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Choosing a health insurance plan

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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.

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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!