Guidance for Employers to Choose the Right Set of Medical Plans

Regardless of the above options, in order for an employee to select the right plan, the following factors play:

1. An estimate of the likely total cost for each of the plan choices for the employee’s coverage tier. Total cost includes premium cost + estimated out-of-pocket expenses
2. Employee’s Risk adverseness factor
3. Potential tax savings if HSA eligible plans are part of the mix
4. In the case of low-income situations, an employee’s income can play a factor as well

The premium cost is stated clearly in the plan offering. The annual premium cost would be a 12* monthly premium. What is not obvious and clear is the out-of-pocket expense.

The out-of-pocket expense can at the simplest level assumed to be the worst-case scenario of the MOOP (Maximum Out-Of-Pocket) amount as defined by the Plan.

For e.g. if a Plan costs $300 per month for a single coverage and has a $4,000 MOOP, then the total cost in a worst-case scenario would be = 12*$300 + $4,000 = $7,600.

However, this is not representative in most cases, especially the ones with 0% Co-insurance. In this example, if the plan has a single deductible of $1,000 and 100% Co-insurance, in other words, the consumer pays 0% for services that require the deductible be met (e.g. hospitalization), and if the copays are generally low say $20 per visit, then the consumer is unlikely to reach the MOOP limit, by just paying copays beyond the $1,000 deductible.

The other extreme end would be that the total cost is just the total premium cost, assuming the consumer never consumes any services other than preventive care which has no co-pay or deductible. This is also not reasonable.

So, it becomes a question of assuming one’s likely usage scenario and applying the plan’s member cost-sharing, and calculating the expected cost. Even this cannot be accurately predicted because we cannot precisely predict the sequence of the occurrence of assumed events.

One way to simplify is to develop an understanding empirically, which will serve the purpose in most cases. Guidelines as per this empirical model follow below:

• If you are super risk-averse and you would rather pay more premium and not take a chance on paying out-of-pocket expenses, you would simply go with the richest plan.
• If you are moderately risk-averse, then you would take a chance and optimize your costs among the choice of plans.
• If you are offered a plan with 100% co-insurance and one with 80% coinsurance, then if you are expecting a planned medical eventsuch as an operation or childbirth, then you could simply take up the richer plan with 100% coinsurance and lower deductible likely.
• If you don’t have a planned medical event, however, you are under medication or need frequent doctor visits, then consider the less rich plan as long as their copays are not unreasonable compared to the richer plan relative to the price differential between the plans.
• If you don’t have a planned medical event and you don’t require frequent visits and are generally healthy, then consider taking the less rich plan.

To all of these, consider the HSA option and apply the tax benefit you are likely to get. HSA plans have a triple tax advantage for the employee. With federal income tax at 25%, State income tax at 5%, and FICA (payroll taxes) at 7.65%, there create a savings of $1,100 on a $3000 contribution into the HSA account. However, note that the HSA plan requires that the plan’s aggregate deductible be met entirely before the plan pays for services. So, if you are someone requiring frequent services or on a medication, the economics may not work out. However, if you have sufficient funds in the HSA account already, it can help to pay your out-of-pocket expenses.

Here is a fictitious empirical model with two plan choices.

• The richer plan has a $1000 deductible, 100% co-insurance, and a $20 copay for non-deductible services.
• The less rich plan has a $2000 deductible, 80% co-insurance, and a $25 copay for non-deductible services. The matrix here helps you to choose the right plan.
• Assume the premium price differential between the two is considerable. Say 20%.

Medical Plan Selection Matrix

The matrix considers both your premium and estimated out-of-pocket costs and makes a suggestion that may optimize your expected total cost. Please note the following is only suggestive based on general practices. Please use your own judgment to make your final decision.

1. Identity the intersecting row by relating you to Down Arrows 1 and 3
2. Pick the column on the center Arrow to locate a cell that contains your suggested plan.