Sammy is a full-time student who does not work. He is too old to stay on his parents' health insurance and is looking for his own health care program. The two options he is considering are outlined in the tables below.
| | | | |
| :---------------------------- | :----------------------------------- | :---------------------------- | :----------------------------------- |
| | OPTION 1: Fee-for-service | | OPTION 2: HMO |
| | $225 monthly premium $7,500 deductible | | $630 monthly premium No annual deductible |
| Co-pays: | | Co-pays: | |
| Name-brand Drugs: | $30 | Name-brand Drugs: | $25 |
| Generic Drugs: | $12 | Generic Drugs | $10 |
| Visits: | | Visits: | |
| Primary Care Physician | $30 | Primary Care Physician | $20 |
| Specialist: | $75 | Specialist: | $62 |
| Urgent Care: | $100 | Urgent Care: | $50 |
| Emergency Room: | $250 | Emergency Room: | $175
Answer (2)
Sammy's annual premium for Option 1 is $2700 and for Option 2 is $7560. Based on different healthcare usage scenarios, Option 1 remains more cost-effective in all cases. Therefore, Sammy should choose Option 1 as his health insurance plan.
;
Calculate the annual premiums for both options: Option 1 is $2700 and Option 2 is $7560.
Calculate the total cost for each option under low, medium and high healthcare usage scenarios.
Compare the total costs for each scenario.
Determine that Option 1 is more cost-effective in all scenarios due to the lower annual premium.
Explanation
Understanding the Problem Sammy is choosing between two health insurance plans: a fee-for-service plan (Option 1) and an HMO plan (Option 2). We need to compare the total costs of each plan to determine which is more economical for him, considering he's a student with potentially varying healthcare needs.
Calculating Annual Premiums First, let's calculate the annual premiums for both options. For Option 1, the monthly premium is 225 , so t h e ann u a lp re mi u mi s : $225 \times 12 = 2700 $
For Option 2, the monthly premium is 630 , so t h e ann u a lp re mi u mi s : $630 \times 12 = 7560 $
Comparing Costs - Low Usage Now, let's consider a scenario with low healthcare usage. Suppose Sammy has 2 name-brand drug prescriptions, 2 generic drug prescriptions, and 1 visit to a primary care physician. We'll calculate the total cost for each option.
For Option 1: Co-pay costs = $(30 \times 2) + (12 \times 2) + (30 \times 1) = $60 + $24 + $30 = $114 Since $114 is less than the $7500 deductible, the total cost for Option 1 is: $2700 + $114 = $2814
For Option 2: Co-pay costs = $(25 \times 2) + (10 \times 2) + (20 \times 1) = $50 + $20 + $20 = $90 The total cost for Option 2 is: $7560 + $90 = $7650
Comparing Costs - Medium Usage Next, let's consider a scenario with medium healthcare usage. Suppose Sammy has 5 name-brand drug prescriptions, 5 generic drug prescriptions, 3 visits to a primary care physician, 1 specialist visit, and 1 urgent care visit.
For Option 1: Co-pay costs = $(30 \times 5) + (12 \times 5) + (30 \times 3) + (75 \times 1) + (100 \times 1) = $150 + $60 + $90 + $75 + $100 = $475 Since $475 is less than the $7500 deductible, the total cost for Option 1 is: $2700 + $475 = $3175
For Option 2: Co-pay costs = $(25 \times 5) + (10 \times 5) + (20 \times 3) + (62 \times 1) + (50 \times 1) = $125 + $50 + $60 + $62 + $50 = $347 The total cost for Option 2 is: $7560 + $347 = $7907
Comparing Costs - High Usage Finally, let's consider a scenario with high healthcare usage. Suppose Sammy has 10 name-brand drug prescriptions, 10 generic drug prescriptions, 5 visits to a primary care physician, 3 specialist visits, 2 urgent care visits and 1 emergency room visit.
For Option 1: Co-pay costs = $(30 \times 10) + (12 \times 10) + (30 \times 5) + (75 \times 3) + (100 \times 2) + (250 \times 1) = $300 + $120 + $150 + $225 + $200 + $250 = $1245 Since $1245 is less than the $7500 deductible, the total cost for Option 1 is: $2700 + $1245 = 3945 F or Opt i o n 2 : C o − p a ycos t s = (25 \times 10) + (10 \times 10) + (20 \times 5) + (62 \times 3) + (50 \times 2) + (175 \times 1) = $250 + $100 + $100 + $186 + $100 + $175 = $911 The total cost for Option 2 is: $7560 + $911 = $8471
Conclusion Based on these scenarios, Option 1 (the fee-for-service plan) is more cost-effective for Sammy, regardless of whether he has low, medium, or high healthcare usage. This is primarily due to the lower annual premium.
Examples
Understanding health insurance options is crucial for students who are transitioning off their parents' plans. For instance, consider a recent graduate starting their first job. They might use this analysis to compare a high-deductible plan with a lower monthly premium against a plan with a higher premium but lower out-of-pocket costs. By estimating their potential healthcare needs—factoring in regular check-ups, potential specialist visits, and prescription medications—they can project annual costs for each plan. This approach helps them make an informed decision, balancing affordability with adequate coverage for their health needs, ensuring they're financially prepared for any medical expenses that may arise.
