AskDong

With the deregulation of the auto insurance industry in Massachusetts, I’ve decided to take a fresh look at my auto and home insurance policies. What dosee as the pros and cons of going through a broker versus a direct carrier? Are the carriers that brokers work with able to offer better rates so that the total cost to the consumer is the same (or less?) when adding in the (undisclosed) broker’s commission? I used to have a negative view of brokers in general (still do for real estate), but recently I had a positive experience with a mortgage broker. I wonder if the same principles of better customer service, flexibility and rates apply to the insurance market as well…

Thanks,
Noah S.

In a perfect world, you should always be able to save money by avoiding a broker. Brokers are in the end just middle men. They take a cut, a cut that could be yours. However, in reality it’s much more complicated. Like Noah, I share his good experience working with a mortgage broker. I ended up getting a much better rate than I could find direct. For that service I indirectly paid $4300, the broker’s cut on the transaction. You would think I should’ve been able to directly talk to the bank and get the same rate. I couldn’t. Most of the time when you talk to the banks directly, they actually give you a fairly non competitive rate. Don’t think just because you’re a good customer, they’ll cut you a break. Banks are often in the business of treating their most loyal customers poorly.

Because the best rates are often not directly available to the average consumer, I’ve found in my own experience that mortgage brokers do often provide a valuable service. This is not to say that one wouldn’t be able to do extra legwork and find a better rate directly from a Bank, but at least sometimes a good broker can uncover rates that you might not be able to dig up. I found this true the last time I shopped for a mortgage. I was recommened a broker, and found he had the best rates I could find. I called half a dozen banks directly, and number of other online mortgage brokers. By far the best rates I found came from the brokers and in particular the broker I was recommened. My broker was great. It wouldn’t suprise me that Noah and I worked with the same guy.

The question is however if this experience can be translated to other brokers, especially in the Insurance world. Given that I have limited experience with insurance brokers, I don’t really know. Complicating the matter is that in the world of insurance is made up to two separate spheres. There is the property and casualty world on one side, and on the other health and life. I would imagine the broker experience really depends on the type of insurance. Given the varied number of insurance providers and products, the competitive landscape is far from clear cut. If a broker truly can shop around amongst many different providers, I would imagine the more useful the broker. If on the other hand there are only a few providers, and or very aggresive direct insurance providers, then it’s likely the cost of the broker does not outweigh the potential savings. That said good insurance brokers (and agents for that matter) are able provide a valuable service not on the basis of just cost, but information. Insurance is a complicated product that people deserve sage advice on.

With health care reform in the air because of the current presidential primaries, I thought I would explore the Massachusetts Healthcare Plan which some candidates past (Romney) have touted as the solution for all of America. Health care reform is something I feel strongly about and an issue that is both complicated and confusing.

The highlights of the Massachusetts are:

• Individual Mandate - Forces individuals to pay for insurance or impose a fine that’s nearly 50% the cost of insurance
• Subsidized Health Insurance for Low Income Earners ($29,400 for Individuals and 60,000 for a family of four)
• Penalties for Employers who fail to offer insurance to employees
• A government run marketplace for private individual and small group insurance - The Health care Connector

The Massachusetts plan is a hybrid private/public solution. It uses the legal power of the Government to mandate that both individuals and employers contribute to sharing the cost of health care either by purchasing insurance or penalties if insurance is not chosen while still allowing consumers choose specific plans offered by private insurance companies. It shifts some of the monies that have in the past gone directly to paying for the cost of caring for the uninsured towards subsidies for individuals to help pay for health insurance.

I thought I would shop for a plan and compare it to the plan I currently have via my employer. The Massachusetts’s Health Connector effectively breaks the plans into three categories; Bronze, Silver and Gold

• Bronze - Smaller Network, Low Payments, Higher Co-payments and Deductibles
• Silver - Moderate Co-payments, and higher Deductibles than Bronze plans and smaller networks than Bronze plans
• Gold - Comprehensive Network, Low Co-payments, No Deductibles

While I personally would most likely opt for a Bronze plan with the higher out of pockets costs, I would actually prefer higher out of pocket costs and a comprehensive network. This is not an option. This is no great loss, however since people like me generally already have insurance through work - which I do.

I compared three different plans, one from each category.

• Bronze, Neighborhood Health Plan, $201.30 Monthly Premium,  $2,000 Deductible, $5,000 Max, $25 Doctor Visit, 20% co-insurance on lab tests
• Silver, Advantage HMO Select 750, $271.50 Monthly Premium, $750 Deductible $5,000 Max, $15 Doctor Visit, lab tests covered under deductible
• Gold, Blue Cross Blue Shield, $526.90 Monthly Premium, No Deductible, $10 Doctor Visits, lab tests are free

These plans are not cheap, but like many fortunate Americans, I don’t actually know if these plans are expensive. I have never shopped for health insurance. I’ve always had insurance through work, and as a result have had no reason or option to shop around. For comparison my insurance has no deductible, $1,250 Annual Max I pay out of pocket, and $25 Doctor’s visits.  While I know I pay approximately $200 from the “flex” dollars I get as part of my benefits package, I actually have no idea what the total cost that is actually paid by the company.  One reason insurance and health care is so expensive is neither the cost of insurance nor the cost of health care is transparent.  I don’t know what insurance costs, and I definitely don’t know what lab tests cost.  Neither doctors or individuals are given incentive to minimize costs.

I think part of this lack of transparency is related the employer paid nature of health insurance. Why is health insurance tied to an employer, and full time employment for that matter? That linkage has increased the incentive for employers to prefer temporary or part time workers over full time employees. While I think that companies and individuals should share the social burden of health insurance, it would be much simpler to do so via a payroll tax (while potentially cutting other taxes) to help insure the uninsured. I also believe if we let individuals not only pick and choose their insurance but give them actual exposure to the cost of care, lower prices would result. This was the hope in Massachusetts, but it has yet to happen. The road to sustainable universal health insurance is a long one, and one that will require tinkering. Not everyone will get everything they want. Those who already have quality care may find waiting times for appointments may go up and we will probably have to accept that universal care will not truly cover everyone for everything.

The Gecko (image courtesy of Adweek) may be coming to town.  I got a letter from my insurance company, Amica, the other day. Apparently Masschusetts will be semi-deregulating auto insurance in April of this year. I knew there had been some talk about this last year, but I hadn’t really followed the matter. While this should be great boon to many drivers, it may not be for me.

While I’m supportive deregulation in general, and supportive of deregulating Massachusetts’s auto insurance, I’m not wholly wed to the idea that insurance is an industry that must be universally deregulated. There are many good reasons for the Government to have a hand in how insurance is operated which are due to the most fundamental nature of insurance. Insurance is about risk pooling, and works best when the pool is both large and diverse. Socialization is at the heart of insurance, and the Government, generally speaking, is the arm of socialization.

One of the biggest problems with light to no regulation with respect to insurance is that it allows insurance companies to excessively cherry pick it’s customers. When an insurance company only picks the best customers, i.e. customers who don’t make claims, it can make insurance prohibitively expensive or unavailable for the rest. In the world of Auto Insurance, this is not quite as a big of a deal as these high risk drivers are high risk because of their own bad choices. However, for example in the world of Health Insurance, without Government intervention who most need insurance could be put in position where they can’t afford insurance even when they can get it. Do we allow the “free market” behaveindiscriminately as to deny health coverage to the old, and or sick?

I’ve digressed since I think deregulation of Auto insurance in Massachusetts is a good thing. Hopefully we’ll have more insurance companies such as GEICO coming in and offering lower rates to good drivers. Where as with Health Insurance, I believe there needs to be some regulation to prevent too much discrimination of poor risks, the case to punish good drivers and reward bad drivers is much more valid. At the same time it can be taken too far. Given that auto insurance is required and that not insuring bad drivers would only add to the burden of good drivers, regulation is still required to ensure that everyone can buy insurance at reasonable rates. When someone drives without insurance everyone suffers.

So why do I think I might get hurt in all of this? My driving average is rather pedestrian. Not spectacular, but certainly not terrible either. Very average I Imagine. However, I live in a urban area, and urban areas tend to be more high risk. The last time the state allowed for competitive rates in 1977, rates skyrocketed for urban driver, and the state had quickly re-regulate.

When I was in my twenties, I hardly used to think about insurance other than what I needed for my car. Now that I’m in my 30s (though barely), I’ve become very insured. When you’re young and invincible, insurance seems like an after thought. It’s one of my bigger regrets that I didn’t tackle my insurance needs earlier. One word - Disability. But before we get into that, let’s go over all the insurance that I have personally chosen to carry and pay for (and you should too). Each of these could be a topic unto themselves.

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Dong, I recently left my job at the State, and am now self-employed. Because I was getting full benefits before, I didn’t pay much attention to my health insurance. Now that I’m paying for it out of pocket (through COBRA, for the time being), however, I am more interested in coverage, premiums, copays, providers, etc. What should I look for in selecting coverage?

Noah S.

Health insurance is something many of us don’t think about enough. We either think we can’t afford it or we have it through group plan with our employer. COBRA effectively extends the group coverage that you had with your previous employer for up to 18 months after separation. Group policy are always more cost effective than individual policies. If you are eligible to join a group policy via a trade organization, or other affiliation, you should at least explore that before looking for an individual policy.

First off buying individual health insurance is costly endeavor that can total hundred per month.

The basic principles of Health Insurance are the following:
1) Deductible - What you need to pay out of pocket every year before the insurance kicks in
2) Copay - What percentage do you still have to pay after the insurance has kicked in
3) Stop Loss (Max out of pocket) - What dollar amount you stop paying your copayment
4) Maximum Benefit - The total amount that the insurance is willing to pay

The first three characteristics are where you can really make choices to either reduce or increase your premium. The maximum benefit should be at high level (in the millions) regardless of what level you decide on the other characteristics. The higher the copay, deductible, and stop-loss, the lower the premium. Choose a level that you are comfortable with paying out of pocket with cash that you have at hand. Managed care plans such as HMOs and PPOs effectively mask these underlying costs.

As for choices in plans there are basically two types, indemnity and managed care. An indemnity plan is classic insurance with a deductibles, copayments, and free choice. HMO, PPO and POS are considered managed care plans. In these plans a visit to the doctor will only cost a standard copayment of something like $20. In addition a yearly physical and other features may be included in the cost of the plan. The primary doctor is intended to manage your care by providing just the right amount of service. HMOs are at one end of the managed care spectrum while PPO and POS are at the other. PPO and POS are much closer to a standard indemnity plans in that you have the option to see whom you want when you want (though at added cost via copay or deductible). In a HMO plan you have to see someone who is the HMO network to get coverage. In a PPO plan you can see anyone but pay more (via a copay) for someone outside the network. HMO’s have gotten a bad rap because of the perception that medical care is doled out by non-medical people in order to cut costs. If done properly a HMO will pass those savings onto their customers with little loss in the quality of care.

In addition recent law changes have introduced an investment vehicle know as a HSA (Health Savings Account) which works like an IRA for Health Care. Contributions to the HSA (2650 limit for an individual) are tax deductibles like a standard deductible IRA while distributions for medical expenses are tax free like a Roth IRA. At 65 or in the event of disability, you can even treat the assets as if they were assets in standard IRA and take distributions as ordinary income (subject to taxes like an standard IRA). Combining a HSA and high deductible insurance plan makes a great deal sense especially for someone who’s young and in good health.

There are many points to consider when choosing a plan. Which doctors you want to be able to see? How much are you willing to pay out of pocket? How easy it to see a specialist?

The following commercial website has some good and more detailed information covering some of the topics I’ve touched on.

http://www.medhealthinsurance.com/

-Dong