Question

Short Answer #1: Tally needs to choose between 2 health insurance plans. Assume Tally will use $3,500 worth of medical services next year. Is she better off choosing plan A or plan B? Explain and define each of the key terms.

Plan A:
i. Monthly premium: $250
ii. Co-pay: $0
iii. Co-insurance (after deductible): 15%
iv. Deductible: $1,500
v. Max out-of-pocket: $5,000

Plan B:
vi. Monthly premium: $125
vii. Co-pay: $0
viii. Co-insurance (after deductible): 25%
ix. Deductible: $2,000
x. Max out-of-pocket: $7,000

Answer 1

Answer:

Tally is better off choosing plan B

Explanation:

Assume Tally will use $3,500 worth of medical services next year:

If Tally chooses Plan A:

Total premium paid for the year = $250 *12 = $3,000

Deductible = $1,500

Co-Insurance = ($3,500 - $1,500) * 15% = $300

Amount Insurance company pays = ($3,500 - $1,500) *85% = $1,700

Total healthcare expense for the year including Insurance premium = Total Insurance Premium + Medical Expense - Insurance claim received

=$3,000 +$3,500 - $1,700 =$4,800

If Tally chooses Plan B:

Total premium paid for the year = $125 *12 = $1,500

Deductible = $2,000

Co-Insurance = ($3,500 - $2,000) * 20% = $300

Amount Insurance company pays = ($3,500 - $2,000) *80% = $1,200

Total healthcare expense for the year including Insurance premium = Total Insurance Premium + Medical Expense - Insurance claim received

=$1,500 +$3,500 - $1,700 =$3,300

As such Tally is better off choosing plan B

Key Terms:

Deductible: Deductible is the fixed amount the insured has to pay each year before insurance kicks in.

For example: Your deductible is $1,500.

If in a year you incur medical expense of say $3,500, you have to bear initial $1,500 before insurance kicks in. Your insurance company pays $2,000 (subject to co-insurance, if any). If for example in year medical expense incurred is $1,200, you have to bear the entire $1,200.

Co-insurance:

Co-Insurance is cost sharing of medical expense incurred. In the above example where you incur medical expense of $3,500 and your deductible is $1,500 and co-insurance is 20%, then amount you bear = $1,500 + $2,000 * 20% = $1,900 and amount insurance company will bear = ($3,500 - $1,500) * (1 - 20%) = $1,600.