As a part-time employee, Rachel does not qualify for any benefits from her current employer. Seeing a need for a health care program, Rachel went shopping for health insurance and is trying to decide between two options with a national health insurance provider. The benefits of each option are outlined in the tables below.

Question

OPTION 1: Fee-for-service

OPTION 2: HMO

$225 monthly premium

$630 monthly premium
$7,500 deductible

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

The first option is a fee-for-service plan with a $7,500 deductible. Rachel must pay the deductible amount in health-related costs (not including co-pays) before the insurance company will contribute. This plan costs $225.00 per month and requires co-pays for most standard healthcare costs.
The second option is an HMO. It is significantly more expensive at $630 per month, but has no annual deductible. The standard co-pays are also less than those in the other option.
Rachel is a young lady with very few health care requirements. She anticipates one monthly visit to her primary care physician, and one annual visit to her allergy specialist. She has two generic prescription allergy medicines that need to be filled twice a month. If Rachel is able to stay healthy the entire year and does not accrue any additional health care costs, which of the following statements is true for her situation?
a.
The higher co-pays and annual deductible make Option 1 more expensive than Option 2.
b.
The higher premium for Option 2 offsets the lower co-pays making the two options the same value.
c.
Rachel's health care needs will cost less under Option 1 if she is able to avoid additional health care costs.
d.
Even though she pays more monthly, the insurance company will cover more of Rachel's health care costs under option 2.

Answer 1

To determine which statement is true based on Rachel's situation, let's calculate the total annual costs for both options, taking into account her expected health care needs.

Option 1: Fee-for-Service

• Monthly Premium: $225
  • Annual premium cost: \( 225 \times 12 = 2,700 \)
• Deductible: $7,500
• Co-pays:
  • Primary Care Physician: $30 (1 visit per month) → \( 30 \times 12 = 360 \)
  • Specialist: $75 (1 annual visit) → \( 75 \)
  • Generic Drugs: $10 (twice a month for 2 prescriptions) → \( 10 \times 2 \times 12 = 240 \)

Total annual costs for Option 1, without hitting the deductible:

• Total co-pays: \( 360 + 75 + 240 = 675 \)
• Total costs: \( 2,700 + 675 = 3,375 \)

Since Rachel does not meet the deductible of $7,500, she will not receive any contributions from the insurance, and her total out-of-pocket costs will remain the full premium and co-pays without hitting the deductible.

Option 2: HMO

• Monthly Premium: $630
  • Annual premium cost: \( 630 \times 12 = 7,560 \)
• Co-pays:
  • Primary Care Physician: $20 (1 visit per month) → \( 20 \times 12 = 240 \)
  • Specialist: $62 (1 annual visit) → \( 62 \)
  • Generic Drugs: $10 (twice a month for 2 prescriptions) → \( 10 \times 2 \times 12 = 240 \)

Total annual costs for Option 2:

• Total co-pays: \( 240 + 62 + 240 = 542 \)
• Total costs: \( 7,560 + 542 = 8,102 \)

Summary of Costs

• Total annual cost for Option 1: $3,375
• Total annual cost for Option 2: $8,102

Analysis of Statements

a. False: The higher co-pays and annual deductible in Option 1 do not make it more expensive. It's significantly cheaper. b. False: The higher premium for Option 2 does not offset the lower co-pays because Option 1 is still less expensive overall. c. True: Rachel's health care needs will cost less under Option 1, assuming she avoids additional healthcare costs, due to the lower overall costs of $3,375 versus $8,102 for Option 2. d. False: Even with higher premiums, the insurance company covers fewer healthcare costs in Option 1 because Rachel does not hit the deductible.

Based on this analysis, the correct answer is: c. Rachel's health care needs will cost less under Option 1 if she is able to avoid additional health care costs.