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A Matter of Time

Richard Connor

I HATE TO BE WRONG. I’ve written before about the technique I’ve developed for evaluating health insurance. My wife and I have used it over the years to decide which plan to select. I’ve shared it with friends and colleagues, and many have found it useful in gaining insight into their own health insurance options. I still think it’s a valid and valuable method.

But our recent experience, after switching health insurance mid-year, made me realize it was missing one important variable—the length of time you’ll be in the plan. If it’s less than a year, it can throw the analysis off.

We’d been using my wife’s employer’s medical insurance since 2017, when I stopped working fulltime. My wife retired in July, so we needed health insurance for the remaining five months of the year.

We could have extended her employer’s coverage with COBRA, but my retiree medical insurance plan seemed the better choice. Through it, we could enroll in one of three medical plans, with the company providing a subsidy based on a retiree’s years of service.

I contacted my retiree benefits service center and requested all the information on the three options. With that in hand, I created a spreadsheet to calculate the minimum and maximum annual costs for each plan. The minimum cost is calculated as 12 months of premium payments. The maximum cost is those premium payments, plus the potential out-of-pocket (OOP) maximum for the year.

Plan A was a preferred provider organization, plan B was a mid-priced high-deductible health plan (HDHP) and plan C was a low-priced HDHP. The table below summarizes the minimum and maximum annual cost for each plan for my wife and me. Although there’s about a $7,000 difference in the annual minimum cost—reflecting the difference in premiums—the maximum cost for the three plans is pretty similar.

If you expect to be healthy and not need medical care, plan C—which is the low-cost HDHP—makes the most sense. You’d pay the lowest premiums and you can contribute to a health savings account. I’ve heard the argument that families can’t afford plan C’s high deductibles and high out-of-pocket costs, and still have money left over to fund a health savings account. These folks often choose the higher-premium plan A to avoid these high potential costs.

The difference in premiums between plan A and plan C is a little over $7,200 annually. In 2021, the maximum allowable family contribution to a health savings account is $7,200. I thought I’d rather put my money into the tax-advantaged health savings account than spend it on higher premiums.

On other fronts, the plans seemed fairly similar. All three are with the same insurer, all covered preventive care and all give us access to the doctors we already see. In addition, we both have health savings accounts from our working years with enough funds to cover several years of out-of-pocket costs. Based on this analysis, we chose plan C, with our coverage starting Aug. 1.

What, then, was my mistake? My analysis was based on an entire year of premiums. Because we switched plans in August, we paid only five months of premiums in 2021. But the deductible and out-of-pocket maximum aren’t pro-rated. You have to meet those in full, whether you’re in the plan for one month or 12.

This became apparent, in part, because we had higher medical costs this year. We moved to a new home in March, and are in the process of finding new doctors, setting up new patient appointments, and getting any tests or procedures they recommend. On top of that, my wife had a health issue that required several nights in the local hospital, plus follow-up tests and procedures. It was a minor scare and she’s doing fine.

With year-end rapidly approaching, it appears we will be close to meeting our family deductible of $6,000. It occurred to me that it might have been wiser to pay the higher premiums of plan A because it has a much lower annual deductible of $1,200. In a nutshell, if we had paid $3,020 more in premiums over five months, we could have saved even more on our annual deductible and out-of-pocket costs.

I revised my spreadsheet to reflect a five-month enrollment period and reran my analysis. It confirmed my hunch, at least in terms of the maximum total cost we could face. Plan A still has the highest minimum cost—but now it also has the lowest maximum cost. In addition, the deductible is lower and thus you start getting the 80% coinsurance payments sooner, but you don’t have to pay a year’s worth of higher premiums to gain this benefit.

The hardest part of this analysis is that you don’t know how healthy you’ll be in any given year. Only time will tell what our total medical costs will be in 2021. We both have doctor’s appointments before year-end, so bills are still coming in.

Perhaps we should have elected COBRA coverage and extended my wife’s employer plan for the rest of 2021. Since COBRA uses the same insurance policy that you had previously been using, your deductibles and out-of-pocket requirements don’t reset to zero just because you retire mid-year. The COBRA premiums were significantly higher than our other insurance options. That’s why, at the time, I assumed it wouldn’t be the better choice.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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Randy Dobkin
Randy Dobkin
6 months ago

Make yourself feel better by maxing out your and your wife’s (she gets $1000) HSA contributions and calculating how much you’ll save on taxes!

wtfwjtd
wtfwjtd
6 months ago

Oftentimes, but not always, a couple is better off financially when they each have their own health plan, as deductibles and OOP are both cut in half. In addition, many insurance plans are way more than double the price for two (or more) individuals than for one. This analysis is especially important when there is a fairly wide disparity in health spending, as seems to be your case at the moment. Could this have made a difference in your case? Maybe, maybe not…until we can invent a crystal ball, choosing health insurance as we get older is mostly going to be a crap shoot. I wish there was a better way.

Rick Connor
Rick Connor
6 months ago
Reply to  wtfwjtd

Really good question – I looked at my wife staying on COBRA and me moving to my retiree plan. The subsidy form my former employer made it the winner. I also thought it would b e good get engaged with them since we would be using them in 2022. My wife had some early health spending, but I’m starting to catch up.

wtfwjtd
wtfwjtd
6 months ago
Reply to  Rick Connor

Oh yeah, and one other minor detail: Neither analysis seems to account for the tax treatment of HSA spending vs strickly OOP spending. Once this is factored in, it appears that choosing between plan A and plan B would be a wash, with plan C being the least favorable option for your scenario.

George Counihan
George Counihan
6 months ago

Always enjoy your commentary gentlemen … One aspect of healthcare decisions that hits me is when I hear new retirees in their early/mid 60s saying that “I’m healthy I never go to the doctor”. I always encourage them to find someone in their late 70s or early 80s and ask them how often they seek medical care. Quite a different story

R Quinn
R Quinn
6 months ago

Don’t feel bad, choosing health benefits is a gamble simply because there are too many choices. I recently helped my son work through a 96 page open enrollment manual for his employer. It was ridiculous with no way to predict the right choice. One plan had different tiers of participating doctors. Try asking your doctor which tier she is in among the eight or so insurers she accepts. Depending on your ages it’s possible selecting an ACA plan could have been a better deal.

Rick Connor
Rick Connor
6 months ago
Reply to  R Quinn

Thanks Dick. That sounds like a lot more complicated plan than I’ve been exposed to.

I have several friends who have preceded me in signing up for our former employer’s retiree medical plan. One did pretty extensive research on other options, including ACA, and concluded the subsidized employer plan was the best choice. I’m still a bit disappointed I missed the point that buying a full years lower deductible for just 5 months of premiums was a good deal.

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