I was recently reviewing two health plans which I could join. One was a typical HMO-type plan and the other a high deductible plan. High deductible plans have been pushed pretty heavily lately, what with the focus on rising health care costs, the recent legislation, etc. I don’t want to jump into the fray on the political aspects, but I do want to share with you an observation on being risk adverse.
The way that a high deductible plan keeps premiums down is by requiring the policy holder to pay everything out of pocket until you reach some limit. For that reason, high deductible plans are often called catastrophic coverage plans, since they only become helpful if you incur massive costs. In exchange, you pay very low premiums. And that’s because you get very little benefit most of the time. These plans, from everything I’ve read online, are great for young and healthy people, but not so good (obviously) for people with chronic conditions or families.
I am married and have two kids, but I was willing to run the numbers and look at the odds to see whether I should go with a traditional plan or a high deductible plan. First you have the premiums to pay. If you use no care than a high deductible plan beats a traditional plan hands down in premiums. The rest is an odds game. How many times will you have to visit the doctor? How many prescriptions will you need? What are your odds of having a catastrophic illness? For a traditional plan, each one of these events costs you just a copay – typically $20. For a high deductible plan, you have to pay the full amount until you reach the yearly limit. (Never mind the fact that if you have a chronic condition you’ll reach that limit year after year after year).
Because I’m a data person, I happen to have tons of data on how often we visit the doctor and my current insurer was kind enough to send me a complete history of all charges so I had a reasonable idea of what various things would cost me. Then, I built two models, one using a traditional plan and the other using a high deductible plan.
Guess what, in the end, odds were that even with my family (and we make our fair share of doctor visits), I’d likely pay less with the high deductible plan than with a traditional plan. It wasn’t true in every situation, the potential cost to me of the high deductible plan overlaps with the potential costs of the traditional plan, but the premiums for a traditional plan are so much higher that it was difficult to overcome them.
But, there was something else I observed. Not only did my models calculate the average result, but they also calculated the range of possible results. And not surprisingly, the high deductible plan had a much, much higher standard deviation. This isn’t surprising, since each medical event in a high deductible plan costs a lot more, and so the variability in the result is potentially much greater.
Ultimately, that’s why I stuck with a traditional plan. Yes, I’m very likely to pay more, but the result is predictable, and I like predictable outcomes. (I also like not having to concern myself with whether its worthwhile to go to the doctor). If you’re a risk adverse person, and if studies about investing are to be believed you are more risk adverse than you think you are, then a traditional plan produces a more comfortable financial result. It’s like buying bonds instead of stocks. You may not come out way ahead, but it’s much more unlikely that you’ll come out far behind.
Consider that when designing a process as well. Consistency is important. You can end up with a software development process that sometimes produces perfect code, but sometimes produces awful code, or you could have a process which produces consistently average code. Which one is easier to deal with for continuous improvement?