In 2014, everyone is now required to have health insurance or pay a penalty if they don’t have health insurance. Health Insurance marketplaces were established to aid individuals in purchasing insurance. These exchanges, when working properly, allows the individual to select insurance plans based on a variety of requirements. To better assist individuals in selecting which insurance to buy, plans were categorized into different buckets. Less expensive plans with higher out of pocket costs were labeled bronze plans. Plans that were slightly more expensive were labeled silver, then gold, then platinum (if your state allows that type of plan). In the press, there was much discussion on the detriments of bronze plans in comparison to their silver and gold categories. Looking at these bronze plans, it was easy to see why this was. Typically bronze plans cover next to nothing, have high deductibles and would result in large out of pocket expenses. However, if you looked closely at the different plans, you would see that bronze plans are actually more beneficial than silver or gold plans to the individual. This blog post will explain why bronze is better than gold.
Before we get into the nitty gritty details and mathematical calculations, it is important that we define a few terms as these terms will be referenced throughout this post. In determining costs of insurance plans comes down to the following four items:
Premiums: Premiums are the amounts paid monthly that allow you to receive the benefits of the insurance that has been purchased. Premiums do not count towards deductibles or out of pocket maximum. Premiums change based on a lot of factors, but in general the higher deductibles the plan has, the lower the premiums and vice versa.
Deductibles: Deductibles are the amounts that are required to be paid out of pocket before the insurance kicks in and covers a portion of the remaining expenses. For instance, if the plan has a $500 deductible, the person would need to pay 100% of expenses until those expenses get to the $500 threshold. If the plan has copays, then typically items subject to that copay do not count towards the deductible since those items are paid on a fixed fee amount.
Copays/Coinsurance: These are amounts that are prescribed by the insurance as the costs to the purchaser of the insurance on certain items. For instance, if you go to the doctor for a sick visit, you would pay a copay, which is a fixed amount and is the amount the purchaser is responsible for the services rendered. Co-insurance is a similar concept to copays except that it is a variable amount based upon a percentage. For instance, chiropractor visits may have a 20% coinsurance attached to them, meaning that the purchaser is responsible for 20% of the bill for the services rendered. Co-insurance may also come into play if the plan states that after the deductible is met, the purchaser is required to pay a co-insurance on any remaining medical expenses.
Out of Pocket Maximum: This is the most you can pay in medical expenses in a given year. The out of pocket maximum does not include any premiums.
All of that being said, lets get down to the numbers. For the example I am showing below, I am using the following assumptions. We are looking to buy insurance for a family consisting of two adults and one child. This family lives in suburban Chicago and has no major medical issues. This family’s income does not qualify it for federal subsidies. For comaparison purposes, we will compare a bronze and a gold PPO plan from the same insurance company that is found on the health insurance exchange for Illinois.
First, the bronze plan. The bronze plan will cost the family $355 per month. The bronze plan has a deductible of $6,000 for the individual and $12,700 for the family and an out of pocket maximum of $12,700 for the family. Any expenses after the deductible are fully covered by the insurance company (meaning a coinsurance of 0%). Copays do not apply for this plan and this plan is eligible for a health savings account.
The gold plan will cost the family $832 per month. The gold plan has a deductible of $3,250 for the individual and $9,750 for the family and an out of pocket maximum of $9,750 for the family. Any expenses after the deductible are fully covered by the insurance company (meaning a co-insurance of 0%). Copays are available for doctors and specialists visits. The plan is not eligible for a health savings account.
So, over a given year, which plan is more economical for the family? In looking at this, we will look at both a year in which the family has nominal health expenses (each family member just goes to see the doctor once for a sick visit) and a year in which the family has major medical expenses that causes them to meet the out of pocket maximum as a family.
Looking at the gold plan, out of the gate, the family must pay $9,984 in annual premiums just for the right to have this policy. In the good year, they pay a total of $90 in copays to visit the doctor. Therefore their total costs in the good year is $10,074. In the bad year, they meet their deductible and out of pocket maximum of $9,750, resulting in total expenses of $19,734.
The bronze plan must pay $4,260 in annual premiums for their right to have insurance. In the good year, their three sick visits will cost them $1,500 ($500 per person). Since the bronze plan does not use copays or coinsurance, the family must pay the full amount of the bill for these three sick visits. Therefore in the good year, the total cost would be $5,760. Similar to the gold plan, in the bad year, they meet their deductible and out of pocket maximum of $12,700, resulting in total expenses of $16,960.
Therefore in summary, here are the total expenditures in both the good years and the bad years for the bronze and gold plans.
As you can see from the above, the bronze plan is better in both the good and bad years. If you did comparison using individuals or large families, you would yield the same results. In addition, since the bronze plan is eligible for the health savings account (meaning that medical expenses can be paid out of the health savings account at pretax dollars), there is even greater savings in using the bronze plans.
So why did the bronze plans receive such bad press? Generally, news outlets and those opining on the plans failed to take into account premiums into their analysis. Most looked at the deductible and out of pocket limits and made assumptions based on that. Given the significant differences in premiums between the plans, that alone is the largest factor in what makes a plan more economical than the other. Olympians may prefer gold to bronze, but when it comes to health insurance plans, bronze is better than gold.