Surprising math on Obamacare levels: Go for the Bronze!

Submitted by brad on Thu, 2014-01-16 15:53

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Recently I learned from health.net, the insurer which did my individual plan, that they were canceling it. I'm one of those who lost his health plan with the switch to the ACA (Obamacare) plans, so I need to shop in the healthcare marketplace and will likely end up paying more.

What surprised me when I went to the marketplace was the math of the plans. For those who don't know, there are 4 main classes of plans (Bronze, Silver, Gold, Platinum) which are roughly the same for all insurers. There is also a 5th, "Catastrophic" plan available to under-30s and hardship cases, which is cheaper and covers even less than Bronze. Low income people get a great subsidized price in the marketplace, but people with decent incomes get no subsidy.

The 4 plans are designed so that for the average patient, they will end up paying 60% (Bronze), 70% (Silver), 80% (Gold) or 90% (Platinum) of health care costs, with the patient, on average, bearing the rest. All plans come with a "Maximum out of pocket" (MOOP) that is at most $6,350 for all plans but $4,000 (or less) for the Platinum.

Here's some analysis based on California prices and plans. The other states can vary a fair bit. Insurance is much cheaper in some regions, and there are plans that use moderately different formulae. In every state the MOOP is no more than $6,350 and the actuarial percentages are the same.

As you might expect, the Platinum costs a lot more than the Bronze. But at my age, in my early 50s, I was surprised how much more. I decided to plug in numbers for Blue Cross, which is actually slightly cheaper than many of the other plans. I actually have little information with which to compare the companies. This is quite odd -- my health insurance is going to be by biggest annual expenditure after my mortgage. More than my car -- but there's tons of information to help you choose a car. (Consumer Reports does have a comparison article on the major insurance companies before the ACA for their subscribers.)

The Platinum plan costs $350/month extra over Bronze, $4200/year. Almost as much as the MOOP. So I decided to build a spreadsheet that would show me what I would end up paying on each plan in total -- premiums plus my personal outlays. Here is the sheet for me in my early 50s:

The X axis is how much your health care actually cost, ie. what your providers were paid. The Y axis is how much you had to pay. The green line is unity, with your payout equal to the cost, as might happen in theory if you were uninsured. In theory, because in reality uninsured people pay a "list price" that is several times the cost that insurance companies negotiate. Also in theory because those uninsured must pay a tax penalty.

All the plans go up at one rate until they first hit your deductibles (Bronze/Silver) and then at a slower rate until you hit your MOOP. After the MOOP they are a flat line almost no matter what your health spending does. The Silver plan is the most complex. It has a $250 drug deductible and a $2000 general deductible and the usual $6,350 MOOP. In reality, these slopes will not be smooth lines. For example, on the silver plan if you are mostly doing doctor visits and labs, you do copays, not the deductible. If you hit something else, like MRI scans or hospitalization, you pay out the full cost until you hit the deductible. So each person's slope will be different, but these slopes are meant to represent an estimate for average patients.

The surprising thing about this chart is that the Bronze plan is pretty clearly superior. Only for a small region of costs does your outlay exceed the other plans, and never by much. However, in the most likely region for most people (modest health care) or the danger zone (lots of health care) it is quite a bit cheaper. The catastrophic plan, if you can get your hands on it over 30, is even better. It almost never does worse than the other plans.

I will note that the zone where Bronze is not the winner is around the $8,400 average cost of health care in the USA. However, what I really want to learn is the median cost, a statistic that is not readily available, or even better the median cost or distribution of costs at each age cohort. The actuaries obviously know this, and I would like pointers to a source.

Premiums are tax deductible for the self-employed, as are large medical expenses for all, but the outlays above premiums can also come from a Health Savings Account (HSA) which is a special IRA-like instrument. You put in up to around $3K each year tax-free, and can pay the costs above from it. (You also don't pay tax on appreciation of the account, and can draw out the money post-retirement at a decent rate.) If you are self-employed, depending on your tax bracket, this can seriously alter the chart and push you to a more expensive plan, because the premium money comes from pre-tax dollars and the health expenses don't, unless they are more than 10% of your total income.

The chart suggests the Bronze plan is the clear winner unless you know you will be in the $6K to $10K zone where it's a modest loser. It seems to beat the Platinum all the time (at least in this simplified model) but might have minor competition from the Silver. The Gold is essentially always worse than the Silver.

If we move to age 60, now the win for Bronze is very clear. At age 60, the $5500 extra premium for Platinum almost exceeds the MOOP on the Bronze -- the Bronze will always be cheaper. This makes no sense, and seems to be a result of the fact that the MOOP remains the same no matter how old you are (and is also the same for B/S/G/Cat.) Perhaps varying deductibles and the MOOP over time would have made more variety.

Here the Gold is clearly a loser to the Silver if you were thinking about it. Nobody in this age group should buy the Gold plan but I doubt the sites will say that. Platinum is almost as clearly a loss.

Thinking about money every time you use health care

With the choice for the older person so obvious, this opens up another question, namely one of psychology. The rational thing to do is to buy the Bronze plan. But with its $5,000 deductible, you will find yourself paying out of pocket for almost all your health care except in years you need major treatments and hospitalizations. This is very hard. You might go to the doctor with a sore ankle. "Let's do an MRI, just to see what we see," she says. This costs you a copay or perhaps nothing on an HMO. But consider the Bronze alternative: "By the way, that will cost you $800." Out of your pocket. All the exploration, the fancy drugs, the labs, coming out of your pocket. All the doctor visits after the first 3 (which are included) come from your pocket. Will you say to yourself, "I don't really feel that bad, do I want to spend $160 to ask the doctor about it?" If you bought the fancy plan with the $10 or $20 copay, you usually will ask. Should you do the $300 urgent care visit or wait 2 days to see if you can see your doctor on Monday for $150?" It seems without question that most people will moderately compromise their health if on this plan, even though the math says it's the cheaper choice even if you spend like crazy and do everything the doctors suggest.

As you get younger it gets more complex

I was surprised that the math on the plans, if not the psychology, gave such a clear result. I had presumed a different answer. I presumed the numbers would say, "Listen, if you are in great health, take the cheap plan. If you know you're going to the doctor a lot, take the higher end one." But if they really did say this, it would screw the insurance companies because most people can predict their pattern at the doctor. The big change of the ACA -- same price insurance for people with pre-existing conditions -- would be devastating to the insurers, with all the sick people taking premium plans and the healthy taking cheap plans, and people who learn about a chronic condition switching from cheap to expensive. But it's not nearly so clear.

Here are the sheets for some younger age groups. We can see at 45 that it's already a bit more complex:

Here we start to see some merit to the Platinum for those with pre-existing conditions.

Looking at a 30 year old, things have reversed. Silver seems the loser, though Bronze always wins if you are generally in good health. Platinum shows stronger attraction and Gold seems of limited merit.

25 year olds can also be covered on their parent's plans -- that's another big ACA change -- though they soon must get their own coverage.

It's much harder to tell here, though most 25 year olds are healthy and almost never go to the doctor and thus will retain the attraction of bronze or catastrophic.

The assumptions

The real chart is complex because all sorts of things have different billings. Outside the Bronze/Catastrophic plans, you use copays for doctor visits, x-rays, drugs and bloodwork, as well as ER visits. Hospitalization has a co-insurance, so you pay from 10% (Platinum) to 30% (Bronze) of hospitalizations and fancy services.

To smooth this out, I've assumed that until you hit your deductible, you are paying (either directly, or via co-pays) a certain percentage of the cost. That percentage I estimated (quite roughly) as 55% on Silver and 90% on Bronze. There is no deductible on Gold/Platinum.

From there up to your MOOP, I estimated insurance was paying 80% on platinum, 70% Silver, 65% Gold and 50% on Bronze, but only 5% on Catastrophic. Those numbers are just a bit below the total actuarial number of what a plan is supposed to pay the average patient. Each patient will be different. If you are doing mostly hospitalizations, the plan will be paying 70%, not 50%, for example.

That's why on the Silver and Bronze plots you see two kinks in the line -- one when the deductible is hit, the other when the MOOP is hit. I did not do much to account for the $250 drug deductible on the Silver plan. Truth is, if you get more than a couple of brand-name prescriptions a year, you will probably hit it and switch to the copays. Copays are all over the map. The $19 generic copay on all but the platinum plan may even exceed the negotiated cost of some generic drugs!

Variations in plans

Note these costs were for Blue Cross in Santa Clara County, California. There are a few other variations around with slightly different deductibles on the Bronze and built in HSAs. I did not include those.

The plans vary more from state to state. The main constant is the "actuarial goal" that says that averaged over all customers, the Bronze plan pays 60% of your costs and the Platinum plan 90%, and so on. The $6,350 MOOP is also standard nationwide as a cap, though some premium plans reduce it. However, in other states you will find Bronze plans with only a $3K deductible (NY) and Silver plans with a $3K deductible (RI) and even Platinum plans with higher deductibles, though the average is $350. (The average Platinum MOOP is also just $1850 nationwide, much lower than California's.)

You need to build your own sheet if you want to really examine a different state. You also need to do this if you are getting the subsidy/tax-credit for low income. With this subsidy, the higher end plans can become a real steal, at taxpayer expense.

Two person plans -- never

My analysis of 2 person family plans showed they are never a good idea. You should only take a family plan if you have a child to add as well. The reason is that the costs of the plans are summed, but so do the deductibles and MOOPs! So if you have two people, and one is healthy and the other hits the deductible or MOOP limits, you will pay a lot more.

Why is it so hard to shop for health care?

Why did I have to build this spreadsheet myself? With millions of people getting insurance outside the workplace, and spending $6,000 to $12,000 on health care per year, there should be a vibrant market of information. But I found very little.

It's also like pulling teeth to find out what you will actually pay for things if you choose the (financially wiser) high deductible plan. You get reports from your provider after things happen sometimes, and you learn the crazy immense difference between the "official rate" for a procedure and the "allowed rate" negotiated by the insurance companies. With Bronze, you will be paying that allowed rate, but good luck finding out what it is, because it's different for every insurance company and every medical firm. It used to be easier to shop online for drugs and find out the real consumer rate for them.

There should be a sheet where these numbers are found, and customers can go and say:

I see the doctor about 5 times a year, visit 2 specialists, have 1 x-ray and 3 bloodworks in a typical year. About every 3 years I get an MRI and every 10 years I have something serious like an ER visit or surgery. What will I end up paying under the different plans?

This should exist, but as everybody knows now, the roll-out of the marketplace was not the finest example of online site-building.

While nobody can be dead sure what they will use, and there's a big difference between one lab test and another and one hospitalization and another, right now we have almost nothing to go on except these averaged actuarial percentages. Those are hard to work from because a lot of the cost if from the most sick people, who all go far beyond their MOOP, raising the average for everybody. Just a single surgery can easily go past the MOOP on the lower plans.

Of course, when I lived in Canada it was vastly simpler, but my goal is not to open the debate comparing our system in Canada to the one in the USA. Politically that is not on the table for a while. Rather, I want there to be more information about what all these plans really mean and cost.

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