Back in the 1960’s, the average cost of an overnight hospital admission was around $100. Not coincidentally, most health insurance plans at the time set their deductible amounts somewhere between $0 and $100. Today, adjusting for geographical differences, PPO discounts, etc., an overnight stay in a hospital will run you between $1,700 – $2,500. According to the Kaiser Family Foundation (KFF), the average health insurance plan deductible in 2014 for an individual covered by employer based coverage was $1,214 (up from $826 in 2009). Smaller employers (fewer than 200 employees) tend to have higher deductibles (nearly $1,800); while larger employers lean toward lower deductibles ( $971). Clearly, there is a relationship between health insurance deductible amounts, and the average cost of an overnight hospitalization.
But hospitalizations are relatively rare in the greater scheme of health care delivery. Much more common are services/supplies such as physician office visits, diagnostic/x-ray/lab, prescription drugs, physical therapy, and chiropractic care. And with few exceptions, these health care products/services tend to cost less than $400, and in the case of generic drugs purchased at a grocery store pharmacy, as little as $4. Primary care office visits can be as low as $100; $75 for a visit to the physical therapist, and $40 for a chiropractic consult.
Let’s get back to the basics of what insurance is, and how it’s supposed to work. By definition, insurance is “a an arrangement by which a company or government agency provides a guarantee of compensation for specified loss, in return for payment of a premium”. By all means, health INSURANCE should be purchased and relied upon for the catastrophic…the unknown…the unaffordable. Examples include hospitalization, surgery, cancer treatments, home health care, or services that can add up to thousands, or even millions of dollars. Alternatively, the IRS has given us the following to use and fund for the less expensive, non-catastrophic, relatively affordable health care expenses:
Note: Previous posts have provided detailed overviews of these tax preferred spending arrangements. Suffice to say, they provide a more economical solution to the vexing issue of health care financing and payment.
So upon reflection, does it really make sense to purchase and rely solely on INSURANCE as the health care financing and payment mechanism for a $4 prescription drug; a $100 office visit; or a $40 chiropractic visit? The answer is not only a resounding – NO – but the answer is – “no, and here’s a better way”. And the “better way” involves none other than our friends…the Internal Revenue Service or IRS. Importantly – generally speaking, the higher the deductible, the lower the premium, making the higher deductible/spending account plan configuration a lower cost, and more economical health care financing solution.
(Note: according to the Mercer 2014 National Survey of Employer Sponsored Health Plans, high deductible/spending account plans are 18% less costly than traditional, PPO plans.)
In summary, the ideal health care financing solution consists of two (2) parts:
1. A high deductible health plan (generally costing less than traditional health plans); and
2. A tax preferred spending arrangement(s).
No. 1 is for the catastrophic, unaffordable, unknown; and no. 2 is for the known, affordable, and predictable expenses.