March 26, 2014
What You Need to Know BEFORE Buying Health Insurance [Part IV]:
Risks of Under-Insuring
HealthCare Education Series written by Net Advisor™
This is Part IV (“Risks of Under-Insuring”) of our eight-part series on information to help you understand about health insurance costs, choosing the right plan for you, and how the industry works.
So far we have covered health insurance basics, choosing a provider, and strategies for HealthCare planning. So what if I ignored all this and just got the cheapest monthly insurance premium with highest deductibles and co-insurance? What could go wrong?
[12] Risks of Under-Insuring.
What is under-insurance risk? When you don’t have enough insurance to cover your particular liability. This can be related to any insurance, health, auto, personal liability, business liability, life and umbrella. When there is liability, or an accident and your insurance doesn’t cover the bills, one could end up in another difficult financial situation they may not have anticipated.
[13] $50,000 Medical Bills Hypothetical Situation
Let’s say you need major medical and have $50,000 in medical bills before applying insurance. With a major medical situation such as surgery, this is not uncommon. With an “average” health plan with say a $4,000 annual deductible and a 70/30 co-insurance this is what one could be looking at:
Pay $4,000 cash or credit right now. Credit will probably cost 15-25% a year on the unpaid balance on the credit card, making those medical costs super expensive even after you have recovered.
After the annual deductible is paid, now pay 30% of the remaining bill (70/30 co-insurance plan).
Example: $50,000 in medical bills:
- Pay $4,000 (annual deductible) on $50,000 total bills leaves $46,000 in bills.
- Now co-insurance kicks in. 70/30 plan. You pay 30% of $46,000 or $13,800 cash, then your insurance covers the rest (check for policy limitations).
- So you ended up paying $17,800 cash – out-of-pocket with $50,000 of healthcare bills.
That 70/30 plan is really a 64.4 / 35.6 plan when factoring in the annual deductible you had to pay before applying co-insurance. Where the insurance didn’t pay 70%, they really paid 64.4% of the total. You didn’t pay 30%, you actually paid 35.6% of the total when factoring in a $4,000 deductible.
“Catastrophic” Insurance Plan:
$6,500 Annual deductible and 70/30 Co-Insurance Plan, with $50,000 medical bills:
With a $6,500 annual deductible and a 70/30 plan, the above scenario works out to be $19,550 cash you would pay out-of-pocket on $50,000 in medical bills. Serious surgery could be double that amount.
Why use $50,000 isn’t that high? Well, it depends on the issue, but if you’re looking at catastrophic plans and catastrophe happens, this is what things could look like. One needs to just consider these scenarios and ask yourself, am I prepared for this? If not, you might seek a higher monthly premium and lower deductible or at least a low or zero co-insurance. You’ll pay more each month, but you are reducing the liability of huge bills in case you need real healthcare.
There could be part of the bill that will have various Write-offs [Report, Section 10] but we don’t know what this may be until the claims are actually processed, and I would not expect it it be a huge portion of the bills.
[14] Analysis of Government HealthCare Plans
In December 2013, I did an analysis on the government’s advertising of healthcare plans under ACA or what is more commonly known as “ObamaCare.” I randomly picked two of the federal government’s Obamacare “success stories” and disclosed the risk of the true costs of those “affordable” healthcare plans.
My analysis was that the government’s plans it used in advertising was misleading because they did not disclose or account for the true costs of healthcare in case one actually needed to use it.
If an agent sold a policy focusing only on the monthly premium, that could be a legal compliance issue. It would fail to properly notify and disclose the annual deductible, the co-insurance rate and thus the true costs and risks of owning that policy.
What the government’s advertising did not say, but the buyer should know is that their total cost of insurance is not limited to the monthly premium. When the buyer agreed to purchase the policy they had to click or sign something to the effect of: ‘I have read, understand, and agree to (everything) in this policy.’ This is a legal agreement which the policy owner is now bound to.
A well trained (state licensed) health insurance agent is required to explain all this to you. Buying insurance by yourself, and on-line assumes you know everything what you are doing, and you agree to that as fact when you sign up. Some people can do this just fine. In my experience, most have no idea what to really look for.
Buying health insurance though a non-insurance-licensed government “navigator,” who can operate with no insurance experience, who are not background checked for criminal history to me is a risk I would avoid.
Remember:
1. All insurance is not equal in coverage and monthly premiums should NOT be the sole determination to compare plans.
2. The U.S. federal government does NOT issue insurance licenses.
3. Only U.S. states can issue health insurance licenses for sales ONLY in their respective state.
Next we look at the reality buying one of those “cheap” catastrophic plans and we have little to no money to cover the bills. National data shows that most people go with the cheaper plans and a high percentage of them who face unexpected major health issues end up in bankruptcy.
[15] #1 Leading Cause of U.S. Bankruptcies are Due to Medical-related Bills.
Based on my analysis in this area, most people have cheap insurance where they have lower monthly premiums, high deductibles and higher co-insurance. Again this insurance is cheap until you actually need it.
“…study found that medical bills, plus related problems such as lost wages for the ill and their caregivers, contributed to 62% of all bankruptcies filed in 2007.
About 78% of bankruptcy filers burdened by healthcare expenses were insured, according to the survey, to be published in the August issue of the American Journal of Medicine.”
What this says is people who were paying their monthly insurance premiums still ended up in bankruptcy when a major health issue arose. To reduce this financial risk, you might want to get a plan that covers where you have a lower or “affordable” annual deductible and zero co-insurance or whatever you can afford for co-insurance. This is where healthcare planning is critical.
Article Series Index:
Part I: Health Insurance Basics
Part II: Choosing a Provider
Part III: HealthCare Planning
Part IV: Risks of Under-Insuring
Part V: The Truth About Health Insurance
Part VI: Navigators (Coming soon)
Part VII: How Your Health Insurance Rates Can Increase (Coming soon)
Part VIII: How to Profit from Your Insurance Company (Coming soon)
original article content, Copyright © 2014 NetAdvisor.org® All Rights Reserved.
Disclaimer: Post intended to be commentary from an insider’s view and based on actual experience working in and out of the industry. Poster’s licenses are currently inactive by personal choice. The information provided herein should not be deemed as specific investment, tax, insurance or legal advice. Rules and laws can change and thus opinions can change without further notice. Individual experiences and situations will vary. All of the data was accurate to the date of this post. Please contact your state or licensed appropriate person for specific advice for your specific needs.
NetAdvisor.org® is a non-profit organization providing public education and analysis primarily on the U.S. financial markets, personal finance and analysis with a transparent look into U.S. public policy. We also perform and report on financial investigations to help protect the public interest. Read More.
