Why You Might Want to Think Twice About Buying a Health Insurance Plan With copays.

September 14, 2010

We’ve all experienced it – you walk into the doctor’s office for an appointment and the receptionist kindly greets you by asking for your insurance information. After you’ve presented the proper credentials, the receptionist informs you the amount of your copayment (if any) that is due at the time of service. Since you have planned for such a request, you handover your preferred method of payment and take a seat in the waiting room. As you sit there, flipping through a six month old issue of Golf Digest, you can’t help but think you have made out on the deal. “A modest fixed fee to see the doctor whenever I want” you think to yourself. That has to be the best deal going, right?

Not so fast.

The only time it’s cost effective to consider a plan with a copay is if you expect to see a doctor in excess of four or five times a year or are currently taking several brand name medications that don’t offer a generic alternative. Otherwise, you’re spending extra money each month in your premium (monthly insurance payment) for a benefit you aren't using. It’s like paying extra each month for HBO and only watching it two or three times a year. The cable company isn’t going to give that money back because you didn’t watch, just like the insurance company won’t if you don’t go to the doctor.

Unlike cable consumption, you don’t want to be using your health insurance 24/7. As a matter of fact, it’s generally a person’s goal to go to the doctor as little as possible throughout the year. So why has everyone become obsessed with wanting to pay for something they don’t want to use?

The answer is that’s what people have become accustomed to from years of coverage through their employer-sponsored health insurance. The primary focus of insurance has shifted from insuring catastrophic events, such as an extended hospital stay or major surgery, to nickel and diming every imaginable upfront cost. A good analogy for attempting to insure non-catastrophic health related events is like trying to insure oil changes for your car. It’s a common and accepted fact that, if you own a car, you are going to need to take it into the garage every three to four months for an oil change, which on average will set you back 40 to 50 dollars a pop.

The question that begs asking is why do people willingly accept to pay small fees up front to maintain the health of their automobile, but are unwilling to do so for their own body? If I had to guess, I would say it’s because no one is telling them that they shouldn’t have to pay for such a service.

Let’s take a minute to look at some hard facts. We’ll use the recently unemployed Tom Smith and his family of four: a 42 year-old male, 38 year-old female, eight-year old daughter and four-year-old son, as an example. If they wanted to purchase an individual health insurance plan similar to Mr. Smith’s previous coverage through work, they would be faced with a $656.75 monthly premium. That premium would net them a plan with a $1,500/$3,000 deductible, 80/20 coinsurance, $30 office visit copay, prescription drug coverage with copays and an $8,000 total out-of-pocket maximum.

On the other hand, if the family were to consider a plan without those upfront copays, otherwise known as a Health Savings Account (HSA) plan, they could enjoy a savings of $163.56 month or $1,962.72 annually for a total premium of $493.19. The HSA plan would offer the same $3,000 deductible, with the only main difference being the exclusion of copayments for doctor’s office visits and prescription medication. Instead, the Smith’s would be responsible for the full negotiated price for doctor’s office visits and prescription medication. They would also enjoy a much lower out-of-pocket maximum of $3,000, reducing their total financial liability for a catastrophic medical claim by $5,000.

That might have been a bit of an overload on the insurance lingo, so lets take a step back and focus on the most important aspects.

The deductible is the annual amount of money the Smiths’ are required to pay out-of-pocket before their insurance policy starts paying claims. It’s also important to note that their monthly premium and copayments will not count toward the deductible. Meaning, the Smiths’ would be responsible for the same amount of money upfront for both plans.

When you hear someone refer to the full negotiated price in regards to medical bills, they are talking about the discounted price the insurance company has agreed to reimburse that facility for their services. On average, that discount is between 40 and 50 percent and could be as high as 70 or 80 for certain services.

I like to tell people that buying any insurance plan is like being able to carry around an unlimited 50 percent discount card for your favorite retail store. Let’s examine this a little more closely. Dr. Tom Jackson is the Smiths’ primary care doctor and Mrs. Smith needs to see the doctor because she thinks she has a sinus infection. Dr. Jackson sees Mrs. Smith and sends her a bill for $100. Mrs. Smith receives the bill and sees that Dr. Jackson has billed her $100 for the visit, but her insurance company is only allowing him to charge $50 for said visit. This ladies and gentlemen, is the negotiated rate. So now, Mrs. Smith would pay Dr. Jackson the $50 which would apply to her $3,000 annual deductible.

Keeping these numbers in mind, doesn’t it seem completely reasonable that the $163.56 the Smiths’ would save each month with a HSA would be enough to cover any unexpected doctor’s office visits over the course of the year? Also keep in mind, if everyone in the family stays healthy, the Smiths’ can pocket an extra $2,000 instead of throwing that money away to the insurance company. Remember, they are not going to give that extra money back if you decide to go for the more expensive plan.

The maximum out-of-pocket is the total amount of money the Smiths’ are financially liable for on an annual basis. The maximum out-of-pocket limit comes into play after the Smiths’ have satisfied their deductible and have paid a certain or “maximum” amount through coinsurance. Once they’ve paid the required amount out-of-pocket the insurance company pays 100 percent of any remaining covered medical service received that year.

In the case of the HSA the Smiths’ would only be required to pay the $3,000 deductible, after that they would receive 100 percent coverage. The traditional copay plan on the other hand, requires the Smiths’ to meet their $3,000 family deductible, but also pay an additional $5,000 at 20 percent through their coinsurance, on top of paying $163.56 more each month.

In the end, a health savings account plan will always offer the lowest monthly premium and out-of-pocket maximum when compared to a traditional copayment plan. Is it going to be the best fit for everyone? No. But it does offer a wide range of people a great opportunity to save money.

I don’t know how many times I have had people tell me, “Well, I want good insurance” or “I had great insurance, it paid for almost everything.” This shouldn’t be about good or bad and right or wrong coverage. Instead it should simply be about finding a health insurance plan that is, above all else, smart for you or your family’s individual needs.