The Smart Way to Shop for Health Insurance

A couple I know, who don’t want to be identified, claimed for years that they had great health insurance. They loved the fact that the plan had no premium charges and therefore didn’t cost them a dime upfront. “That works for us,” the wife said happily and often.

And the health plan did work for them, until the husband came down with a mysterious illness that baffled the doctors in his plan’s limited network. One physician whom the couple was counting on for a diagnosis spent months ordering costly tests and then said, “I’m sorry, there is nothing I can do for you.”

Without a referral to the right specialist, the husband ended up spending more than a year and a lot of money bouncing from one ineffective provider to another: from doctors, to chiropractors, to acupuncturists. He didn’t get diagnosed until he signed up for a better plan, with premium costs and a skilled physician who steered him to the right specialist at a major teaching hospital. The specialist knew immediately that he was suffering from inclusion body myositis (IBM), a rare autoimmune disease that leads to severe weakness of the arm and leg muscles.

“We wasted two years when I could have been getting treated,” the husband told me.

As that story illustrates, the most common mistake people make shopping for health insurance is focusing on the plans’ premiums rather than on the overall cost and quality of the insurance. It’s only logical that when insurers collect little or no money from customers up front through premiums, they look to control costs by reducing benefits and their provider networks. In the end, the plan’s limitations can cost you no limit of headaches and expenses.

Here’s what to do. When you shop for your next health plan, set aside the premium number and, instead, pin down the plan’s “actuarial value.”

Anything “actuarial” sounds complicated. But it’s just a fancy insider term for a critical piece of information you need: What percent of your medical expenses will your health plan actually pay?

Do you know what percent of your health plan’s standard stack of medical bills your insurer expects to pay? You should, because your insurer figures you’ll end up paying everything beyond that actuarial percentage. Does your insurer figure to cover 60 percent of your bills? If so, that will leave you with 40 percent of the costs. Or does the plan expect to cover 70 percent, 80 percent, or 90 percent?

Trust me, your insurer has very precise estimates for every plan it sells. The percentage your insurer expects to cover is your plan’s actuarial value—your best window into how much your insurance will shell out to cover your bills, and how much you’re likely to pay out of your own pocket. Most commonly, your plan’s actuarial value will be about 80 percent, which means experienced insurance executives calculate that the plan members—including you—are going to pay the remaining 20 percent. We’ll discuss more specifics about how to determine this actuarial value

The plan’s actuarial value is also a window into the premiums you’ll be asked to pay. The higher the actuarial value—therefore the more the insurer expects to pay—the higher your premiums will be. Somebody has to pay those doctor bills.

According to Lynn Quincy, a health reform expert at Consumers Union, the policy division of Consumer Reports, your insurance plan’s actuarial value reflects the plan’s “relative generosity.” The more “generous” the plan is, the less you’re likely to pay out of your pocket for medical services—but the higher your monthly premiums will be.

Keep in mind, at the end of the day, your insurer and you are going to pay the doctor bills. Therefore, assume that if your insurance company’s “generous” plan is covering a lot of your actual medical services, your insurer will demand more from you in monthly premiums. And vice versa. The less it collects from you up front, the lower the share of your health care bills the company expects to pay—after your copays or coinsurance for your medical services, as well as your annual off-the-top deductible.

Also, take an especially close look at your deductible. That’s the amount you must pay for medical services before your insurer kicks in a dime. Plans with low or no premiums almost always have high deductibles, often upward of $2,000 to $4,000. I’ve even heard of deductibles of up to $30,000.

In addition, low-premium plans can end up with coverage largely in name only—as the couple discovered when they needed a savvy specialist.

In many cases, the only care people get for their low premiums is preventive care. If they are lucky enough to stay healthy and out of the doctor’s office, not to mention the hospital, they might tell friends for years that they have great, affordable health insurance. But sooner or later, when many of those people get sick, they sadly realize that they are stuck with doctor bills that their insurance company won’t pay and the family can’t afford.

Around two-thirds of the people who are driven into bankruptcy each year because of medical bills have health insurance policies. But it’s “Swiss cheese insurance,” as Families USA executive director Ron Pollack called it: “The insurance is full of costly holes.”

On average each year, medical bills drive around 650,000 American households into bankruptcy—including around 400,000 families with health insurance who were often stunned to learn their plans did not cover their chemotherapy, diabetes, newborn child’s life-threatening illness, and countless other bad breaks.

The Obama administration claimed in an official filing that people with ACA coverage will “no longer face bankruptcy when they have health insurance.” That should be largely true—but only if you stay in your plan’s network of hospitals and doctors.

Before you go shopping for health insurance, try to calculate what your total medical bills might be next year. Start with last year’s total bills. Then think about whether you’re likely to need less care or more. Did you address any nagging health issues? Are you coughing because of a cold? Or have you been coughing for a month? What’s your blood pressure? Do you get short of breath? Dizzy?

Let’s assume you feel fine. Still add up to 33 percent to last year’s total as a cushion. Believe me, stuff happens.

With that projected total in mind, ask yourself what percent of it you could comfortably afford. If your bills might reach, say, $10,000, could you get along with an insurance plan that carries an actuarial value of 60, meaning that experienced insurance executives figure you might have to pay 40 percent of your doctor bills next year? That would be around $4,000 in copays, coinsurance, and that dreaded deductible. Plus your premiums, of course.

As a general rule, you should stay away from insurance plans with actuarial values as low as 60. Having to face 40 percent of any hospital bill would be a nightmare for most people. On the other hand, if your plan has an actuarial value approaching 90 percent, ask yourself if you can afford the plan’s inevitably high monthly premiums? You are looking for a balance. For most people, plans with actuarial values at around 70 to 80 percent offer reasonable coverage and affordable premiums after subsidies as well as manageable cost sharing.