Choosing a Health Plan: The Arithmetic That Decides It | HL Hunt
Choosing a Health Plan: The Arithmetic That Decides It
Plans are presented as a premium with a deductible underneath, which invites comparing premiums. The premium is the part you pay regardless, which is why it tells you least. Totalling two stylized plans puts the crossover at about $4,200 of billed cost, and their worst cases differ by only $980 in total but by $3,500 in the part that arrives unpredictably. That second figure, rather than any forecast of next year’s spending, is what actually decides which plan fits.
What you'll learn
Compare total cost, not premiums
Plans are presented as a monthly premium with a deductible underneath, which invites comparing the premiums. The premium is the only part you pay regardless, which is exactly why it is the least informative number. Per our pricing analysis, the figure to compare is always the total you end up paying rather than the component that is easiest to display.
Take two stylized plans:
| Plan | Premium | Annual premium | Deductible | Coinsurance | Out-of-pocket max |
|---|---|---|---|---|---|
| Low deductible | $520/mo | $6,240 | $1,000 | 20% | $4,000 |
| High deductible | $310/mo | $3,720 | $4,500 | 20% | $7,500 |
The high deductible plan starts $2,520 a year ahead. Now total both at different levels of billed cost:
| Billed cost for the year | Low deductible total | High deductible total | Better |
|---|---|---|---|
| $0 | $6,240 | $3,720 | High |
| $1,500 | $7,340 | $5,220 | High |
| $6,000 | $8,240 | $8,520 | Low, barely |
| $20,000 | $10,240 | $11,220 | Low |
Two things in that table are worth sitting with. First, the crossover is a single number you can compute for your own options in ten minutes, and it converts an argument into a threshold. Second, the maximum either plan can cost you is bounded and the two bounds are close together: $10,240 against $11,220. The choice is far less consequential than it feels, and it is usually agonized over more than the decisions below, which are not bounded at all.
Run the worst case, not the average
The average-year calculation is the one everyone does and the one that matters least, because an average year is affordable under either plan.
The question that decides the choice is: in a bad year, can you produce the out-of-pocket maximum?
- Low deductible plan: worst case is $6,240 of premiums plus $4,000, which is $10,240, of which $4,000 arrives unpredictably.
- High deductible plan: worst case is $3,720 plus $7,500, which is $11,220, of which $7,500 arrives unpredictably.
The totals differ by $980. The unpredictable portion differs by $3,500, and per our variance analysis that is the number that determines whether a bad year is manageable or not. Per our buffer analysis, a household without that amount available is choosing between a certain $2,520 of extra premium and an uncertain $3,500 it cannot produce. Per our triage analysis, that uncertain amount competes with every other obligation in the month it arrives.
Stated that way the decision is usually clear and it is not the one the spreadsheet gives. A household with the buffer should normally take the high deductible plan and bank the premium difference. A household without one is buying certainty, which is what insurance is for, and the extra premium is the price of it.
The calculation worth doing instead
For each plan, compute premium times twelve plus the out-of-pocket maximum. That is the most the year can cost you. Then ask which of those numbers you could actually produce if it happened, and when. The answer to that question selects the plan more reliably than any estimate of next year's medical spending, which nobody can make.
Pre-tax accounts and the trade inside them
Where a high deductible plan qualifies for a pre-tax savings account, the arithmetic changes in a specific way.
- Contributions reduce taxable income, so a dollar set aside costs less than a dollar, which per our compensation analysis is the same mechanism that makes pre-tax structuring worth attention generally.
- Funds in a health savings account roll forward and belong to you, which makes the premium saving recoverable rather than spent.
- A flexible spending account generally does not roll forward beyond limited carryover, so the amount elected should be the amount you are confident of using.
- The money has to exist to be contributed. Per our timing analysis the tax benefit is real and it arrives later than the contribution does.
The second and third items are frequently confused and have opposite implications. An account that rolls forward rewards contributing the maximum you can afford; one that does not rewards contributing only what you will certainly spend. Which one a plan offers is a fact to establish before electing anything.
The last item is the practical constraint that defeats the strategy. The optimal plan for a household with a buffer is the high deductible plan with the premium saving contributed to a rolling account. A household that takes the high deductible plan and does not contribute the saving has taken the exposure without buying the protection, which is the worst available position and a common one.
Deciding the plan and not deciding the saving
The $2,520 premium difference does not protect you unless it goes somewhere. If it is absorbed into ordinary spending, the household has accepted a $3,500 larger unpredictable exposure in exchange for nothing it can point to. Set the transfer up at the same time as the election, in the same session, because this is the step that gets intended and not done.
The details that change the answer
| Detail | Why it matters |
|---|---|
| Whether your providers are in network | Out-of-network costs can fall outside the out-of-pocket maximum entirely, which breaks the bounded-worst-case logic above |
| Whether the deductible is per person or per family | A family deductible and an embedded individual deductible produce very different worst cases |
| What is covered before the deductible | Many plans cover certain services first dollar, which shifts the crossover substantially |
| Prescription coverage structure | Frequently a separate tier structure with its own rules, and per our medical debt analysis unpaid balances here are treated differently from other debt |
| Employer contribution to the savings account | Changes the premium comparison directly and is often overlooked |
| Whether anything is already scheduled | A known procedure next year is the one case where you can predict spending, per our timing analysis |
The first row is the one that can invalidate the whole calculation. The bounded worst case assumes the out-of-pocket maximum actually caps your exposure, and it only caps in-network costs. Confirming that the providers you use are in network is worth more than any optimization of the plan choice itself.
The last row is the only legitimate use of a spending forecast. Estimating next year's medical costs is guesswork, except for what is already scheduled, which is not. If something is planned, the arithmetic above stops being about probabilities and becomes a straightforward comparison at a known figure.
Credit is what absorbs the gap you cannot fund
When a deductible arrives before the savings do, the terms available to you are set by your credit file rather than by the plan you chose. HL Hunt Personal Credit Builder reports a revolving account in your name every month, so the record that prices that gap is already established before you need it.
A decision sequence
- Confirm your providers are in network on every plan you are considering, before anything else.
- Write down premium times twelve plus the out-of-pocket maximum for each plan. That is the bounded worst case.
- Ask which of those amounts you could produce, and over what period.
- Compute the crossover in billed cost where the plans change places, so you know which side of it a normal year falls on.
- Add anything already scheduled to the expected figure, since that part is known rather than forecast.
- Check the employer contribution to any savings account, which adjusts the premium comparison directly.
- Set up the transfer of the premium difference in the same session as the election, not afterward.
- Note the deadline to change anything, because outside it the decision usually holds for the year regardless of circumstances.
Step seven is the one that converts the analysis into a result. Everything above it is a comparison, and a comparison that produces no transfer has changed the household's exposure without changing its resources.
Step eight is worth a diary entry. Per our notice analysis, enrollment windows are communicated by notices that assume they arrive, and missing one typically means the previous election carries forward whether or not it still fits.
Frequently asked questions
Total premium plus out-of-pocket cost at several spending levels. In the worked case the crossover is about $4,200 of billed cost.
The unpredictable part of the worst case. The totals differ by $980 but the unpredictable portion differs by $3,500, and that decides whether a bad year is survivable.
Choosing the high deductible plan and not banking the premium saving. That accepts the larger exposure in exchange for nothing, and it is common.
Out-of-network care, because the out-of-pocket maximum usually caps only in-network costs. Confirming your providers are in network matters more than the plan choice.
Key takeaways
- Total each plan at several spending levels rather than comparing premiums; in the worked case the crossover is about $4,200 of billed cost.
- Both plans have a bounded worst case and the two bounds are close: $10,240 against $11,220.
- The unpredictable portion differs by $3,500, and that is the figure that decides whether a bad year is manageable.
- A household with that amount available should normally take the high deductible plan; one without it is buying certainty, which is what insurance is for.
- Taking the high deductible plan without banking the premium saving accepts the larger exposure in exchange for nothing.
- An account that rolls forward rewards contributing the maximum; one that does not rewards contributing only what you will certainly spend.
- Out-of-network care can fall outside the out-of-pocket maximum, which breaks the bounded worst case entirely.
- The only medical spending you can forecast is what is already scheduled; everything else is guesswork.
This guide is educational and does not constitute medical, insurance, tax, or financial advice. All figures are stylized illustrations using assumed premiums, deductibles, coinsurance rates, and out-of-pocket maximums, and do not describe any actual plan. Plan structures, network rules, what applies before a deductible, out-of-pocket maximum scope, savings account eligibility, contribution limits, carryover rules, and enrollment deadlines vary by plan, by employer, and by jurisdiction and change annually. Read your own plan documents and consult your benefits administrator or a licensed adviser about your specific options.