The Cost of Being Over-Insured


Forty-five thousand dollars is a conservative estimate of the 30-year opportunity cost of having family PPO1Preferred Provider Organization coverage instead of a high deductible health plan (HDHP).

According to the Kaiser Family Foundation (“Kaiser”), the average annual family premium for an 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 compounded savings are worth framing next to the $5,200 in out-of-pocket healthcare costs28-9 years worth of out-of-pocket costs in retirement a typical 65-year-old could expect to pay this year3according to a great new study from Vanguard and Mercer.

Of course, HDHPs have higher deductibles and copays, but for most people most of the time, not by much. Assume $950, or 50% of the difference in premiums, covers out-of-pocket costs due to higher cost-share. This also ignores the employer health savings account (HSA) contributions, which average $1,000 per year according to Kaiser. 

A current example drives the savings home. Today, a sample search for 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.

Those who tout the need for near first-dollar coverage, or rich plans, often say HDHPs lead to avoided care. A previous post discussed the pros and cons of higher deductibles. Skeptics forget that premium dollars are fixed and are gone once paid. Like diamonds, premiums are forever. Premium differences and HSA contributions tilt the game toward HDHPs. Token high achieving institutions 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 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. They may encourage too much utilization as well. It carries a cost, especially when money can be invested long-term in a triple tax-advantaged HSA. To drive waste out of the system, to give consumers skin in the game, to help boost shopping for care, and to reduce healthcare as a percentage of GDP in the United States, HDHPs and HSAs will grow.

Opportunity costs can be the mightiest of costs but also the most subtle; their full weight is rarely felt at any given moment. Being over-insured can be detrimental, especially toward our future selves. Insurance is meant to bring peace of mind and protect against ruin. We shouldn’t ask for more.

Disclosure: author has non-ACA coverage with a $5,000 deductible and no relationships or consulting agreements with any of the groups mentioned.

Photo by Ulises Baga on Unsplash

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