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Avoiding the Minefield of Health Insurance By Stephen J. Butler

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Back in the seventies, when Marin County California represented "ground zero" of the emerging world of the Yuppie, a common phenomenon in emergency rooms on weekend nights was something called "French bread thumb." This was the self-inflicted injury caused by hostesses who, after a few glasses of wine and distracted by conversation, managed to seriously cut their thumbs while slicing French bread. Today, like Martha Stewart products at K-Mart, this injury has spread like the plague across America. This culinary Grim Reaper even visited my own home a few months ago, and my wife and I spent an evening in the emergency room of a local hospital in what turned out to be a successful $750 effort to save her thumb. The experience prompted me, for the first time in several years, to get "up close and personal" with my group health insurance coverage.

Medical insurance premiums will have risen by about 40% over two years after many years of relatively flat rates. The reasons are varied and complex with no simple solutions in sight. The bottom line is that employees are being asked to pay more out of their own pockets for coverage. This adversely impacts spend-able income and should prompt us all to review our options.

In one of my favorite books, "Why Smart People Make Big Money Mistakes," the exploration of behavioral economics asks and then explains the question of why we are attracted to low deductibles on our insurance policies. We basically don't like uncertainty. We will spend a set amount of money to avoid a possible larger amount of loss ...even if the odds of the latter are very low.

The problem with this mindset is that it conflicts with a basic rule of insurance: "It never pays to insure something that we can afford to pay for ourselves." When we insure against relatively small claims, we are just trading dollars with an insurance company. As much as 35% of our premiums will disappear in administration costs. In the aggregate, we as a group can never expect to see this portion of our premiums returning to us for claims payments.

The average employee, asked to pay all or a portion of the increase, should be exploring other alternatives. The health insurance industry is meeting the increases with more creativity as they offer plans with a variety of deductibles. Employers should not hesitate to offer these options to employees who can choose lower premiums in return for self-insuring their smaller, every-day claims.

To use a specific example, there is a California group health insurance program for companies with less than 50 employees which offers a broad spectrum of individual choices for employees. At many companies, employees are expected to pay the entire cost of dependent coverage. In this situation, an employee who selects a $1,000 deductible for family coverage versus a $250 deductible saves about $300 per month in premiums or $3,600 per year.

To the extent that families do have routine smaller claims, they can pay for them with pre-tax dollars if they fund an employer-sponsored Section 125 Flexible Spending plan. The actual cost, then, of an uninsured medical expense, if paid with these pre-tax dollars, is effectively reduced by 45% if we total up the federal, state, and social security taxes on the last few dollars of the average family income. Remember, money we contribute to fund these accounts artificially reduces income for tax calculation purposes. The taxes saved are those that would have been charged on the last few dollars of income ... the highest rate we pay. Any family adjusted gross income over $45,000 is taxed at roughly 45% when we combine all three basic tax categories.

In a more draconian move, some employees may be better off insuring their families using individual policies with really high deductibles. A $2,500-deductible plan for a child offered by Blue Cross can cost less that $30 per month. (Check prices at www.ehealthinsurance.com.) The advantage of this approach is that the plan stays in place regardless of the parents' employment situation. All too often, an employee changing jobs while a dependent has a health problem will be stuck having to pay COBRA premiums to the old health plan after leaving work if the new job's benefits do not offer guaranteed coverage to family members. The term COBRA refers to a former employee's right to continue paying premiums to preserve health coverage. However, this means paying ALL of the premium with no employer contribution. It is prohibitively expensive for most families, and far too many elect to play health insurance roulette with no coverage between jobs.

A careful review of health insurance options, then, should take into consideration our ability to self-insure larger portions by identifying where the money to do so might come from. There are credit cards, savings, 401(k) accounts (with loan provisions,) and a variety of other resources for paying hospital bills up to some reasonable stop-loss amount. Most of us can afford higher deductibles. If we choose a program that saves some premium dollars, we should consider contributing what we save into a Section 125 Flexible Spending account and/or a 401(k) plan. This will enable us to avoid paying taxes on these savings, and we will be creating a sinking fund for expenses that may never materialize.

Statistically, this approach will generate more money for retirement. We are "paying ourselves" at least what the insurance industry charges for administration.

Don't count on rates coming down anytime soon. The greatest influence on insurance rates is the return on bonds. During some periods, insurance companies that can invest premiums profitably can keep costs below what their claims actually are in some years. In recent years, however, bond interest rates have dropped to next to nothing, so that feeding trough has dried up. The only alternative is higher premiums. Our medical insurance and delivery system is a mess at the moment, but a judicious application of self insurance can help us do an end run around at least some of the quagmire.

And finally, those of us who elect a higher deductible may be inclined to be more health conscious and even less accident-prone. Embracing the "fitness lifestyle" because we have an immediate financial incentive could lead to more money and better health at retirement someday. For my part, I'm aware that 90% of all accidents occur in the home. I don't run with scissors, and I use knives more carefully when I recall how quickly we blew through $750 with an emergency room visit and few stitches.