The following question provides some practice calculating the AFPs for different
ID: 1169473 • Letter: T
Question
The following question provides some practice calculating the AFPs for different insurance policies. If the individual remains healthy (80% probability), she will consume $500 in medical care in the upcoming year. If the individual is afflicted by a moderate health condition (15% probability), she will consume $5000 in medical care. If the individual is afflicted with a serious condition (5% probability), she will consume $101,000 in medical care. Calculate the AFP for this person under each type of insurance described below.
a. An insurance policy with a $1000 deductible and no coinsurance (i.e. every dollar of HC spending beyond the $1000 deductible is fully covered by the insurance).
b. An insurance policy with a $1000 deductible and a coinsurance rate of 20%.
c. An insurance policy with a $1000 deductible, a coinsurance rate of 20%, and a catastrophic cap of $10,000.
Explanation / Answer
Ans:
Let me first try to clarify a few things. You often use the term "provider" in your question, and in the health insurance industry that word refers to a doctor, nurse, hospital or some other entity which actually "provides" the health care service to you. Based on the rest of your question, I think you are actually asking about how to evaluate insurance companies, not health care providers. If this is wrong, please clarify.
Unfortunately, there isn't a really easy way to evaluate your different insurance options because it's ultimately a decision about how much *risk* you are willing to take on. Everybody has a different answer to that question, and all I can do is try to explain the terms so you can make an educated decision.
You wanted to know about the total potential cost to yourself. These days, most insurance policies should have an annual "out of pocket limit." That amount is the maximum that you would have to pay in pretty much the worst case scenarioi. It includes the deductible, the co-pay, and the coinsurance. Once you reach that limit in a year, your insurance company should be paying for all your medical costs thereafter without billing you for any further charges.
But the vast majority of us aren't going to hit our out of pocket limit in any given year because we usually don't experience major illnesses or injuries requiring dramatic medical procedures (thankfully). So that's why we look at the other potential charges such as co-pay, deductible, and coinsurance. It seems like you understand co-pay and deductible, so I'll explain coinsurance.
Quite simply, coinsurance is a percentage of the medical cost that you are responsible for after you have paid the deductible. Suppose you have an insurance policy with a $1,000 deductible and a 20% coinsurance. If you see a doctor who charges you $2,000 her medical services, you will first pay $1,000 to use up the deductible and then you will pay 20% of the remaining amount before your insurance kicks in for the rest (in other words, an additional $200). Even after your deductible has been used up, you would still be paying 20% of all medical costs you incur.
But remember that your policy has an annual out of pocket limit, so eventually you would hit that limit and you would stop paying any coinsurance at all.
So how to evaluate the costs from your options? It depends on whether you think you'll need a doctor's services in that year or not. Typically an insurance policy with a low monthly premium will also have a high deductible and high coinsurance. By choosing such a plan, you are betting that you won't get sick in the upcoming year which means you would never have to pay any coinsurance and thus you've saved money. On the other hand, policies with high premiums tend to have low or even no coinsurance which means that when you actually go to utilize some medical services, your insurance company will pay a larger share of the bills. Generally, if somebody has a chronic condition like diabetes, I recommend that they choose a plan with very low or no coinsurance because they will probably save money in the long term.
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