Cost Effective Catastrophe Insurance

The Appendix Problem
When I was 9, my stepbrother came home one day complaining of terrible stomach pain.  The usual remedies proved ineffective, and as time went on the pain intensified.  It became so acute and insufferable that his parents eventually took him to the hospital.  After performing a range of diagnostic tests, the doctors determined that his appendix was on the verge of rupturing.  He was rushed into the ER and, not long after, he was one internal organ less and a few ounces lighter.

Two weeks later, the medical bills started showing up.

The testing, surgery, and recovery care could have cost my parents over $20k.  You would not believe how expensive time in front of doctors can be.  Luckily, they had health insurance that covered all but the deductible.  For a low cost each month, they eliminated the risk of unlimited medical liability.

From a young age, I understood the value of medical insurance as a hedge against the unexpected.


Reducing Medical Liability for a Low Cost
While the chance of one’s appendix becoming inflamed is low, there are many possible illnesses and catastrophic events (i.e car wreck) that may occur at any time.  Nearly all of them are out of your control.  For example, heart disease is only partially driven by diet and lifestyle, both of which are controllable.  Other factors, including family history and random risk factors, are out of your control.

You may be the safest driver in the world, but you may also live in LA, driving next to some of the worst.

The following formula conceptualizes your expected medical liability for any sickness or injury:

Medical Liability ($) = Cost ($) x Probability (%)

While the probability of a catastrophic event is low, it is definitely > 0. The problem with probability is that when said event happens to you, the value is 1, or 100%.

It pays to do some research on the cost of medical procedures for the uninsured.  The cost of many medical procedures in the United States is astronomical.  Without insurance, that cost may be well beyond your financial reach.

Imagine the scenario in which you are uninsured and are involved in a car accident.  Thankfully, you survive after an ambulance ride, a few emergency surgeries and 2 weeks or recovery.  Weeks later, the medical bills start rolling in.  Unfortunately, without insurance, you are responsible for the bills in their entirety.  What would be the effect on your finances if the bills totaled $10k?  $20k?  $50k?  Walking around with unlimited Medical Liability could wipe out years of hard-earned savings, or put you in a bottomless pit of debt. Mitigating this risk is the cornerstone of health insurance.

Considering the above formula further, the only variable you can materially influence is the Medical Liability.  You can make healthy choices to reduce some Probabilities, but others still lurk in the shadows, untamed.  As for Cost, you may be able to negotiate a lower bill with a hospital after an accident, but you may not like the amount you still need to pay.

This is why an HDHP (and HSA) is such an intelligent form of insurance.  For a small amount each month, it limits one’s Medical Liability to your OOP max.  It is both cost effective and good value. At the same time, it provides an excellent investment vehicle with which you can protect yourself.

As many a financier has stated, the first rule of investing is wealth preservation.