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Choosing a health insurance plan

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Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

THE SCENARIO It's Open Enrollment time for health insurance again, and yet again the premiums have gone up significantly. My plan is a Platinum HMO plan, and it's significantly expensive - to cover both me and my wife, it costs a huge portion of my gross income. Governmental subsidies undeniably help, but the payment is my largest monthly expense outside of my mortgage - by a lot. Because the cost of my plan is going up by about 20% in 2018, and my income may not go up by 20%, it's time to evaluate other options. So I decided to compare my current plan with a Gold plan with the same HMO. That way, even if I switch plans, I won't have to switch doctors, medical groups, dentists, or otherwise endure the disruption and confusion that completely switching can incur. The premiums and out-of-pocket maximums are as follows: Platinum plan Monthly premium: $893.90 Out of pocket maximum: $6,700 Gold plan Monthly premium: $730.45 Out of pocket maximum: $12,000 The office co-pays and prescription cost differences should work out to less than $300 for the next year if we consume the same amount of medical care in 2018 that we did in 2017. We'll call that an extra $25 per month in costs if I choose the Gold plan instead of staying with the Platinum plan. Both plans have $0 deductible. Since nearly any major medical care (for example, a broken bone or the birth of a child with associated prenatal care) will blow right past the higher of the two maximums ($12,000), I can assume that if I ever need to use the insurance for anything beyond routine health maintenance, I'll pay the maximum of whichever plan I have. The question: I'd like to make at least 10% on my money if I choose the Gold plan instead of the Platinum plan. What chance of having a major medical issue would be the tipping point for the two plans at this return*? Assume that the costs of the major medical event are all paid at the very end of the year. * Note: I'm going to use a risk management technique called 'risk exposure analysis' to do this. It multiples the likelihood of a negative event by the consequence of its occurrence to come up with a simple dollar value that can be applied to the risk. Since I know the consequence (the extra out-of-pocket money), I need to find the likelihood of incurring that expense - which is the likelihood of having even a single major medical issue in 2018.
THE SOLUTION Sorry that this one is a bit more complicated - most things involving health care in America are. This one has a few parts. First, I need to find out how much I save each month by getting the Gold plan rather than the Platinum plan. Second, I need to figure out how much I'd be willing to pay at the end of the year to save that much per month if I want to make 10% on my money. Third, I need to find out how much higher my out-of-pocket expenses would be if I got the Gold plan rather than the Platinum plan. Fourth, I need to find out the ratio between my target savings and the extra out-of-pocket money to find the likelihood tipping point. Step 1 The Platinum plan costs $893.90 per month. The Gold plan costs $730.45 per month, and will likely incur an additional $25 per month in office visit costs, prescription costs, and the like. If I get the Gold plan, I pay 893.90 - (730.45 + 25.00) = $138.45 less each month. Step 2 First things first, make sure the calculator is using 12 Payments per Year. N: 12 (The insurance lasts for one year) I/YR: 10 (I want to make 10% on my money) PV: 0 PMT: 138.45 (The Gold plan saves me $138.45 per month) FV: (this is what I'm trying to find) At a 10% return, saving $138.45 per month is worth $1,739.70. Step 3 The out-of-pocket maximum for the Platinum plan is $6,300. For Gold, it's $12,000. If I get the Gold plan and have any major medical issues, I'll pay an extra $12,000 - $6,300 = $5,700. Step 4 The ratio of the $1,739.70 in monthly costs I save by buying the Gold plan and the $5,700 higher out-of-pocket maximum in case something major happens is 1,739.70 / 5,700 = 0.3052, or 30.52%.

So if I think it's more than 30.52% likely that one of us will have a major medical issue in 2018, I should buy the Platinum plan. If I think it's less likely than that, I should buy the Gold plan.

Most insurance boils down to guessing about the future - some people consider it a form of gambling. With health insurance, you're guessing that you'll stay healthy or that you'll get sick or injured. The choice about which plan to buy is a complicated one, and this is just one approach to evaluate it.

What do you think? Do you see a flaw in my methodology? Do you have one you think works better? Let us know in the comments!