A Comparison of Health Insurance Cost / Benefit Using Latest Publicly Available Data

By James McLellan

Summary:

Health Insurance has, for me, been a very murky subject. I understand that I pay a certain amount every month and, in exchange, when I get sick, some portion of my medical expenses will be paid.

Each time I have looked for health insurance, I’ve desperately wanted some objective way to assess the value I was getting for my dollar. Merely deciding by the lowest price or the best reputation have both proven to be poor ways of making a health insurance decision.

Friends had often suggested that pocketing the money for a rainy day would be a better use of my money than paying health insurance premiums. In this paper, I take a stab at determining if this is true or not.

I also create an Excel worksheet that allows you to compare known health care costs and simulate what your health insurance package would or would not cover, and how well your benefits stack up to the premiums.

Method:

• I downloaded the 2007 Oregon State Healthcare Costs by Diagnosis-Related Group (DRG) data. I compared the number of incidents reported to the published 2007 population of Oregon to get health care usage as a percentage of the population.
  
• I also collected the 1996 Most Common Diagnoses and Procedures in U.S. Community Hospitals (located at: http://www.hcup-us.ahrq.gov/reports/natstats/commdx/table2j.htm). I also compared this to the 1996 US population to get health care usage as a percentage of the population.

Both tables are copied in summary and in full as an appendix to this article.

Findings:

• In 1996, there was a 1-in-1,000 chance of being in a hospital. The average visit cost $11,283.
  
• According to the 2007 Oregon data, there is 1-in-100 chance of requiring major health care. The average health care cost $22,280.
  
• The most expensive health care use from the Oregon data is $101,620. The number of cases recorded represents a 6-in-10million chance of developing this health care need.
  
• For sake of comparison, the chances of getting into a traffic collision are roughly 1-in-10 (ref: Wikipedia)

Conclusions:

Given a fairly low health insurance premium of $200 per month, a $0 deductible, and no co-pay, a person could bank the average expenditure per hospital stay in 10 years of savings. The same person could bank the maximum recorded cost in 42 years without interest, or in 25 years if earning a 5% annual return over the period.

Given a $2,000 deductible and the same premium, a person could bank the average expenditure in eight years. With a 20% copay 5-to-6 years of savings. Depending on your appetite for risk, forgoing insurance might be an acceptable alternative if you are very young, very healthy, and very dedicated to saving. In almost all other cases, health insurance is probably mitigates risk worth it’s cost.

What’s a good benefit versus cost for insurance then? Which health insurer should I choose?

Policies can be complicated with a deductibles, maximum payments, and co-pays. Using the Oregon cost data, I built a Microsoft Excel worksheet that allows you to enter a hypothetical health care benefit as a credit and premiums, co-pay, deductible, etc. as accounting debits, and then run the calculator.

You can use this cost data to simulate particular health care needs for you or your family and compare them to a premium or a premium offer.

The calculator is available here for download – http://www.mclellansys.com/articles/article007/healthins.xls

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