A catastrophic health insurance policy is one that is designed to protect against devastatingly expensive medical costs – the sort of medical expenses that bankrupt people, cause people to lose their homes, ruin people’s credit, etc. – but provides little or no help for the lesser medical expenses we encounter in life. As such, catastrophic health insurance policies typically have higher deductibles than other policies, from, say $1,000 to as much as $5,000 for individuals or $10,000 for families.
If you have a catastrophic health insurance policy with a deductible of $3,000, for instance, then any expenses up to $3,000 in any given year you will have to pay. But if you run into greater misfortune – you’re seriously injured in an accident and hospitalized for months, you need major surgery, you need expensive cancer treatments, etc. – anything above $3,000 is what the insurance company pays.
The exception within the first $3,000 (or whatever the deductible is) is that depending on the policy, the insurance may cover a smattering of minor preventative care such as annual check-ups. The exception above the $3,000 is that depending on the policy, the insurance may still not cover the cost of certain specific items – like non-generic prescription drugs – or cover only a certain percentage of it, or might have a yearly or lifetime cap on how much it will pay. (So if your catastrophe is too big a catastrophe, well…)
Remember also that with a catastrophic policy, as with any health insurance policy, even when you have to pay you’re still typically getting a discount, sometimes a very big discount, because the insurance company negotiates with health care providers to get group rates for its members.
For instance, consider again your plan with a $3,000 deductible. You go to the emergency room. The bill might be $1,700 for just an individual having to pay for herself, but $600 for someone who’s part of a group – such as your insurance company – that negotiated lower prices for its members with the hospital. So even though you and not the insurance company is having to pay the entire bill because it’s under the deductible, you still save $1,100 due to having this insurance.
A catastrophic, high deductible, health insurance policy is more likely to allow linkage to a Health Savings Account (HSA), which is worth looking into, as it can provide significant tax advantages. An HSA is an Individual Retirement Account (IRA)-type account where you set aside some of your income to avoid having to pay taxes on it, as long as it’s never withdrawn except to pay medical costs. So in a year where you have to pay your entire deductible of, say, $3,000 in medical costs, if you run that through your HSA account, that’s $3,000 less income you have to pay taxes on.
A catastrophic health insurance policy can certainly be tempting because the premiums are so much lower, but of course keep in mind that you get what you pay for. You pay a lot less in premiums because the policy is inferior in certain respects to the more expensive ones.
The higher deductible is the most obvious way in which a catastrophic policy is inferior, but it’s not always the only way. Catastrophic policies often have other weaknesses that enable them to be priced at comparatively bargain basement levels. So be sure before you commit to one that you know what it covers and what it doesn’t, what yearly or lifetime maximums it might have, etc. The monthly premium and the annual deductible are very important, but don’t get caught up in only looking at those two factors when choosing an insurance policy.
A catastrophic health insurance policy may be best for younger, healthier people, the kind of people who, like anyone, could suffer a fluke “catastrophe” – a serious accident, an unexpected major disease diagnosis, etc. – but in all likelihood will have little if any medical expenses in a given year. Much like you buy fire or flood insurance for your house even though you’ll almost never need it. The deductible isn’t as big a factor for those folks, because most years they won’t come close to reaching it no matter how high or low it is, unless something truly major happens, in which case they’ll blow past it regardless of how high or low it is. So they might as well keep their premiums low. Especially if they can and will take advantage of an HSA account linkage.
Whereas with people who are more likely to have significant medical expenses in a given year – older people, people with a history of ill health, etc. – the deductible is more important and a catastrophic, high deductible policy may not be such a good idea. It’s obviously not helping you to pay $50 or $100 a month less for a policy with a $4,000 deductible instead of a $1,000 deductible, if most years you have medical expenses of close to if not above $4,000.
So the advisability of getting this kind of health insurance policy will depend on your specific circumstances and the status of your health.