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Impact of Healthcare Underestimated by Many Advisors

There are some very good points raised in this article by Emily Brower Auchard. We agree that employees should approach healthcare with the same financial awareness they bring to buying a car or a home. The article is reproduced below….

The high cost of healthcare in the U.S. takes up an increasingly large portion of consumers’ financial resources, with health spending in the U.S. reaching $3.1 trillion—or nearly $10,000 per person per year, according to the Centers for Medicaid and Medicare Services. Even with long-term disability and health insurance, consumers who get sick can be hit with unexpectedly large out-of-pocket expenses.

Advisors say the unpredictable nature of healthcare costs requires creative planning and careful attention to the small print of health-related insurance. Over the course of his career, Anthony Domino, an advisor with Associated Benefit Consultants in Rye Brook, N.Y., with $2 billion under management, has seen big changes in how healthcare costs impact his clients.

“Today my clients can spend more on co-pays for drugs than they used to for their entire health insurance premium,” he says. While healthcare reform has changed the funding for health insurance it hasn’t impacted healthcare costs, he notes. With that in mind he encourages clients to shop carefully for their healthcare insurance. He also recommends they repeat the process for every annual enrollment period to be sure they are getting the best coverage possible. In addition to premium increases, other plan benefits and costs, such as drug benefits or coverage of out-of-network provider care, can change significantly from one year to the next. This can lead to what the healthcare industry now calls “surprise medical bills.”

Neal Slafsky, managing director of United Capital in Newport Beach, Calif., encourages clients to approach healthcare with the same financial awareness they bring to buying a car or a home.

Slafsky, whose firm has $15.4 billion under management, works with his clients to ensure they get the benefits they are due from their health insurance providers — which can mean taking a more active role in reviewing medical bills after a client’s hospital stay.

“Sometimes clients have to appeal their claim and go back more than once to get the benefits they are due,” he explains. If the process is too much for a client, he recommends they hire a medical claims processor.

“The fees are very reasonable and I’ve seen them get terrific results,” he says. The best way advisors can serve clients, he says, is to do a “deep dive” into the world of healthcare insurance.

Providers can be very opaque in their explanations of benefits and advisors can play a crucial role in translating that information for clients. “Where else is a client going to go to get that information?” he notes.

Long-term disability insurance is another element where clients typically need advisor guidance. “Clients need to plan well in advance to prepare for the possibility of being disabled,” explains Venita Zavidny, an advisor with Houston, Texas-based Kanaly Trust, which has $2 billion under management. Zavidny, who considers incurring a long-term disability to be one of her clients’ biggest risks, is well versed in the financial needs of long-term care. Zavidny works with clients to look closely and carefully at their long-term disability plans and to make sure they know exactly what coverage they are buying.

For instance, a plan that says it will provide 60 percent of a client’s income may look appealing on paper — but clients often neglect to factor in other costs. “Taxes will make that income considerably less,” notes Zavidny. Many plans include Social Security benefits in their formulas and will subtract any amount of long-term disability provided by Social Security from their payments. One piece of advice Zavidny offers her clients: avoid paying taxes on future long-term disability income by taking the benefit as imputed income. “This small decision on insurance choices can have big consequences for the future,” she notes.

Evaluating health insurance plans can be daunting and confusing, and most people don’t get much guidance, research shows

The following is taken from an article written by Austin Frakt at the New York Times. It highlights the challenges around picking a health plan…….

It’s open enrollment season for almost every kind of health insurance in America. Millions of Americans using Medicare plans, employer-sponsored health insurance or Affordable Care Act marketplaces select health plans each fall. Many consumers face numerous options, and research shows that they make many mistakes, often paying more than they need to.

Some err by selecting deductibles that are too low. Lower deductibles can be a fine choice for some consumers, but trying to save money with a lower deductible can be a poor choice if a person pays even more in premiums. For instance, at one large American company in 2010, employees could reduce their deductible by $250 — to $750 from $1,000 — by paying $500 more in premiums. Trading $500 for $250 is clearly a bad deal for the consumer.

Yet a majority of the firm’s workers made bad deals like this, according to a study by Saurabh Bhargava, a Carnegie Mellon economist, and his colleagues. Workers were offered a choice of 48 plans that were identical except in cost sharing and premiums. Though no plan would have been optimal for every employee, a $1,000 deductible plan would have been better for many and at least a no-worse choice for 97 percent of employees who chose a lower deductible.

People make mistakes like this for a variety of reasons. Some don’t understand basic health insurance concepts. In an experiment accompanying Mr. Bhargava’s study, 71 percent of people couldn’t identify fundamental cost-sharing features of health insurance plans. This type of illiteracy was highly predictive of mistakes like overpaying for a lower deductible.

Another study, led by George Loewenstein, a professor of economics and psychology at Carnegie Mellon, found that people misunderstood plan features and costs. Even with plan details right in front of them, only 40 percent of privately insured Americans could identify how much they’d have to pay for anM.R.I. scan. Only 11 percent could report what a four-day hospital stay would cost them. Yet study subjects were overconfident. All said they understood what a “co-pay” was, but 28 percent could not correctly answer a question testing their understanding of the term; only 7 percent would admit to not knowing what “maximum out-of-pocket” meant, but 41 percent couldn’t define it.

Another study found that less than a third of respondents could correctly answer questions about coverage features of their own plan. Yet anotherfound that only a minority of workers at a large firm could answer questions about plan characteristics or their own, recent health care spending.

Without a doubt, choosing a plan can be daunting. A shopper in the Affordable Care Act marketplace can choose from 40 plans, on average. A typical Medicare beneficiary can choose from among nearly 20 Medicare Advantage plans and 30 stand-alone prescription drug plans.

In selecting plans, consumers are prone to mental shortcuts that often lead to poor choices. Plan labels — like the “gold,” “silver” or “bronze” — can fool people. To some, “gold” sounds better than “bronze,” even if it isn’t. In one study, people were asked to select hypothetical plans with these labels, but the researchers reversed the meaning of “gold” and “bronze” for half of them. It didn’t matter. Most people picked “gold” anyway.

The ordering of choices also matters. Consumers tend to select plans near the top of a list, a phenomenon that arises in other contexts: Economists download more papers from the tops of lists of new studies, as my colleague Neil Irwinreported; politicians at the top of ballots receive more votes.

Eric Johnson, a Columbia business professor, led a study that found that without substantial additional assistance, a consumer’s likelihood of selecting the lowest-cost plan is no better than chance. The researchers conducted a series of experiments on people similar to those who would shop for marketplace coverage. Each study participant was asked to presume he’d use a certain amount of health care and, based on that, to choose the lowest-cost plan from among eight choices, which varied by premium, doctor co-pay and deductible.Only 21 percent could accomplish this task, a figure not statistically different from chance. The annual cost of errors was about $250. A separate analysis showed that participants had a stronger aversion to an increase in costs in deductible or co-pay than to the same increase in premium. Because a dollar is a dollar, no matter how you spend it, this is another indication of irrational decision making.

But when study subjects were provided with a tutorial or with a calculator that revealed the full cost of each plan, or if they were placed in the lowest-cost plan by default (from which they could voluntarily switch), their chance of selecting the cheapest plan was much higher, upward of 75 percent in some experiments.

Though some Medicare beneficiaries switch to lower-cost drug plans over time, another way consumers get stuck with bad deals is by staying in plans as their premiums increase, a status quo bias. One study found that New Jersey enrollees in Medicare prescription drug plans paid an average of $536 more over three years because of this kind of inertia. Some insurers strategically enter marketswith low prices and increase them over time, exploiting consumers’ inertia. This “invest then harvest” pricing strategy has been observed in markets for Medicare Advantage planscommercial health insurance and others.

Providing consumers with easier access to cost comparison information can help. A study published in The Journal of Economics in 2012 found that when a random sample of Medicare beneficiaries got letters that compared prescription drug plan costs, they were more likely to switch plans and to save money, relative to nonrecipients. When pharmacy students helped California Medicare beneficiaries understand drug plan costs, 60 percent switched plans.

Few consumers get this much help. When researchers at the University of Pennsylvania examined the Obamacare online marketplaces last year, they found only a few that provided some of the tools consumers need. Most marketplaces presented plans in order of the cost of the premium, which doesn’t take other cost sharing into account. (However, California ranked plans according to total cost, Kentucky listed them randomly, and Minnesota ranked them based on best match according to a series of preference questions, similar in spirit to an approach recommended by University of California, Berkeley economists in a recent Brookings policy paper.)

Only three states offered cost estimators. The federal government’s site, HealthCare.gov, will offer more information about plans — like which physicians are in plan networks — and cost comparison tools.

If last year is any guide, once again few consumers will actively shop for a more beneficial plan. An analysis by the Department of Health and Human Services showed that more than 70 percent could have found a cheaper plan. The research is clear: Most won’t find that cheaper plan without a great deal more help.

Austin Frakt is a health economist with several governmental and academic affiliations. He blogs at The Incidental Economist, and you can follow him on Twitter at @afrakt.