How to Assess Value of Health Plans

Whenever you’re about to make a major purchase, financial experts will suggest a cost/benefit analysis--a fancy term for figuring out whether what you’re buying is worth the amount you have to pay.

Nowhere is a cost/benefit analysis more advisable than when you’re choosing between health care plans.

“A lot of people will spend hours figuring out whether they should buy a car or a dishwasher, but they don’t do anything when they’re faced with a health care choice,” said Colleen Murphy, associate at William M. Mercer Inc. in Los Angeles. “Over time, health care is going to cost you a lot more than a dishwasher.”

How do you do the cost/benefit analysis?

First, consider your health care history. Pull out all of your medical bills. How much did you spend on doctors last year? Did you have hospital visits, prescription drugs, drug or alcohol dependency treatments? Is your health care utilization likely to be similar next year?

The second step involves introspection. What do you want and need a health care provider to provide? Do you have children who have frequent checkups? Do you have any existing medical conditions? Are there congenital ailments in your family? Are you at high risk for a serious communicable disease, such as AIDS or hepatitis?

What are your plans? Do you want to have children soon? Are there medical procedures that you need that you’ve put off, such as a tonsillectomy or having moles removed? How important are your current doctors and hospitals? Is there a particular doctor, specialist or pediatrician whom you can’t imagine giving up?

Finally, plot out your health care options. Chances are you’ll be given at least two or three. A good way to do this is set up a grid with horizontal columns for each option, such as indemnity plan, health maintenance organization (HMO), preferred provider organization (PPO), or whatever you’ve been offered.

Under each plan name, list the main cost provisions. For instance, in the indemnity column you might have: $300 deductible; 20% co-payment; 20% co-payment for prescription drugs.

Under your HMO option, you could list: $0 deductible; $5 doctor’s visit; $20 hospital stay; $5 per prescription. No reimbursement for non-plan doctors.

The PPO column might read: $100 deductible; 10% co-payment for plan doctors; 40% co-payment for non-plan doctors; $10 per prescription.

Now start plotting in your historic health care expenses, noting what the cost would be under each plan. A $50 doctor’s visit, for example would be listed with a $10 cost in the indemnity plan column; $5 in the PPO column and $5 under HMO.

If you have a particular doctor that you can’t imagine leaving, also account for visits to that doctor at the lower (or nonexistent) reimbursement rates you’d get in an HMO or PPO.

For instance, your $110 office visit to Dr. X would cost $22 in the indemnity column; $110 in the HMO column and $44 in the PPO column, assuming this doctor isn’t a member of the HMO or PPO.

Exclude extraordinary expenses that you don’t expect to be repeated, such as an appendectomy. But don’t cut out expenses that are possible, but unplanned.

For instance, a young couple may want to include maternity expenses even if they don’t plan to have another child that year. Why? Your plans could change before the health program comes up for renewal.

When you’re all done, add up the numbers in each column to compute your medical costs. Then add in the annual cost--if any--of your co-insurance payments.

For instance, your employer may charge you $100 a month to be covered under the indemnity plan, $50 a month for the PPO and $50 a month for the HMO. Add $1,200 to your indemnity total ($100 times 12 months), or $600 to the PPO and HMO totals.

Now compare expenses. Chances are that your indemnity option is going to be the most expensive. The question you have to answer is whether it’s worth the additional expense.

To help determine that, figure out how much money you earn per hour. If you are a salaried worker, divide your weekly wage by the average number of hours you work. Let’s say you earn $1,000 a week, but you typically work 50-hour weeks. Your hourly wage is $20.

Now look at the cost differentials under the various health care choices as hours you must spend at work. Are you willing to work an extra 12 hours a year--miss one family dinner a month--if the indemnity plan costs $240 more a year? Maybe.

What if the annual differential is $2,400? Are you willing to work an extra 120 hours, miss an extra 10 dinners a month, 120 in the year? Maybe not.