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How Much Does a $20 Co-pay Really Cost?

C. Dean Richard, JD, MSBA

Many people are reluctant to let go of their high-priced health insurance plan because it has “low” co-pays for routine medical bills, such as Dr's visits and Rx drugs.  That raises a fair question: Just how much does it really cost to carry a policy with a co-pays for routine expenses? 

Let’s assume the co-pay is $20.  Our happily insured family sends one family member to the Doctor this month.  The cost?  “Just 20 bucks”.  That is what I will typically hear—that the Dr. visit “only cost me 20 bucks out of my pocket.”  But did it?

A closer look reveals a hidden secret fact—our happily insured family member forgot to include the amount of the premiums they have to pay every month to maintain that coverage!  After all, the total amount of money out of your pocket is just that—money out of your pocket. You have to count ALL of it!

A typical family today may easily be paying $700 (or more) in monthly premiums for that policy.  Let’s assume it is exactly $700 (a nice easy number).  Wouldn’t it then be more correct to state that the total out of pocket expense for the month was $730?  After all, you had to pay the $700 premium in order to have the “convenience” of a $20 co-pay.

What if that lone Dr's visit turned out to be the only medical expense incurred for the year?  Now, how much did that little Dr's visit cost?  The annual premium is $8,400. Add $20 for one Dr. visit.  My calculator tells me that our happy little client had one Dr. visit for the year that actually cost him/her a mere $8,430! 

But that example simplifies too much. Let's take a more realistic example. Given the same family and situation, how much would they pay for an HSA plan with a high deductible but with no co-pays? The answer will vary from state to state and depends on a variety of factors such as age, insurability, etc. For illustrative purposes, let's presume this family has opted to go with a 7,500 deductible HSA family plan with a monthly premium of $320.

The key is to compare the premiums on the co-plan with the HSA plan premiums. In this example, the difference is $380/month (700 minus 320 = 380). This is a much more accurate and realistic number. That's because the true "cost" of carrying a $20 co-pay in this example is the difference between the high premiums on the co-pay plan and the low premiums on the HSA plan that has no co-pays (by law). Here, it happens to be $380 a month, which means that the true net cost of carrying a $20 co-pay plan is $380/month, or $4,560/year. 

Seriously now friends, I hope you are beginning to see the absurdity of those goofy little co-pays.  (My favorite term for them-no offense intended.) The actual difference between the co-pay plan and the HSA plan will vary from case-to-case, but the principle remains the same: The insurance company is going to charge you a pretty penny for the privilege of being able to pay "only" $20 when you visit the Doctor (or buy a prescription, etc.).

Simply stated, the more risk you're willing to assume at point-of-purchase, the lower the insurance company can make the premiums! The key is what you actually do with the money you save in premiums. And that's where the HSA comes to the rescue, because Uncle Sam will actually pay you to save money in an HSA account!  

Wouldn’t you be much better off without any insurance at all?  Well, wouldn’t you? Of course you would—especially if you never had a hospital bill!  Without insurance, that Dr. visit would probably average about $70.  That’s it!  Your total medical expense for the year would literally be $70 if you had no insurance (and thus, no premiums to pay) and you only had one Dr. visit per year.

Of course, that approach is very risky today.  If you happen to end up in the hospital for just 3 days, you could easily incur expenses in excess of $21,000!  And it just gets worse from there.

People don’t buy insurance on their car that covers a $50 oil change, do they?  Why then are they so insistent to pay so much extra in premiums just to be able to “insure” a minor expense such as a Dr. visit or prescription for a small co-pay? 

Most people would be much better off following this simple, time tested formula:

If you can pay for it without insurance, don’t buy insurance for it.

When it comes to insuring your health, the formula is again very simple:

Buy a policy with a “high” deductible, and self-insure the “small stuff.”

That’s where the HSA concept makes so much sense.  With an HSA, you carry a “high” deductible for the big stuff and you self-insure the small stuff.  But there’s a catch—a good catch for once.  With an HSA plan, the U.S. Government is actually giving you a tax-break for saving money to self-insure those small bills!  In other words, you'd pay that $70 Dr.'s bill out of your HSA account, using money that otherwise you would have paid to the IRS in taxes! And yes, it is absolutely correct to say that Uncle Sam is subsidizing the first $1,500 or so of your medical bills every year with an HSA plan (based on full HSA contributions for a family in the 28% marginal tax bracket).   All things considered, the HSA will be your lowest cost alternative to traditional health insurance time after time (unless someone else is paying your premiums for you).

Thanks for reading!  I hope you enjoyed it.  Please feel free to email us with any questions.

C. Dean Richard

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