Seth’s Blog on Finance

Are You Going to Burn $30,000 on Medical Insurance?

What is your answer to the question I pose to you in the title? It is the one burning question (pun intended) a person should ask him/herself before committing to a Shield policy.

Does this mean I am against hospitalisation Shield policies? If you have been following my blog from my regrettable experience with my dad to the example of our Health Minister’s surgery, it is clear that I am a strong proponent of such medical insurance. So what do I mean by “burning $30,000 on medical insurance”?

There are currently five insurers who provide integrated Medishield “Shield policies”. If a 25-year-old person is going to purchase a Shield policy for private ward coverage until he is 90, he can stand to pay as much as $30,000 more than he should over the years. It is worth noting that most of such policies command this high premium.

What does this premium accord to the insured over the more affordable policy? Mainly, the pricier policies cover 100% of the bill from the first dollar. This is a feature that many agents are trumpeting. It sounds good not having to pay for your hospital bills, but the Mathematics of this is not as attractive.

The more affordable policy does not cover 100% of the hospital bill but limits the insured’s co-payment to a maximum of $3,000 per policy year. In other words, if someone taking the more affordable policy is hospitalised on 10 separate occasions, incurring the maximum bill required for the co-payment to max out at $3,000 each time, he would still not be worse off than someone who has a 100% coverage. What’s more, the co-payment can be partially paid for with one’s Medisave subject to certain limits.

Moreover, the $30,000 figure has not yet taken into account the opportunity cost of paying the extra premium over the years!

Mathematics aside, there are people who claim that prices of the policies are (somehow) correlated to the quality of assurance you get. A quick check at MOH website shows the cost-effective policy I’m talking about at first place in claims experience. One of the insurers which offers expensive policies is nowhere near the top spot.

Furthermore, a 100% coverage leads to a buffet-style over-consumption mentality amongst policyholders, making one feel the need to opt for the best healthcare available even if it’s not necessary. This has certain implications – The insured’s claim might be rejected depending on the circumstances, and he would find himself stuck with a high bill to pay. Also, such eat-all-you-want coverage can result in a worse claims experience for the risk-sharing pool, leading to potential increases in premiums for everyone. A co-payment that is capped at a relatively small sum is a good deterrent for such wastage and yet remains affordable for the insured to pay when the need arises.

The true costs of financial products are rarely seen by the layman, but has frightening financial implications for themselves. My philosophy for my clients and my own insurance portfolio has always been cost-efficiency – it’s not about price; It’s about value.

11/06/11 Post-Scipt: Upon some reflection I suppose “burn” may be too strong a word to use. People taking up any kind of insurance plan need to analyse the costs vs benefits and make an informed decision.