When You Need Major Medical Insurance – and When You Don’t
Buying health insurance is no simple task. Even armed with the right knowledge, understanding the options available to you can be tough, especially if you’re new to the process or you don’t see a doctor very often anyway. Do you even need health insurance? Plenty of people get stuck on that very question. If you’re young, healthy and have no dependents to take care of, then you may be able to forgo health insurance – or bundle some standalone products together to create a different kind of insurance package. But not everyone has the luxury of skipping out on health insurance. From chronic medical problems to taking care of a family, there are valid and important reasons to buy major medical coverage each year.
Should you buy health insurance? That depends.
Even if you can justify avoiding health insurance, you may not come out ahead, for a couple of reasons. First, you may face an unexpected medical crisis – a broken back, for instance, or a cancer diagnosis – and without medical insurance, you could be on the hook for hundreds of thousands of dollars. Worst-case scenario? You might bankrupt yourself trying to cover your medical bills and still not get the adequate treatment that you need. Second, there’s an individual mandate in place under the Affordable Care Act (ACA or Obamacare) requiring most people to have qualifying health insurance. If you don’t, then you’ll face a penalty fee for not complying with the law.
The mandate has been in effect since the start of Obamacare, but people still seem to be confused about what it means. We explore the individual mandate in more detail in another article. Here, we want to talk about the price tag of this key ACA provision and how it might factor in when you’re deciding whether to buy major medical insurance or not. For some, skipping health insurance and paying the fine can be more economical. For others, affordable – if somewhat basic – plans are available that cost just as much as the fine. Let’s crunch the numbers on the individual mandate.
Note: We’re using the individual mandate penalty calculator and the subsidy calculator developed by the Kaiser Family Foundation for our estimates. For consistency’s sake, our example customers live in Ringgold, Georgia, a small town at the top of that state. Georgia ranks third among the states with the highest spike in premiums for 2018. We’re also assuming that our example customers cannot get coverage through work.
Health insurance makes sense for some.
Example 1: Kevin, a single man with no dependents and a pre-existing condition
Kevin is in his mid-30s, lives alone and has no dependents. He earns about $45,000 a year. Kevin has diabetes and has to take several medications each month. He also visits his doctor regularly for screenings, checkups and lab work. Here’s how the individual mandate stacks up against the lowest-cost health insurance plan on the marketplace for Kevin:
- Individual mandate: The penalty fee for not having health insurance in 2017 is the greater of 2.5 percent of a person’s taxable household income, or a flat $695 fee per adult. Kevin’s taxable income ($45,000 – $10,400 [tax threshold for individuals]) is about $34,600. If you multiply that figure by 2.5 percent, you get $865. Since $865 is higher than the flat fee amount, Kevin would owe $865 when he files his taxes if he didn’t buy health insurance. That’s about $72 a month (if it were paid monthly), and he doesn’t benefit from that payment. He would have to cover all of his medical costs on his own.
- Health insurance: Kevin’s income puts him at about 373 percent of the federal poverty level. He earns too much for cost-sharing reductions, but he’s still within the limits for regular tax credits to bring down his premiums. The lowest-priced plan in Kevin’s area would cost him $194 a month after his tax credit. But because Kevin needs more medical care than a bronze plan would cover, he’s more likely to get a silver or even gold plan. In that case, his cost would jump to about $359 a month after subsidies for silver-level coverage.
Even though it seems like Kevin could save money during the year by not having major medical coverage, he should still buy a plan. He’s got a chronic health problem (a pre-existing condition), and he’ll need more care as he gets older. Five years ago, people with diabetes required nearly $14,000 a year in medical care. Costs rarely go down in the medical world. Obamacare places a cap on how much people with health insurance have to spend out of pocket on medical costs. In 2018, that’s $7,350 a year for an individual with a silver plan.
Between monthly premiums (which don’t count toward the annual cap on expenses) and various out-of-pocket costs up to that maximum, Kevin might end up paying over $11,000 for the year for healthcare. But in that same year, he would have gotten the care that he needed and actually saved money over what a person with diabetes typically costs. If he didn’t have health insurance, he might forgo doctor’s visits, skip prescriptions and develop more problems in the future.
The example of Kevin isn’t even an extreme one, since he’s a single guy without any kids and just one health problem. Imagine if he had kids, a spouse, less income or more than one medical issue – as is the case for millions of Americans. Many low-income individuals, too, should invest in health insurance. In some cases, the lowest-priced bronze plan on the exchange could cost substantially less than paying the penalty fee for the year, and you’d have coverage if you needed it. Health insurance makes sense from practical and economic standpoints in these scenarios.
Paying the fine might work out better for some.
Example 2: Kevin’s twin sister, Stacy, who also has no dependents but doesn’t have a pre-existing condition.
Stacy, like Kevin, is in her 30s and lives alone. She works in a similar field but earns substantially less than her brother – about $35,000 a year compared to his $45,000 salary. Men earn a great deal more than women, on average, in the counties that surround Ringgold, Georgia. Unlike her twin brother, Stacy does not have any health problems, and she rarely sees a doctor. Here’s what the cost of the mandate vs. health insurance might look like for Stacy:
- Individual mandate: Using the same information that we used for Kevin, we can calculate Stacy’s taxable income ($35,000 – $10,400 [tax threshold for individuals]) to be about $24,600. If you multiply that by 2.5 percent, you get $615. Since that’s less than the flat fee of $695, Stacy would pay the flat fee rate for not having health insurance. That divides out to about $58 a month.
- Health insurance: Stacy’s income puts her at about 290 percent of the federal poverty level. The cutoff for cost-sharing subsidies is 250 percent, but she does still qualify for regular tax credits, like her brother. In Stacy’s case, tax credits would reduce her premiums for the lowest-priced plan in her area to about $106 a month. That’s nearly twice what she would pay for the individual mandate penalty. And unlike Kevin, Stacy has no medical problems and doesn’t need extensive coverage. If she wanted to join a silver plan, she’d have to pay about $270 a month after subsidies.
Premiums aren’t the only cost that Stacy would have to cover during the year. Until she met her deductible – which averages to over $5,700 for a bronze plan in 2018 – she would have to cover most medical expenses herself. Once she met the deductible, she’d still be responsible for out-of-pocket costs. Unlike her brother, Stacy probably won’t meet her out-of-pocket cap for the year because she hardly sees a doctor for anything other than preventive care.
She would be paying high monthly premiums (as a portion of her income) and have to meet an absurdly high deductible to benefit from major medical insurance. In Stacy’s case, paying the fine and getting a bundle of ancillary products or a short-term policy instead would make more economical and practical sense.
Who else might be able to get away with not having health insurance? Generally, this approach only works for people with few or no medical problems who are young and don’t have dependents to take care of. But families might also forgo major medical coverage, at least for the adults, if their kids qualify for the Children’s Health Insurance Program (CHIP). All states have this program to some degree. In Georgia, for example, kids can qualify for the CHIP program if their families earn too much for Medicaid but fall within certain low income parameters.
On the opposite end of the spectrum, a person who earns too much for subsidies but can’t afford major medical insurance could afford to pay the fine, buy short-term policies or standalone ancillary products, and probably come out ahead barring any life-changing medical disasters.
So, do you need major medical or not?
The answer depends on a few things, namely your health, your income and your comfort level with assuming certain types of risk. It’s risky to go uninsured, especially if you’ve got family history of health problems or are getting older. Accidents, too, can happen to anyone at any age. In fact, they’re the fourth leading cause of death overall in the U.S. (number one for ages 1 to 44). Cancer is number two. You can’t predict what will happen from year to year with your health.
But if you’re reasonably sure that you don’t need coverage – or you simply can’t afford the premiums even with subsidies – then you may be able to forgo health insurance, buy cheaper non-major medical policies instead (for “what-if” scenarios) and pay the individual mandate penalty. If you want to see the numbers for your specific situation, check out the calculators linked above on the Kaiser Family Foundation website. And if you need help sorting through your options, talk to a licensed health insurance agent today for more information.