Health Plans vs Emergency Cash Savings

In light of the rapidly rising cost of health “coverage,” courtesy of Obamacare, I thought I’d offer a few thoughts comparing health plans with emergency cash savings.  To concretize things, let’s say a medical emergency costs $50,000.  A three-person household consisting of 43- and 41-year old parents and a 16-year-old child, a family with an $85,000 annual income in Collin County, Texas might select a Silver Plan from the ObamaMart that has a $681 monthly premium and that pays 70% of covered medical expenses after deductible and copays (this Plan has a $12,700 annual deductible with copays of $500 for ER and $250 for a hospital stay of any length, but let’s ignore these for this comparison.  On the other hand, let’s say the $50k medical event is a comprised of items that are covered under the Plan.  Also, it should be clear that, even though I’m positing a three-member family, the principles illustrated would apply to a family of any size, from a single person on up).

Health Plan Pros:

  • provides all the coverage it ever will with the first premium

Health Plan Cons:

  • only useable for the covered items
  • premiums paid are lost forever from the perspective of the family—they can’t be recalled and redirected
  • covers low probability, high cost events (under Obamacare, routine, minor expenses, like annual checkups, contraceptives, and so on also are covered; I’ll come back to that below)
  • guaranteed to cover only a fraction of the covered item(s)’ actual expenses—70% of them under this family’s Plan; under Obamacare generally, the per centage can go as low as 60%

Emergency Cash Savings Pros:

  • accumulates money to cover those same low probability, high cost events
  • usable for any expense, and there are no arguments over whether the item is a covered item
  • have chance of paying for 100% of the emergency expense
  • entirely under control of family doing the saving, including how the money is held or invested.  Also, the person doing the saving gets the proceeds of any investing plan, not a Plan provider

Emergency Cash Savings Cons:

  • must be accumulated before there’s enough money to cover the emergency/medical event

Now consider how Health Plan providers (and the insurers in the remaining insurance industry—life, property, etc—generally) make their money.  First they estimate the likelihood of a payout for a covered event (and their actuarial statisticians are very good), then they aggregate that over the number of customers they have for that event coverage, and they arrive at a premium that exactly covers the expected payouts.  That is, if their numbers are right, the collected premiums will exactly pay for the most likely total payouts in, say, a year’s time.  Then the insurers plus up the premium actually charged so as to cover additional costs like R&D, marketing, and so on, and a profit.  The result of this is that the Health Plan buyer (for instance) pays a bit higher premium than he’s expected to collect on the actual occurrence of the medical event(s) for which he bought the Plan.

It seems to me that, at least for a family that’s fundamentally healthy and doesn’t take too many risks with that health (e.g., they eat moderately well and they exercise moderately regularly), they’re better off funding their own Emergency Cash Savings fund.  The pros and cons above favor the ECS, if the family is willing to run the risk of having such an event before their fund is fully loaded.

But look at what’s expected of the family, if it buys the Plan described at the outset: it’s expected to pay to the provider $681 per month, month in and month out, year in and year out, even if the covered medical event(s) never happen.

It occurs to me that if the family can afford to make those payments, it can afford instead to sock them away in its own ECS, ultimately fully funding it.  Doing that, at essentially 0% return (e.g., sticking the money into a bank savings account or a money market fund), means the family will accumulate the $50,000 of the posited medical event in six years.  Oh, and in those six years, the 30% not paid by their Plan also is covered.  Just getting to the $35,000 paid by the Plan will take a skosh over four years.

Now, invest that at a nominal rate, seed it with some startup money, and the family’s ECS is accumulated much more quickly.  And will continue to grow.

Notice, too, that that fund, under the sole control of the family, is not limited to a medical event, or to any particular purpose.  It’s available, also, to repair/replace the roof that got nailed in one of those Texas hail storms.  Or it can be drawn on to replace the car that failed catastrophically.  Or….  You don’t have that flexibility with a Health Plan.  And the Plan costs the same.

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