UPDATED: Aug 10, 2017
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For the young and healthy in the United States, health insurance has become an absolute rip-off, and it is only getting worse.
Individuals that elect to forgo health insurance on the open market from ages 21-30 and instead invest what would be their premium payments will, in most cases, come out financially ahead.
Before diving too far in, let me preface the article by saying the following has nothing to do with moral responsibility, ethics, politics, or the greater good. It is simply based on math and how the health care landscape of today impacts many individuals.
Additionally, in the illustrations below I talk about the insurance company “not paying a dime” before deductibles are met. In some cases, an insurance company may pay for part of a routine office visit (or other minor costs) prior to the deductible being reached. These are usually small costs in the grand scheme of things, and do not have much of an impact on the overall outcome illustrated.
I will begin with a bit of my personal story, which demonstrates how I came to start this research. It also paints a picture of the scenario many individuals and families are finding themselves in.
I am 30 years old, married and the father of two young children. In January, our health insurance premiums nearly doubled for basically the same coverage. For my family of four, our annual premium cost is just south of $10,000.
Let me reiterate this – If no one in my family sets foot in a health care facility all year, our cost will be $10,000.
That makes health insurance premiums the second largest expense behind our home. We spend more on health insurance than gas and food combined.
Our deductible is $1,500 per person or $3,000 for the family. Our coinsurance is 30% and our annual maximum out-of-pocket cost is $12,700 for four of us.
So for all intents and purposes, in the best case scenario we are on the hook for $11,500 per year before the insurance company pays a dime (premiums plus one person’s deductible). Worst case scenario, our cost could reach $22,700.
I laid all these numbers out in a spreadsheet and starting running scenarios.
- What happens in a year when everyone is healthy?
- What happens if there is a major health incident with one of the kids?
- What if we have a baby?
The real kicker came when I started thinking about the likelihood of these scenarios actually happening. I began digging around through any statistics I could get my hands on, and what I found was alarming.
The vast majority of young individuals create next-to-nothing in health care costs, but are now required to foot a large part of the bill for everyone else.
I have to admit, finding the right statistics to calculate the answers I was in search of was difficult. It seems every study about health insurance costs comes up with slightly different averages, but for the most part the trend is obvious. Higher costs for the young and healthy.
21 years old
According to a study done by Sector & Sovereign, a 21 year old male will pay on average $261 a month for a new health care plan on the open market with a $3,649 deductible.
$261 * 12 months = $3,132 per year.
$3,132 + $3,649 deductible = $6,781 before insurance pays anything.
So why does this matter?
Because according to US Census data, from 2007 to 2009 the average person under the age of 25 years old spent $167 on medical services per year. Of course this data is a few years old, so let’s nearly triple it to account for increases in medical costs over the past 5 years and any cost sharing an insurance company may have paid. Call it an even $500 for simplicity’s sake.
So a 21 year old male can buy a health insurance policy today for $3,132 and would need to spend another $3,649 out of their own pocket before the insurance company would cover anything. However, in all likelihood they will incur around $500 in actual health related expenses.
30 years old
According to a study done by HealthPocket.com, an average Silver level plan for a 30 year old costs $284 a month. The average deductible for a Silver plan in this age group is $2,907.
$284 *12 = $3,408 per year.
$3,408 + $2,907 deductible = $6,315 before insurance pays anything.
The same US Census study we looked at previously shows the average amount spent on medical services for people 25-34 years of age was $466. Using the same logic as above, tripling it gives us about $1,400.
In this case, a 30 year old would need to spend almost $6,500 a year before the insurance company kicks anything in. Yet their expected expenses are somewhere in the neighborhood of $1,400.
So What Should You Do?
Everyone has their own risk tolerance. I cannot tell you what to do. I can, however, tell you what I would do if I were 21 years old and armed with the knowledge I have now.
- Determine the premium amount of the insurance policy I would buy – I would sit down and go over the insurance policies available in my state, and determine which one was right for me. For this example I will use the average for a 21 year old male listed above ($261 / month).
- Pay myself the monthly premium payment – Rather than paying the insurance company, I would invest a good chunk of the monthly premium amount automatically in a few mutual funds. The rest I would keep in cash as a buffer for periodic medical costs.
- Pay random medical costs out of my monthly budget – Even if I had medical insurance, I would still be paying out-of-pocket until I reached my deductible. For every day medical expenses, this will be basically the same.
- Use local clinics and negotiate with cash – A current doctor visit to my primary care physician costs me $220 every time I step foot in his office. A local health clinic costs $90 because I pay them without going through insurance. Same service, same prescription. I would do my due diligence and find affordable options for periodic, planned care.
So now I would be walking around as an “uninsured,” but every month I would be adding to my growing cash reserve that acts as a buffer between me and any health costs. Within 1 year I would amass a nest egg of over $3,000 by simply paying myself instead of the insurance company.
Of course this scenario makes an obvious assumption: I do not have any major medical issue.
The reason I can make this assumption is because statistics show I probably will not.
According to the CDC, the percentage of people ages 18-44 that actually had out-of-pocket medical expenses in 2009 was 76.2%. Of those, only 5.4% had costs in excess of $2,000. That means just over 4% surpassed $2,000 for the year. This includes people up to the age of 44, so it is fair to assume that 21 year olds were even lower.
That means there is at least a 96% chance that the $3,000 I saved could cover all my medical expenses and still have money left over. In fact, I would probably be able to manage the periodic costs with my normal monthly budget and not even touch the premiums I paid myself.
It should be noted that these numbers may reflect people that actually had insurance coverage and still paid over $2,000 in out of pocket expenses. But as mentioned prior, you can often get better deals on regular health care visits simply by going to clinics and paying cash.
Possible Growth of Savings:
Here is an example of what paying myself the premium payments could look like by the time I am 31. In this case, I make a few assumptions:
- I have no major medical issues that crack my nest egg
- For simplicity purposes, my premiums remain the same
- 6% Return
- 3% Inflation
- 15% Tax Rate
After 10 years of paying myself and investing the premiums, I would have over $40,000 by my 31st birthday.
Up until the beginning of 2014, I could pretty much accomplish this plan and still have a safety net in case of a major medical issue.
Catastrophic plans, in my opinion, were one of the greatest tools in my health insurance arsenal. Premium payments were about 1/3 of a regular plan, and the benefits kicked in somewhere after $5,000 in health costs.
Investing the difference in premium payments could yield a similar result as listed above, and at the same time provide insurance coverage for major accidents.
Unfortunately, they were banned in their prior form under the new Affordable Care Act, and the new ones available to those under 30 are overpriced.
What About Major Health Issues That Arise?
The fact is some people get sick, and some people get hurt. It just happens.
$10,000 Hospital Bill
You break your leg, and end up with $10,000 in bills. Depending on how many years you have been saving your premium payments, you may be able to simply write a check from your brokerage account and be done with it. If not, negotiate. Then set up a payment plan and start directing your premium checks toward that bill.
$400,000 Hospital Bill
This is the one that you’re banking on not happening. If it does, there is no way around it. Of all the scenarios I have run, this is the one that cracks the bank.
First and foremost, this is very unlikely. But if it does, you will probably file for bankruptcy.
The average 21 year old has a net worth less than $2,000. The average 30 year old can lay claim to around $9,000. Let’s be honest. Filing bankruptcy at this point is not the end of the world for most people.
Chronic Illness Diagnosis
This is where some people’s moral compass may go awry, but as I mentioned earlier, this is simply an illustration of what can be done.
If you need health insurance because a chronic illness arises, then buy it. You should have cash saved from years investing your premiums, and that can help pay for care until open enrollment comes back around. The longest you should have to float yourself is 9 months.
Under the new health care laws, insurance companies may not discriminate against pre-existing conditions. So if you need insurance from something that pops up, buy it.
In most circumstances, skipping health insurance will incur a penalty when filing your taxes. While it is not the end of the world, for certain income levels it can play a role in determining whether forgoing insurance altogether makes sense.
The fee is the greater of:
- 2014 – $95 or 1% of Modified Adjusted Gross Income (MAGI)
- $35,000 income = $350
- 2015 – 325 or 2% MAGI
- $35,000 income = $700
- 2016 – $695 or 2.5% MAGI
- $35,000 income = $875
- 2017 and beyond – $Adjusted for inflation or 2.5% MAGI
The examples above are based on someone filing as single on their tax return. So for an income around $35,000 the penalty is not considerably high, but also not negligible. As income rises, the penalty becomes more important to consider, especially in later years.
Real Life Application
Applying the above scenario to myself and my wife (with the benefit of hindsight) and assuming we lived in a similar landscape as today, we would have come out significantly ahead by forgoing health insurance most years.
Combined, we have had 16 years of paying health insurance premiums on our own, and in only two of those years did we meet the deductible. Each of those times was due to the birth of one of our children, which we knew ahead of time.
Using examples from above, in the two years where we were having children, we simply could have stepped out of the “uninsured” group and bought insurance. Then jump back out afterward.
Even counting the amount our insurance company paid for the birth of both children, we have paid far more in premiums then we ever received in care. As is typically the case for what is called the “Young Invincibles.”
It is fair to assume that the difference between premiums paid and health care received will continue to rise for 21-30 year olds under the new landscape.
The recession that began in 2008 spawned a phenomenon that was coined Strategic Defaults. For the first time in recent history, a number of homeowners who could afford their mortgage payments defaulted on purpose because it was financially a better move than staying in a home that was under water.
21-30 year olds are faced with a similar choice when it comes to health insurance. A significant number of individuals could see a brighter financial future by playing the current game outside the lines. The game has been rigged against this age group, and some careful maneuvering could put them on top in the end.
This is by no means supposed to be a solution to the growing health care problem in the United States. In fact, it would undoubtedly make the situation worse overall if most of the healthy young adults followed this plan. But I am not here to solve that problem, but rather to help provide guidance for those trying to navigate through the chaos.
This plan is not a one-size-fits-all, and not everyone will benefit from the process. But I invite you to look at your personal situation and actually dig into the details, rather than simply following what everyone else does.
This was not meant to be an exhaustive study on the subject, but rather an overview based on the limited information I was able to find. If anyone has additional statistics that can help paint an even more accurate picture, I would be glad to add them.