Understanding the Risks of Healthcare

I understand football—American style. In junior high, I could pop the pads with the best of them. After I sustained injuries in the ninth grade, though, football lost its appeal. Some mornings, I still wake up and remember the folly of my youth.

My grandsons play soccer, not football. This decision made by their parents illustrates one option in risk management—risk avoidance. Risk avoidance is when a person chooses not to do something because of the hazard involved. Risk retention, in contrast, would be the decision to play football in spite of the higher incidence of injury; the risk is retained. Risk sharing involves a transfer of liability for the risk. A person pays a premium to the insurance company, for example, to shift the financial risk from the person to the insurer.

Individual Responsibility

When a person purchases health insurance, then, that person shares with the insurance company the financial risk that accompanies illness or injury. When the insurer accepts the premium, the insurer is under contract to provide financial assistance according to the rules outlined in the policy documents.

In the last few years, federal mandates have changed the way health insurance functions. The economics of healthcare have changed.

The Milliman Medical Index (MMI) reports that healthcare costs increased 5.4 percent between 2013 and 2014. This is the smallest increase in more than 10 years. On average, a family of four with an employer-provided preferred provider health plan (PPO) had $23,215 in healthcare costs in 2014. In 2004, the sum was $11,192. This increase of 107 percent far outpaces inflation, which was about 25 percent for the same decade.

The MMI shows that in 2014 an employer provided $13,520 of annual healthcare expenditures—58 percent of the total. The employee paid 26 percent of the annual costs in medical premiums deducted from payroll and 16 percent in out-of-pocket expense paid at the time of service, a total of $9,695 for 2014.

Part of the change in the economics of healthcare involves an insurance company accepting less risk transfer and the person retaining more financial responsibility. Since 2007, according to the MMI, the cost of healthcare coverage has increased 52 percent for employers and 73 percent for employees.

Increases in medical premiums paid by the employee and higher deductibles and co-pays have shifted the financial burden toward the individual. One family I know, with all members in good health, paid about $13,000 in the past two years for premiums, deductibles, and co-pays. The insurance company paid about $3,800 in benefits. Clearly, more of the responsibility is retained by the individual in the health insurance programs being promoted these days.

Reallocation to the individual requires an increased understanding of healthcare economics to properly navigate the shifting tides. Knowing the details of the medical plan is necessary to optimize benefits and minimize liabilities. For example, individuals need to confirm that their healthcare providers participate in their medical plan. The individual must be assertive in the use of information. If a medical plan provides preventative care at no cost, for example, then the individual should confirm with the healthcare provider that it is coded correctly on the bill.

The insured should carefully read all documents provided by the insurance company to learn more about the medical plan. Likely, this will not be the most stimulating literature, but it may provide help in finding the most cost savings. Circle words or concepts you do not understand, then do additional research. Call the insurance company, or ask healthcare providers for an explanation.

My wife recently had a medical test for which the health insurance company negotiated a 45 percent decrease in the costs. But with more of the cost of healthcare being retained by the individual, there are times when individuals must advocate for themselves. We have a friend who needed a hip replacement. Her surgeon coached her on what to ask and who to speak with in his and the anesthesiologist’s offices, and at the hospital. Her final bill showed savings of more than 50 percent of the original estimate for care.

A medical doctor started Healthcare Bluebook to provide healthcare information in a way similar to what the Kelly Bluebook does for automobiles. One section of the website features information on how to approach doctors about the cost of medical procedures. This is useful information for those seeking to minimize the out-of-pocket expenses of healthcare.

New Rules

I do not fully understand soccer. The “pitch” is about the same size as a football field. In both sports, eleven players from each team are on the field at one time. Both games have an offside rule to keep the offensive unit functioning as a team. But I still fail to see when an offside occurs in soccer. I have had several people explain it to me, but I miss the call most times. I intend to keep going to youth soccer games, so I need to get a better grasp of the fine points of the game.

In a similar way, I must learn the nuances of the economics of healthcare. I recognize the field and players and I know the basic plays, but the new rules require my attention. This will benefit both my physical and financial health.

Originally published by Pensions & Benefits USA.