oct 17 '12 at 11:07
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    You are omitting the most important factor in any medical plan - what it covers. If certain kinds of illnesses are excluded then that can literally mean the difference wealth and bankruptcy; maybe life and death. – DJClayworth Oct 17 '12 at 15:36
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    @DJClayworth +1 for the reminder on coverage. Many plans will not cover pre-existing conditions, or will cover them only after a waiting period. Although the OP has used "Man" in his nom de plume, child-birth is usually not covered for the first ten months or year, and this might need to be taken into consideration if a family plan is being evaluated as opposed to a single-user plan. – Dilip Sarwate Oct 17 '12 at 16:13
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    That's OK as long as you don't fall into the trap of saying: "I can't work out how to include this factor in the calculation, so I'm going to treat it as unimportant". – DJClayworth Oct 17 '12 at 16:47
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Ok, well, after much futzing, here's what I settled on.

As a pseudo-excel formula:

=MIN(MIN(Service Cost, Deductible) + (MAX(Service Cost - Deductible,0) * Co-Insurance Rate), Out of pocket Max) + Yearly Premium Cost

So what this does, in effect, is:

  1. Calculate which is lower, cost of service or deductible.
  2. Calculate the cost of Services - the Deductible (or 0 if it's less than 0)
  3. Multiply #2 * the co-insurance percent (.2, .1, etc..)
  4. Take the lesser of #3 or OOP Max
  5. Add Yearly Premium Costs

This gives me a basic idea of how much any given set of services for a year will cost me in real out of pocket money.

As others have said, this doesn't take into account fuzzier factors, like costs of prescription drugs, what services are covered, etc.. It's just one of the factors I need to consider when choosing a health plan.

But, this let's me apply a hard number to compare the general coverage costs.

1

Assuming $5000 medical costs.

1st: You pay deductible $1000 + 20% of $4000 = $1800

2nd: You pay deductible $750 + 10% of $4250 = $1175 (Lesser, but you paid way more in premiums, $2000 more)

Assuming $10,000

1st: You pay deductible $1000 + 20% of $9000 (1800) = $2800 (But max cap @ $2500)

2nd: You pay deductible $750 + 10% of $9250 = $1675 (Lesser, but you still paid way more in premiums, $2000 more and still doesn't make up for the lower costs.)

Assuming $30,000

1st: You pay deductible $1000 + 20% of $29000 (5800) = $6800 (But max cap @ $2500)

2nd: You pay deductible $750 + 10% of $29250 (2925) = $3675 (But max Cap @ $2000)

So @ $30000 in medical costs per year, you maximize the benefits of paying more.

Which plan you benefit you would depend on your age, income and requirements.

To me personally, I think if the coverage of both plans are pretty much the same and the only difference is the premium and deductable as you have mentioned. Plan 1 is the most cost effective.

Assuming that you do not get hospitalized or make use of the plan in the next 3 years, your costs savings between plan 1 and 2 is $6000 in total. Assuming you are still young and healthy, then you may not even need to use your plan for the next 10 years, that amounts to $20,000.

Unless your medical plan has a investment portion and you can get money back at the end of a certain period, its not worth it.

Just my 2 cents

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There are other factors that can be significant:

  1. What is the maximum lifetime benefit? This can make or break you if you get a significant long term illness.
  2. Can you go to the doctor of your choice or must you choose from a insurance company list?
  3. What about specialists? Do you have to go through a gatekeeper doctor or can you go directly to a specialist?
  4. Do you have to get a second opinion for certain procedures such as operations? If you don't and its required coverage can be denied.
  5. How are visits to emergency rooms handled? Must you notify the insurance company within a fixed period or risk losing this coverage?
  6. Although you dismissed it, drug coverage is very significant considering the price of most medicines.
  7. How are "reasonable and customary" rates calculated. This is important because insurance won't cover charges over these rates/

I believe you will get a misleading result if these and other items are not considered. Obviously, it makes deciding between plans more difficult but unless they are included, a fair comparison cannot be made.

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