The greater your chances of having high health care costs next year, the more important is for you to have a health insurance. What your health care costs will be next year depends on your chances of illness or injury and the cost of treating such conditions.

“Expected Value” is one way to estimate future costs, based on which you can decide on an affordable health insurance plan. Expected value is the frequency of something happening multiplied times its dollar amount. For example, if you have a 1% chance of losing $2,000, then the expected value of your loss is 1% times $2,000 which equals $20. When more than one thing can happen, you add up the expected values for each. For example, if you expect to have a 2% chance of a $20,000 hospital admission, a 10% chance of a $1,000 emergency room visit, around 5 office visits at $100 each, and around 10 prescriptions at $20, then your overall expected value for health care costs is (2%)($20,000) + (10%)($1,000) + (5)$100 + (10)($20) = $400+$100+$500+$200 = $1,200. This is called your “Expected Cost.” Expected cost is one of the factors that affects your premium for health insurance.

Expected cost is like an average, except that an average looks at the past and expected cost looks toward the future. When you expect the future to be like the past, you can use historical average cost as an estimate for future expected cost. However, if there is inflation, a change in how healthy you are, or change in what your health plan covers, then your future expected cost will be different than your past average cost. “Underwriting” is the process that insurance companies use to estimate expected cost and set insurance premiums. Underwriting often considers past average cost, chronic medical conditions, demographic factors such as age and gender, and health care inflation.

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