Your Super Cheap Health Care Deductible Is Too Expensive

How to find the real cost of your health plan.

Adam Parsons
Apr 27 · 6 min read
(Image credit: University of Michigan)

For most of us, health insurance is somewhere between a persistent headache and a waking nightmare. From coverage to copays, deductibles to deadlines, the insurance industry has done a wonderful job of making people just throw up their hands in surrender.

What the insurance industry has also done is direct our focus to one number above all others: the deductible.

The deductible is the amount of money that you must pay before insurance starts covering your bills. Until you reach that level, you are responsible for 100% of the cost of your medical bills.

And that 100% responsibility is used to scare us into buying the plan with the lowest possible deduction. We think that it must be cheaper to have a $1,000 limit than a $6,000, especially when the premiums are only a few bucks cheaper.

As with most things, the direction we’re being pushed by a company is not necessarily the best option.

Impact of Deductible Level

I got married and had my first child within two years, so my insurance plan went from the simple, low cost, almost interchangeable plans offered to a single male to the complex, high cost, completely unique plans offered to families. The single plan didn’t have much cost variation, but man oh man, the family plans were all over the map.

The first few years on the family plan, I estimate that we paid more than $8,000 than we could have/should have, had we chosen a more affordable option.

Losing that money has led to me approaching the annual open enrollment period like I’m facing off with a mortal enemy. I have my Excel sheets already prepared, created out of years of trial and error. I am out to thwart the evil insurance companies by finding the absolute lowest cost health insurance possible that still covers what my family needs.

This level of analysis, which I have turned into my own personal holy war against Anthem and its ilk, may sound nerdy to some. And maybe it is. But I’m a white collar engineer, living in suburbia with his wife and kids. I’ve got to find something to battle against, and health insurance is my chosen foe.

After several years of working the math, one thing that I’ve found is that the plans with the lowest deductibles aren’t always the cheapest overall.

This got me curious about other plans, aside from the ones offered through my employer. To get some data, I went the ACA website and compared the plans available to the following people:

  • Single male, $25,000 salary
  • Single male, $69,000 salary
  • Married male, 2 kids under 18, $115,000 combined salaries

All three options came up with 35 plans, with the monthly premiums, annual deductibles, and out of pocket maximums listed. I put these numbers into a spreadsheet, created a scatterplot, and added trendlines. This is what I found.

All the charts show deductibles from smallest to largest, with the other data plotted accordingly.

(Note: I assume enough medical expenses to meet the annual out of pocket max.)

Single Male, Catastrophic Plans

For singles who have low income, they are allowed to buy “catastrophic” insurance, which is below the bronze level of ACA plans.

These plans provide the bare minimum of coverage.

The chart shows that there is no difference in deductible amount and overall annual cost.

Single Male, Metal Plans

As your income climbs higher, you are barred from the catastrophic plans and must purchase one of the “metal” plans mentioned above.

These plans provide more coverage for a higher price.

It is slight, but there is actually a decrease in overall annual cost as deductibles increase.

Married, Two Children, Metal Plans

Lastly, families have access to the same metal plans as singles do, albeit at a much higher price.

Similar and more significant than the single metal plans, overall annual cost decreases as deductibles increase.

The conclusion from all three of these data sets is that the deductible level has either no impact or is negatively correlated to overall annual cost, assuming enough medical expenses are incurred to meet your annual out of pocket maximum.

There are pros and cons to assuming the out of pocket max, and I discuss them in this article about health insurance. I use it because I like to follow the maxim of “hope for the best but prepare for the worst.”

What’s Driving the Cost?

If the deductible isn’t the main driver of health insurance cost, then what’s happening?You can start to see it in the charts above, but here are some more charts with annual cost from smallest to largest, just to make the picture clearer.

Single Male, Catastrophic Plans

For the catastrophic plans, premiums increase slightly to cover the decrease in deductible, but it’s really the out of pocket max that makes up the difference.

Single Male, Metal Plans

For the metal plans, the monthly premiums and out of pocket max increase at about the same rate to cover the decrease in deductible.

Married, Two Children, Metal Plans

Interestingly enough, the out of pocket stays about the same for the family metal plans.

The big difference difference is the annual premiums, which show a sharp increase as deductibles decrease.

These data sets show one thing that we’ve all probably thought but couldn’t really prove: The insurance companies don’t lose.

Why do you think Warren Buffet is so heavily invested in insurance? Let me tell you, it’s not because they’re feel-good companies. GEICO, General Re, and Berkshire Hathaway Re all provide Buffet the “float” that he uses to invest.

From his 2010 stockholder letter:

Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. …

Furthermore,

Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009.

What does this mean for you?

It means that you need to look at all the numbers, not just the deductible (or any other single number, for that matter). It’s never been technically easier to get the accurate information and make the best choice. The problem is that it has never been harder to separate that from the disinformation and marketing system that is clogging up your mental bandwidth.

For a straightforward, apples-to-apples analysis among health insurance plans, assume, like I did, that your health care costs will meet your deductible and out of pocket maximum for the year.

While there are always exceptions, your total annual costs equal the annual cost of the premiums plus the out of pocket maximum. You can ignore the deductible, since it already gets applied to the out of pocket max.

This article is for informational purposes only and should not be considered Financial or Legal Advice. Not all information may be accurate. Consult a financial professional before making any major financial decisions.

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Adam Parsons

Written by

Husband | Father | Engineer | Writer — Focused on how to get a little better every day.

Money. Daily.

Today’s money news, and what it means to you.

Adam Parsons

Written by

Husband | Father | Engineer | Writer — Focused on how to get a little better every day.

Money. Daily.

Today’s money news, and what it means to you.

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