Choosing a health plan during open enrollment

Most people compare health plans by premium, choose the cheapest, and discover the rest of the design in March.

The comparison that matters takes about an hour.

Start with total expected cost, not premium

Premium is what you pay whether or not you use care. Cost sharing is what you pay when you do.

The relevant figure is annual premium plus expected cost sharing, and it has to be calculated at more than one usage level.

Calculate three scenarios for each plan.

Low use. Premium plus a few office visits and prescriptions.

Expected use. Premium plus your realistic usage based on last year, including any ongoing conditions, medications and planned procedures.

Worst case. Premium plus the out-of-pocket maximum.

The third scenario is the one that reveals differences. A plan with a low premium and a high out-of-pocket maximum can be substantially worse in a bad year than one costing more per month.

The variables to compare

Annual premium, from the plan documents rather than from memory.

Deductible, individual and family, and whether it is aggregate or embedded.

Out-of-pocket maximum, individual and family, in-network and out-of-network.

Coinsurance percentage.

Copays for the services you actually use.

Whether the deductible applies before copays for office visits and prescriptions.

Network type and whether your providers participate.

Prescription formulary and the tier of your specific medications.

Whether referrals are required.

The prescription check

The most commonly skipped step and the most consequential for anyone on regular medication.

Look up each of your medications in each plan's formulary. Note the tier, the copay or coinsurance, whether prior authorization or step therapy applies, and whether there is a quantity limit.

The same drug can cost $15 on one plan and several hundred on another, or require an authorization process on one and not the other.

Specialty medications in particular can carry coinsurance rather than copays, which on an expensive drug is a very large number.

Also check whether the plan uses a copay accumulator or maximizer program, which affects whether manufacturer assistance counts toward your deductible.

The provider check

Verify each of your current providers in each plan's network — by calling, not by relying on the online directory.

Also check the hospitals. If you have a preferred hospital system, or if there is a specialty center you would want in a serious illness, confirm it is included.

Narrow network plans frequently exclude academic medical centers, which is a reasonable trade for a healthy person and a significant one otherwise.

High deductible plans and health savings accounts

A high deductible health plan meeting IRS criteria allows contributions to a health savings account.

The account has a distinctive tax treatment: contributions are generally deductible or made pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.

Funds roll over indefinitely, unlike flexible spending accounts, and the account belongs to you rather than the employer.

Many employers contribute to it, which should be counted as reducing the effective cost of the plan.

For someone with low expected medical use, the combination of a lower premium plus employer contribution plus tax advantages frequently makes this the lowest total cost option.

For someone with high ongoing costs, or without the cash flow to fund the deductible, it may not be.

Note that you cannot contribute to a health savings account if you have other disqualifying coverage, including a general purpose flexible spending account or certain other plans.

The situations that change the answer

A planned procedure or pregnancy. Model the cost specifically. A plan with higher premium and lower cost sharing frequently wins in a year with a known large expense.

An ongoing condition requiring regular specialist care and medication. The formulary and specialist copays dominate.

Family with children. Check how the family deductible works, since aggregate deductibles behave very differently from embedded ones.

Anticipating a life change — new job, marriage, a birth. Note that these are qualifying events allowing mid-year changes.

The subsidy consideration

For coverage purchased on the individual marketplace, premium tax credits depend on income and on the cost of the benchmark plan in your area.

Cost sharing reductions, which reduce deductibles and out-of-pocket maximums substantially, are available at certain income levels but only on silver-tier plans.

Which means someone eligible for cost sharing reductions may be much better off on a silver plan than on a bronze plan with a lower premium, because the silver plan's cost sharing is reduced dramatically.

This is counterintuitive and it changes the answer for a large number of people.

The practical method

Put the plans in a spreadsheet with the variables above.

Calculate the three scenarios for each.

Check prescriptions and providers.

Then choose based on total cost across scenarios and on which worst case you can actually absorb.

An hour, once a year, for a decision worth thousands.

General information about insurance concepts, not insurance, financial or tax advice. Plan designs, subsidy rules and account eligibility vary and change. Consult plan documents, a licensed advisor or a tax professional.