That’s a conservative estimate of the 30 year opportunity cost of having family PPO coverage instead of a high deductible health plan (HDHP). Allow me to explain. According to Kaiser Family Foundation (“Kaiser”), the average annual family premium for a HDHP is $1,900 cheaper than a preferred provider plan (and has averaged $2,000 over the last seven years). Assuming a 3% real return per year invested over 30 years, and that half the $1,900 premium difference is invested each year, you get $45,000. The savings is worth framing next to the $5,200 in out-of-pocket healthcare costs a typical 65-year-old could expect to pay this year according to a great new study from Vanguard and Mercer.
Of course HDHPs have higher deductibles and copays, but not always by much. I assume $950, or 50% of the difference in premiums, covers out-of-pocket costs due to higher cost share. My assumptions also consider no employer health savings account (HSA) contributions, which average $1,000 per year according to Kaiser. A current example drives the savings home. Today I looked at Covered California marketplace plans: three platinum plans (where users pay 10% of the cost of care on average) compared to three very high deductible bronze (40% cost share) plans.
- Even with higher cost sharing, the bronze plans show total savings of 2%, or $600, assuming a family hits their out-of-pocket maximum, something only 5% of those with single coverage due in a typical plan.
- For the average family, the total out-of-pocket differences (premiums + deductibles + copays) are $3,000-$5,000, and of course even greater if someone has lower healthcare costs. So $950 per year is low.
Those who tout the need for near first-dollar coverage, or rich plans, often say HDHPs lead to avoided care. A previous post I wrote discussed whether HDHPs are good or bad. They forget that premium dollars are fixed and are gone once paid. Like diamonds, premiums are forever. They also forget that premium differences and HSA contributions tilt the game toward HDHPs. Places like Harvard have set up HDHPs to be the clear winners for over 90% of employees.
Richer plan designs with low cost sharing tend to benefit doctors, insurance companies, consultants, brokers, politicians, hospitals, and some users within a fairly narrow band of utilization, with high out-of-network claims or on specialty medications. People also use healthcare more that way. But it carries a cost, especially when money can be invested long-term in a tax-advantaged HSA. To drive waste out of the system, give consumers skin in the game, help boost shopping for care, and reduce healthcare as a percentage of GDP in the United States, HDHPs and HSAs will only grow.
Being over-insured can be detrimental, especially toward our future self. Opportunity costs can be the mightiest of costs but also the most silent because their full weight is rarely felt at any given moment. Insurance is meant to bring peace of mind and protect against ruin. We shouldn’t ask for more.