Let’s buy an insurance plan!
Now that we have some of the details of the Affordable Care Act out of the way, it’s time to take a deep dive into the insurance plans offered on exchanges. We’re going to do an analysis of all the potential costs and benefits for our hypothetical family and come down to a final decision on a plan for next year. We’ll be using the total cost calculator to assess our total out of pocket costs.
Our Example Family
Our test family is a typical group of mid-westerners: a husband, wife, and one young daughter (surprise! they sound a bit like the Grizzlies). Their adjusted gross income is $50k before an HSA contribution (close to what the Grizzlies will be showing in early retirement). They currently live in Johnson Co, KS.
Kansas chose not to build out its own exchange, so all are plans will be purchased through www.healthcare.gov. You can preview plans without submitting an application here. There are 17 plans available for our family: seven Bronze, six Silver, and four gold. The plans are provided by two different companies: Blue Cross and Blue Shield and Medica. We’re going to narrow the comparison down to six of the seventeen plans to make it a bit more manageable. Three HSA eligible plans and three in-eligible ones. Two plans from each tier.
Our Family is all healthy without any major disease management needs and conveniently their current doctor is in the network for the selected plans. For anyone who has different circumstances, the first step in narrowing down the list of options would be to look at those qualifications. But we’re mostly going to focus on costs for our test family. The six plans have the total costs curves shown below. HSA plans are dotted lines, non-HSA plans are solid.
Always get the Health Saving Account (HSA) Plan!
We’ll be getting a more in-depth look at HSAs later this week. But here is my first chance to point out how great they are, both as savings vehicles but also as a tool for reducing out of pocket costs. I’ll caveat this first by saying that everyone should look at their own marketplace and assess the details. But for our test family, the HSA plans are ALWAYS a no brainer. Here is a simplified version of the same chart with just the silver plans.
Under every cost scenario, the HSA plan dominates the non-HSA plan in total out of pocket costs. The HSA plan is ALWAYS the cheaper option. This is true across every coverage tier and at any level of healthcare usage. An HSA plan is a no-brainer for our family. Why is this?
There are two reasons. First and simplest, there are the direct tax savings. HSA’s are tax deductible and our family is sitting in the 15% tax bracket. They can contribute $6750 to their HSA, which leads to a direct tax savings of ~$1000.
Second and more interestingly, contributing to an HSA reduces our family’s adjusted gross income. Reducing adjusted gross income increases the premium tax credit subsidy, directly reducing the premiums charged for the plans. In this case, the subsidy increases by over $1000 per year. You can see this effect in the graph below. The HSA plan starts with a higher annual premium, $12,932 vs. $11,376. But after the tax savings of $1000 plus the additional $1000 subsidy, the total premium paid by our family is $3500 vs. $4000 for the plan without the HSA. The HSA plan starts out cheaper and the various other variables of the plan (deductions, out-of-pocket max, co-pays) never allow the other plan to catch up!
Bronze Plans are for healthy people, Gold plans are for fools
After we narrow our choice down to just the plans with just HSAs available out decision gets a little more complicated. The cost profiles of the plans are all a little bit different, with Gold and Silver plans being better at higher costs and bronze plans better at lower costs.
First, let’s tackle the gold plan. The gold plan is for fools who can’t do math properly. Under no possible scenario is the gold plan a better option than the silver plan for our family. Even under very high healthcare usage scenarios, the silver plan is the lower cost option. Do your own math with the plans available to you. But for our test family, the gold plan gets thrown out immediately.
The silver vs. bronze choice is more complicated. At higher usages, the silver plan is the lower cost option. Let’s look at the actual cost difference over the entire set of outcomes.
The starting cost difference is a $2800 advantage for the bronze plan. However, zero costs is unlikely. But the bronze plan stays at this level all the way to $5000 in total healthcare costs. Unless there is a major incident most families will stay below this mark. In the event of a major healthcare need, the silver plan gets a maximum advantage of $3700 before settling in at $1300 cheaper than the bronze plan in VERY high-cost scenarios.
For our family, the question of bronze vs. silver is simple. In most years, they will not need a significant amount of care – they’re pretty healthy and young after all. There is no reason to trade $2800 in almost guaranteed savings for a small chance to save $3700 or less. The bronze plan is the clear winner. They’ll pocket the cost difference in most years, and in the event of an unlikely health scare, they’ll still be confident they made the right choice.
Cost sharing subsidies
Cost sharing subsidies for applicable silver plans are included in all these numbers. Remember, if you enter your income correctly the marketplace will automatically show you silver plans with adjusted deductibles, co-pays, etc. that align with the correct cost sharing targets. The guideline for what % of costs silver plans should cover are shown below.
Our family of three falls in the 201-250% band of income. Every silver plan shown to them will on average cover about 73% of their costs. If they we’re earning under $40k (or had a way to get under $40k, i.e. IRA or HSA contributions) they would qualify for lower cost plans.
This is a very important point for those on the cusp between one tier and the next. If you can lower your MAGI through retirement contributions, HSA contributions, or reducing your income, you can qualify for significant reductions in cost for Silver Plans. This isn’t applicable for our test family, but it is an important point for those with a high degree of control over their final income (like early retirees or small business owners).
It’s also another point in favor of HSA plans. If you are near one of these breakpoints, make sure you make any comparisons between plans using your after HSA AGI to ensure you’re seeing the correct Silver Plan options.
- Plans that offer health savings accounts were superior in all circumstances to those that did not. This is a result of both tax savings AND increases subsidies due to lower adjusted gross income.
- The HSA gold plan available to our family was always worse than the silver plan. For any given level of care, the gold plan was more expensive.
- The Bronze plans made the most sense for our family. It would offer a better financial outcome in most years and the downside in years with high health care costs was not significant.
- Cost sharing subsidies can be significant and are important to keep in mind for purchasers near transition points between income tiers. Purchasers should take advantage of HSA or retirement contributions to reduce their AGI into the next lower cost tier.