Category: how to

On Monday we talked about the fat, dumb, and happy path we took when we got our health insurance from our employer.  On Tuesday we talked about how insurance works and what are the shoals you have to navigate through.  Today, we’ll talk about how the Fox family is going to go forward.

 

 

What we have been spending on health insurance in the past

Let’s look at what we’re going to do and how that impacts us financially.

First, let’s remember what we’ve been paying when covered by traditional, employer-sponsored health insurance.  We directly pay about $1,100 per month, plus the company pays about $1,200 per month.  Remember that $1,200 is really your money.  Your employer doesn’t give that to you out of charity.  You earn that money and you are paid that in the form of subsidized health insurance.  Add those together and it’s about $2,300 per month which comes to about $28,000 annually.

Plus, you have to add all the copays and deductibles.  I track this stuff because I am a nut.  Going back to when Foxy and I got married in 2010, we typically spend about $1,200 each year on copays.  However, there were two years where it was closer to $4,000.  That’s when ‘Lil Fox had to be hospitalized for croup.  More on that scary episode in a second.

Our average premiums were about $28,000 each year, and our out-of-pocket is about $2,000 each year, knowing some years are higher than others.  That’s $30,000 each year that we were spending on health insurance, not that far off from what Obamacare was going to charge.  I had no idea I was spending so much.  I just barfed in my mouth.

 

What we’ll end up doing now

After extensive searching, we found a really good policy from United Healthcare that costs about $500 per month.  It gives us access to their negotiated rates which is the most important thing, and then it covers certain things up to a set amount.

For example, it covers a regular doctor visit up to $100, after which I am responsible for the excess charges.  As I said, figuring out negotiated rates are really hard, but I think on average a doctor visit with the negotiated rate is about $150.  So, I would pay the $50 not covered.

This stuff is really confusing, but looking at all the coverage I figure that I would pay a bit more under this plan than I would in copays under the traditional employer-sponsored plan (or Obamacare which looks a lot like a traditional employer-sponsored plan).  But you can pay for a lot of copays with an $1,800 per month difference in premiums.

With this coverage, we get #1 and #3 of what insurance coverage offers.  But we’re missing #2 which is that protection from some catastrophic medical event like a car accident or something.  For that we can get a supplemental policy that costs about $100 per month and it covers us for any expenses that exceed $15,000 in a three-month period.

That ensures that if tragedy strikes in the form of a car accident or a fire where one of us are stuck inside or . . . I don’t even like thinking about this.  You get my point.  If something really bad happens and one of us (or all of us) is in the hospital for a long time and the medical bills really rack up, we’ll max out at $15,000.

 

How we’ll probably end up ahead

Good news.  We get all our coverage—access to negotiated rates, typical coverage of basic stuff, and protection against catastrophic costs—for about $600 per month or $7,000 per year.  That compares pretty favorably to the $28,000 in monthly premiums from my employee-sponsored plan (or even the $1,100 per month or $13,000 per year that was my portion, but again make no mistake that I was paying for both portions).

There’s no questions that our out-of-pockets will be higher now than they were before.  Typically, we spend $2,000 per year on that stuff, so let’s say it doubles to $4,000 per year (about $350 per month).  That’s a lot of money, but we’re still ending up way ahead because although we spend an extra $2,000 on out-of-pockets we are spending about $21,000 less on premiums.  That’s a huge windfall.  $21,000 a year is enough on its own to fund a nice retirement (about $5 million over a 40-year investing lifetime!!!).

Of course, those numbers assume we’re pretty healthy and don’t consume a ton of medical care.  Let’s say Foxy and I each get our annual check-ups, the boys go twice a year, and there’s one ER visit and a couple urgent care visits thrown in for fun.

But what if catastrophe happens?  After all, that’s the whole point of insurance, right?  God forbid we have a repeat of 2013 when ‘Lil Fox was in the PICU for 4 days with a nasty case of croup.  At the time we were covered under my Medtronic insurance and the total cost was about $32,000 of which we had to pay out-of-pocket about $4,000.

Those are some big numbers.  But let’s say that we were on the hook for the whole $28,000 (instead of just the $4,000).  First, we’d be helped out by the catastrophic coverage, so we’d only pay $15,000.  Given that we’re saving about $22,000 annually on premiums we’d come out about even.  Bear in mind, we’ve had kids for seven years now (including in utero), and that one event was the biggest medical issue we’ve had.  If at it’s worst we break even and then all the other years we come out way ahead, that seems like a winning combination.

 

How we’ll change our behavior

Given that the plan we’ll get is pretty bare-bones, there’s a much closer link between the healthcare we actually use and what we pay out-of-pocket.  This provides a lot of transparency which is actually a good thing (basically what my friend Oguz said in a comment on Tuesday).  One of the big problems is that when things are “covered” by insurance and people don’t have to pay for it, they use a lot more.

For us, we’ll pay when ever we see a doctor or get a prescription.  That will make us more selective of when we actually go see a doctor.  If Mini Fox has a cough (which he actually does right now), we’ll probably wait an extra day or two before going to the doctor (which we are in fact doing right now).  Maybe that sounds like terrible parenting, but actually most experts agree that people are hypochondriacs, and waiting a bit gives your body the chance to heal.  We’d never put our family in harms way, but the body does have the ability to heal itself pretty miraculously.  We’ll take advantage of that.

Also, we’ll be more mindful of using the most expensive types of care.  The most obvious example is an emergency room versus an office visit or urgent care.  If you don’t pay the costs, it doesn’t matter and most people will do the quickest thing they can (ER).  However, if you’re paying for it, you’re a lot more likely to have the inner dialogue at 11:30pm when you’re kid is puking: “Do I really need to go to the ER or can I wait until morning and go to the urgent care?”

Those are the little things that can save the healthcare system a ton of money.  But we as consumers only think about it when we have skin in the game (again, to Oguz’s point).  Now that we’ll have a more bare-bones policy, we’ll be thinking about that, and it’s a good thing.

 

There are bargains to be had

Another major benefit of the bare-bones coverage is that with less things “covered” we’ll need to shop around more for our medical treatment.  We’re becoming more engaged in the process which is a good thing.  Also, this allows us to actually find some major bargains out there, and who says “no” to getting better quality while paying less?

There’s a fun little procedure a fox can get when he doesn’t want to have any more cubs.  Vasectomies are covered under most plans.  The total cost is very opaque (again Oguz’s point on transparency), but the typical out-of-pocket was about $200.

However, there are clinics that don’t accept insurance and are only cash pay.  I must say they seem A LOT nicer.  The receptionist answers the phone by the third ring, not after you’re on hold for 20 minutes (literally, I’ve had that experience).  The facilities are beautiful and totally modern.  They do the consult and the procedure all in one meeting which is awesome.  Everything is better.  All for the low cost of $750 which you pay with a credit card at the time of the procedure.  Bear in mind, the monthly premium for coverage that covers vasectomies is $2,300 per month and the premium for the plan that doesn’t cover vasectomies is $600.  Simple math to me.

This very similar example can extend to all sorts of stuff like Lasix.

Another example close to our heart is speech therapy.  That’s an optional piece of healthcare which is also fairly predictable, so it doesn’t fall under the traditional definition of “insurance”.

Under our employer plan (and Obamacare as well), we could sign up with an approved provider.  The list price was $200 per 45-minute session, and the negotiated price came down to $150.  Our copay was $50.

I ended up talking to a guy who used to give us speech therapy (so he’s licensed and the same high quality).  He left his company that was covered by insurance and went out on his own.  He and I came up with an awesome deal.

His previous company would charge insurance $150 of which I paid $50.  He actually got about $30 per session.  He and I agreed to cut the middleman out.  We bypass insurance, and I pay him directly $40 per session.  He comes to our house to do the speech therapy which is a ton more convenient, plus he does it for 60 minutes because he’s hustling and wants the business.  Everyone wins.

He makes more money, I pay less, and we get a better-quality product.  This only happens because I go outside the health insurance paradigm and used that awesome thing in capitalism called competition.

 

There you have it.  After 4,300 words in three parts, you now have a sense for how we are handling our health insurance.

Having to do it on our own, away from the protection of an employee-sponsored plan was a bit unnerving at first, but after I went through it all, I’m actually fairly optimistic.  I’m still going to get great healthcare (and the speech therapy and vasectomy examples show that maybe even better quality), all the while saving a ton of money.

Remember, that each month we’ll save about $1,700 in premiums.  Maybe we’ll pay an extra $200 per month in copays, but still that’s $1,500 to the good each month.  That is HUGE, coming to about $5 million over a typical healthcare consumer’s investing lifetime.

 

Yesterday I started the story of how the Fox family had to shop for health insurance in the open market.  Mostly, I talked about how we had always had employee-sponsored health insurance; we were shocked by how much Obamacare cost, but it turns out we were always paying that much, and we just didn’t know it (which is part of the problem).

Today we’ll talk about how health insurance has gotten so screwed up.  Thursday we’ll finish up with how the Fox family is going to beat the system and save enough to completely fund our retirement (at about $5 million) along the way.

 

The definition of “insurance”

Part of the problem is the word “insurance” has been bastardized.  Anywhere you go except for healthcare, the concept of insurance means you pay a small amount of money and if an unpredictable catastrophe occurs, those expenses are covered.  Think auto insurance or homeowner’s insurance.

For a lot of political reasons, “insurance” has taken on a very different meaning when applied to healthcare.  Health insurance isn’t meant to cover only unforeseen expenses and very large expenses.  It has come to mean to many people “paying for all medical expenses”, including those that are optional (Viagra, psychological counseling, baby head helmets) and very predictable (birth control, contact lenses, dialysis).

Always remember that Las Vegas wasn’t built on winners and neither are insurance companies.  Insurance companies have to make money or they go out of business.  To cover all those expenses, they need to raise premiums or increase the patient’s share of the expenses through deductibles or out-of-pockets.

That’s coming out of your pocket.  So when your insurance plan offers chiropractic visits or smoking cessation or a million other things that you’re pretty confident that you won’t ever use, you’re still paying for that.

The point is that “health insurance” has become more of a “healthcare buffet”.  For a monthly cost you get (or at least can get) a bunch of stuff, some of which you’ll use and much of it you won’t.  This has predictably lead to health insurance costs spiraling out of control (Obamacare costs rose about 10% in 2017).  More on this in a minute.

 

What health insurance really provides

When you buy health insurance, what are you actually getting?  This seems like an easy question, but it actually breaks down into three major components (two of which you probably know right away, but one that’s a bit more subtle):

1. Payment of medical expenses: This seems obvious.  When you have health insurance, you can go to the doctor and your health insurance pays some or all of those costs.  This isn’t that big of a deal because for those predictable healthcare expenditures, you’re really paying these costs anyway through your premiums.
2. Protection from major expenditures: In the more traditional sense of insurance, if you have some catastrophic medical event (in a major car accident, get diagnosed with cancer, etc.) your health insurance will cover the enormous expenses that would otherwise bankrupt most people.
3. Negotiated rates: This is the subtle one.  In addition to #1 and #2, when you have health insurance, you get access to the rates they negotiate with healthcare providers.

So when you “buy” health insurance, either one on your own like the Fox family is getting ready to do, or as part of your employee benefit package (and make no mistake, you’re paying for all of that), you are getting those three things.

 

Negotiated rates are a big deal

#3 is such a big deal that it deserves its own section.

When you go to a hospital, there is a list price that someone off the street without insurance would be charged.  Then there is the negotiated rate that insurance companies work out with the hospital which is much, much lower.

Negotiated rates are a closely guarded secret, so it’s hard to figure out exactly how large the negotiated rate discount is, but if you know where to look, you can find it.  It tends to be about 1.5 to 3x.  For every $3 a person without insurance in charged for something, an insurance company will negotiate that rate down to $1.  That’s a HUGE benefit!!!

This is one of those things that really pisses me off.  When I am elected to Congress, I am going to work hard to remedy this.

The argument goes that insurance companies use their volume to negotiate better prices, but do they really?  How many of those patients go to St Mary’s Hospital instead of Sinai Medical Center because of their insurance?  My experience is that most insurers allow patients to go most places.

Second, when you use insurance it takes a long period of time for the insurance claim to be processed and paid, the deductible to be calculated and that invoice to be sent out and paid.  Contrast that to a cash patient who could pay with a credit card that day (or a check to avoid credit card fees), and you could actually argue that cash patients should pay less than insurance patients, not three times more.

Also, where else would it be acceptable to charge a customer 3x compared to another.  If you did that based on race (charge black people more than white) or gender (charge women more than men) or wealth (charge poor people more than rich people) or ethnicity (charge Asians more than Jews) people would throw a total fit, and it would totally be justified.

Scaling it down a notch, charging people 3x more because they are ready to pay you in US legal tender really isn’t all that different.  People are throwing a fit about unaffordable healthcare in America, but I really don’t hear a lot about this.  This is where you could make some real progress and give real relief to those who aren’t insured.

I’m not saying that hospitals and other healthcare providers should take less.  I’m just saying they should charge everyone the same price, and it should be transparent.

Bottom line, in the country we live in today, probably the biggest benefit of health insurance is having access to those negotiated rates.

 

Everything is available at the buffet

Another major factor that has made health insurance more complicated and a lot more expensive is the breadth of coverage that is now fairly typical with most plans like Obamacare and employee-sponsored plans.

Obamacare has a special name these “extra” things—minimum essential coverage.  They are things like: pregnancy, birth control, drug and alcohol abuse treatment, mental therapy to name a few.  Those are required to be included in any Obamacare plan.  Many employee-sponsored plans (like the one I had at Medtronic) had a lot more stuff too like: chiropractor visits, fitness counselors, etc.  Plus, of course, Medtronic had amazingly good coverage for diabetes patients.

Look at that list.  In our situation, we wouldn’t use any of those.  We aren’t planning on having any more children and other steps have been taken to assure ongoing birth control isn’t needed ?.  We don’t abuse drugs, don’t use chiropractors, don’t have diabetes, and don’t have high cholesterol.

However, when plans offer that coverage for things that are fairly predictable (not the classic definition of “insurance”) it has to be paid for somehow, and that somehow is with higher premiums.  Whether we used it or not we pay those higher costs, and that’s one of the reasons health insurance is so expensive.  It offers and charges you for so much that you won’t end up using.  I guess that’s how we get to a crazy high cost like $2,300 per month as a premium.

For us (and a lot of people out there), we’re pretty healthy and really don’t take advantage of some of those gray areas of healthcare like chiropractors.  We just want something simple that covers our doctor’s visits and catastrophic events.

As medicine gets more and more socialized (and you move away from the ability to choose a bare-bones plan—what we’ll be doing), you open yourself up to an ugly word in healthcare—Lobbyists.  There are a lot of companies making incredible technology that helps people (I speak first hand on this, having worked for Medtronic for almost 20 years).  It’s understandable that they are going to do everything they can, legally and otherwise, to get their products covered on insurance formularies.  They aren’t bad people per se; they are just advocating for the products they believe in (and the products which also pay their bills).

Of course, nationalized medicine offers the biggest opportunity for this.  Whether it’s Pfizer trying to explain how Viagra must absolutely be offered as a part of health insurance, or Medtronic and continuous glucose monitoring, or Bayer and birth control, or the American Association of Chiropractors, or the American Institute of Homeopathy.  On and on and on.

There’s so much that could be offered as a part of insurance, the vast majority of which a very, very small portion of the population actually uses.  Simply put, we can’t afford it all.  In that case, it becomes a game of lobbyists who can best convince bureaucrats to support what they want.  That’s not a good situation.

That leads to out-of-control costs, which we’re already seeing today–$2,300 per month.  But if you have choices in the market, you can pick the plans that only give you what you want, and you can save a ton of money (about $5 million over your lifetime).  That’s what we’ll talk about tomorrow.

 

I started writing this blog because I wanted to share my own experiences with investing, including how to navigate the complex world of investing on your own.  I am a firm believer in DIY financial management.  That is what worked for me, and I believe all people can get really great results doing it on their own.  That said, many readers ask about using a broker or investment adviser or financial planner.  Here’s my take.

Quick disclosure: I am an investment adviser.  I passed my Series 65 and work with a small number of friends, helping them with their finances.

 

Are financial professionals worth it?

As with any purchase you make, you need to evaluate a investment adviser on the basis of how much she costs, and how much value you get in return.  On the surface I would say “no, it probably isn’t worth it,” however there are definitely some factors which may reverse that decision.

First, let’s look at how much investment advisers cost.  The rates range widely.  Plus there isn’t a lot of transparency in the marketplace so it’s not always easy to know what the going rate is.  My experience says that 1-2% is typical.  This can come in many forms—typically brokers get paid fees from the mutual funds they suggest for you or from the transaction costs for trades.  Advisers tend to charge a percentage of your portfolio.  We know that 1% coupons are really valuable, so those fees are a lot.  Over an investing career they can add up to hundreds of thousands of dollars.  That’s a pretty big deal.

Of course, if you’re getting a lot of value from your investment adviser, maybe it’s worth it.  One of the main missions of this blog is to show you how you can invest successfully on your own, and I think most people can do that without having to hire a professional.  Sure you have to make decisions on asset allocation, which accounts to use, what investments to make; but those aren’t really all that complex.  Also, thanks to the efficient market lessons from A Random Walk Down Wall Street we know that you’re as good a stock picker as anyone.

So my general feeling is that investment professionals aren’t worth the money; a motivated investor can do just as well on their own and pocket the fees.  Wait, what???  You said “motivated”.  As it turns out, a lot of people, despite their best intentions, aren’t able to put their financial plan in motion.  If you’re one of those people, and if an investment adviser can help motivate you to do the right things, then I do think they are more than worth it.

In this way, investment advisers are a lot like personal trainers.  Most of us know that exercise is good for us, and most of us know how to run on the treadmill and lift weights properly (or you can find out by watching a 3-minute video on Youtube).  But if a trainer can motivate you to actually hit the treadmill and the weights, they’re definitely worth the money, right?  How much is your physical health worth to you?  Same thing with finances.  If you know what you should be doing, but for one of a million reasons you never end up actually doing it, maybe you should get an investment adviser to help you out.

Nearly every post I’ve done shows that there is a ton of value out there if you invest properly, taking into account things like time horizon, taxes, etc.  But if you don’t do anything, you’re losing ALL that value.  In fact, loyal reader Jessamyn noted that studies show that investment advisors do increase returns about 3%.  That’s a ton, especially because we know how much a 1% coupon is worth.  Are they magic?  Can they predict the future?  No.  The data shows that investment advisors help people do what they are supposed to–keep track with their plan, invest regularly, don’t panic when the market goes crazy, etc.

If an investment adviser helps you in ways you won’t or can’t, then you’ll probably end up ahead of the game, even after you take his fees into account.

 

How would you pick a financial professional?

So let’s say you’ve decided that an investment adviser makes sense for you.  How do you pick a good one?  This is one of the biggest challenges, and in my opinion one of the reasons a lot of people don’t get investment advisers: They don’t know a good one they can trust.  The problem is there are a ton of them and the quality varies greatly.  Sadly, there are a lot of unskilled people in the industry who don’t know what they’re doing.  Even worse, there are some real shysters who might take your money, either overtly steal it or use other schemes to siphon away your money and put it in their pockets.  It’s a legitimate concern.

First, you need to find someone you can trust.  Ideally, this would come from a personal reference.  Today you also have things like yelp.com or Angie’s List that gives ratings.  Additionally, there are government agencies like FINRA.org that track these people so you can look them up to see how long they have been around and any complaints that have been files against them, etc.  These are okay, but for my money, nothing beats a personal reference from someone you trust.  Of course, it’s not always easy to have those conversations with friends: “So Mary, who is helping you with your money, and can I talk to them?”

Second, you need to find someone who is good.  Of course, knowing this isn’t always easy.  Using that same personal trainer analogy, you probably wouldn’t hire an obese trainer.  You’d want someone who is ripped, someone who has shown they have been successful at physical fitness themselves (like my totally buff friends Christel and Tobias).

 

Similarly, you want a rich investment adviser.  You want someone who has been successful creating wealth for themselves.  But this is where the challenge comes in: if the investment adviser is wealthy then why is he working with you?  Seriously.  You have a lot of young kids who are doing this (let’s say less than 30).  I’m sure there are some good ones, but I’m not trusting my family’s financial wellbeing to someone without a lot of experience.  You also have a lot of people who just aren’t that good.  If someone has been an investment adviser for 10 or 20 years and they aren’t a multi-millionaire, how good can they really be?  I’m not trying to be mean, but shouldn’t that be more than enough time to accumulate some serious wealth?

 

Questions to ask:

If you do decide to go with a investment adviser, make sure you ask a lot, A LOT, of questions.  Beyond your doctor or minister/rabbi, this person will probably have the biggest impact on your wellbeing.  Take the time to make sure you find a good one.

How long have you been doing this?  This is an area where experience definitely matters.  In particular, you want her to have lived through a few bear markets.  At a minimum she should have been doing advising people since 2008 and even better if she’s been doing it since 2001.

What did you do during 2001 and 2008?  Investing is a lot easier when things are going well.  You prove your mettle during the tough times.  Figure out how he handled himself when everyone thought the world was coming to an end.

What are you paid?  This should be answered in excruciating detail.  Does he get paid by you (how is the amount determined, when is it paid), by others like mutual fund companies (how much, how do you make sure you serve my interests ahead of theirs)?

What is your personal financial situation?  No point sugar-coating it.  Find what his financial situation is like.  As mentioned above, if he isn’t pretty well off, how good is he really?  Also, the relationship you have with him needs to be based on trust because you’re going to be sharing everything with him.  If he isn’t willing to reciprocate in some way, that might tell you something.

How will you ensure you serve my best interests?  This is a biggie.  Ideally you want her to have a fiduciary relationship which is a legal standard where she serves your interests ahead of anyone else’s, including her own.  No matter how this turns out, you’re going to need to trust this person, but you should get a sense of how she will ensure that you are #1.

What is your investing strategy?  Obviously, there are a lot of nuisances to this, especially as he customizes it to your specific situation.  But he should definitely have an approach and a philosophy that he can articulate clearly and understandably.

What type of power will you have over my money?  Will she be able to make trades and move money between accounts with your express permission, on her own, or not at all?  This is a tricky one because maybe you want to offload these activities completely, so her having a ton of control may be okay.  No matter, you should definitely understand this completely.

How will you take into account other assets that you won’t manage?  Most situations will have him managing an account like your IRA or brokerage account but not others like your 401k, mortgage, pension, etc.  Most times, he’s only paid on the accounts he manages, but to do his job well he’ll need to take into consideration those other accounts as well.

 

Those are what I came up with off the top of my head.  At the end of the day, if you do go with an investment adviser make sure you find someone who has demonstrated they have the skills to build your wealth.  Just as importantly, make sure you find someone who you can trust completely.