With health insurance, the premium is just one part of the equation. A small part. Bigger factors are your deductible and your out-of-pocket maximum. (There are also other important things like which doctors and hospitals are in your network, but I’ll leave that for another website to cover.)
Many people say they are happy with their health insurance if they are young and healthy so long as their premiums are relatively low. They say this because they rarely go to the doctor, and therefore don’t really use their health insurance, so the premium is really all that they see. Many individuals from countries that have socialized medicine say it is great when they are young and healthy. They are often less enthused when they are old and sick after being told that the surgery that must be done immediately cannot be scheduled for 12 months. The best insurance plans in Canada pay for travel and healthcare in the US because the waits there are often long.
Still, even for young and healthy people, bad things happen. You get into a car accident and spend a week in the hospital, complete with lots of x-rays and surgeries. You have an appendicitis. You swallow something you should not have that needs to be surgically removed, or fall while you are rock climbing. Maybe you travel to a foreign country and get a rare parasite like those seen on The Monsters Inside Me. For women, it can be something as simple as having a child, especially if a surgery is needed due to complications or the baby is premature.
One of the issue with the plans under the Affordable Care Act is that they have really high deductibles and really high out-of-pocket max amounts. To see how high, check out this article in Forbes. As you can see, the yearly premiums vary by state, but tend to be between $2000 and $4000 for young people. For all of those except those in the lowest income brackets, the deductible is $5,000 and the Out-Of-Pocket max is $6350. This is a lot more than people have for cash-on-hand.
The deductible is how much you would need to pay before the insurance paid for anything. This means that if you make $30,000 per year or more in most states, you will pay your $2,000-$4,000 premium plus $5,000 before the insurance pays for anything. If you think this is a lot and that it is very unlikely you will pay out this amount in any given year, you are right. If you think you would most likely be better off saving up your $4,000 premium each year and just pay cash when you need medical help, you would also be right most of the time. The only time you would be wrong is if you were unlucky and one of the things I mention above happened when you were 21 or 22, before you had time to save up much money.
The out-of-pocket maximum is the most you would pay in any year before insurance would cover the rest. Note that this is per year, so if something happens one year and then something happens again the next, or if something happens that requires treatment in different years, you would need to meet the out-of-pocket max each year before the rest would be covered by insurance. Try not to get sick the week of New Years!
So really, even if you have Obamacare (or really any health insurance nowadays since many plans are converging on the same limits as the ACA), you really should still have about $6500 in the bank at all times just in case one of those freak things happened to you. You should have even more if you’re in the period of your life where you are having children, or later in life and starting to have more surgeries and procedures.
How will you save up $6500, however, if you’re spending $4000 in health insurance premiums? The answer is that if you are young and healthy you shouldn’t be spending that much on premiums. You should be spending something around $1,000 because the chances of something happening to you where you would have costs that exceed the deductible are remote. The issue is that you are covering all of the people who are older and sicker than you when you are paying your premiums. You then need to hope that someone will do the same for you when you are older.
There is a better way. Instead of sending money into insurance companies when people are young and healthy, they could be sending the money into Health Savings Accounts (HSA)s when they are young and letting that money build until they need it when they are older. They could buy a major medical insurance plan that covers everything over maybe $6,000 or $10,000, which would cost maybe $800 per year, to take care of the times when some freak thing does happen and they end up in the hospital. In twenty to thirty years most people would have plenty of cash to cover their medical care. They would also be paying cash, which means those big insurance companies everyone criticizes would lose a lot of their business.
That is one of the odd things about the ACA. It was passed when people were talking about how bad insurance companies are, and yet it makes everyone send all of the money for their healthcare to the insurance companies! This leaves people with little money to use to take care of themselves when insurance fails them and dopesn’t cover a procedure they need or doesn’t include the doctor they need for their rare medical condition. How did that happen? Would you do this with your grocery money?
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
