What Does "Cost Effective" Mean When It Comes to Health Insurance?

by Beverly Bird

    If something is cost effective, it's worth paying for. You get something that's worth the money you paid for it. When it comes to health care and health insurance, cost effectiveness can have different nuances -- depending on who's footing the bill for premiums.

    According to the Society for Human Resource Management, the average employee contributed $2,204 toward employer-sponsored health insurance in 2012. That number jumps dramatically if you’re self-employed or if your job doesn't offer health insurance benefits. If you must insure privately, Forbes reports that an individual over age 50 who doesn't smoke can expect to pay as much as $764 a month in premiums. This covers only you, not your family. If you find yourself spending far more on premiums than your insurer is paying for your claims, this isn't cost effective; you're spending more than the service or goods you're receiving for your money. If you crunch the numbers, you might find that you'd spend less by paying care providers directly for their services. Then again, you might not save much because hospitals and physicians typically charge uninsured patients more than they charge insurance companies. You also leave yourself vulnerable to the immense costs incurred by a catastrophic illness. Should you become seriously ill or injured, your premiums would be much more cost effective -- assuming your health insurance really picks up the tab.

    Some employers have determined that paying for policies to cover their employees isn't cost effective. Insurance premiums are prohibitive, and employers don't get much in return. Some have turned to self-insuring instead. Some states allow employers to instead set up trust funds for the purpose of paying their employees' medical expenses directly to providers. Employees typically contribute to the fund rather than give up a portion of their paychecks to premiums.

    Low-income individuals who qualify for state-sponsored health insurance are often required to enroll for other coverage if it's available to them and if it's cost effective – that is, the premiums cost less than what the state is paying for a similar plan. This usually factors in COBRA eligibility or Medicare eligibility for those 65 or older. Even if your income is such that you can afford your own premiums, the government can still play a part in the cost effectiveness of doing so. For example, under the Patient Protection and Affordable Care Act -- "Obamacare" -- if you decide to opt out of paying insurance premiums, you may have to add a tax penalty to your out-of-pocket medical costs, which may affect whether it's actually more cost effective for you to forgo coverage and pay caregivers directly.

    The World Health Organization defines cost effectiveness in a whole different way. It calculates whether a particular treatment is cost prohibitive or worthwhile. WHO's calculation for determining cost effectiveness is complicated, but it works out to whether a specific treatment will buy a patient an improved year of life for less than three times his annual earnings.

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    About the Author

    Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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