• High deductible health plans have a math problem

    Aon Hewitt’s 2011 Health Insurance Trend Driver Survey explained something I had not considered before: “deductible leveraging.” That’s the term for a phenomenon that can cause high deductible health plans to have greater relative increases in premiums than plans with lower deductibles. This is counter-intuitive. Here’s an example from the report:

    Compare two nearly identical plans, the first with a $250 deductible and the second with a $1,000 deductible. For a $5,000 procedure, the first plan pays $4,750 and the second plan pays $4,000. The next year, the cost of the $5,000 procedure increases by 6% to $5,300. The first plan would pay $5,050 ($5,300 – $250), with an overall trend increase of 6.3%. In this instance, deductible leveraging increased the trend by 0.3%. The second plan would pay $4,300 ($5,300 – $1,000), with an overall trend increase of 7.5%. The high deductible plan experienced a 1.5% deductible leveraging impact in this example.

    That is, for the same total increase in health care costs, the higher deductible plan experienced a greater proportional increase in plan liability than the low deductible plan. That would translate into larger premium growth for the higher deductible plan than the lower deductible one. The higher deductible plan should still have a lower premium level, but that level would grow more rapidly. If the deductibles never change, then, over time, the rate of growth in premiums of the two plans would converge.

    I simulated this in Excel using the numbers in the above example. I imagined that the procedure continues to increase in costs at the rate given (6% per year) and the deductibles never change. I also imagined, without loss of generality, that the cost to the plan for this procedure is the full premium. (By changing wording, one can make this seem like less of a leap because, in fact, for illustrative purposes–which is all I’m using it for–it is not a leap at all.)

    This is just math, so there’s no normative conclusion to draw from it. But the math does suggest a problem. People in high deductible health plans may wonder why their health insurance premiums are going up faster than their counterparts with lower deductible coverage. The result is sufficiently counter-intuitive that few are going to understand. I expect people will feel like they’re being cheated, that health plans are ripping them off. They joined high deductible plans for low premiums only to find higher premium growth. They may suspect a bait and switch. Worse, the difference in growth rates is largest right at the start, when people are forming their opinions of their experience.

    This all presumes people actually observe the differential premium growth. A lot depends on what employers do. If they average across offered products so everyone in the firm experiences the same growth rate, deductible leveraging will be unobservable to employees. On the other hand, organizations conducting surveys (like the Kaiser/HRET employer survey) may illuminate differential growth rates. The media may notice, report the phenomenon, and fuel disappointment in high deductible health plans.

    This is a math problem that may have public relations consequences.

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    • Just to be obvious, this could be offset by raising the deductible every year. However, most of us who run businesses understand that this is a bit of a problem also. You tell your employees you are going to a high deductible plan to save money, then have to increase that deductible every year. That goes over really well.

      Steve

    • I work in the insurance industry and the practical reality is that deductibles in ALL types of plans will increase over time, negating the impact of deductible leveraging. Employers try to hold benefits steady for a couple/few years, but then they have to move to somewhat leaner benefits as a way to accommodate cost increases.

      So deductible leveraging is a reality — for CDH or for ANY deductible-based plan — but in practice the secular trend in benefits is a much bigger deal in terms of it’s impact on individuals.

    • Maybe I am wrong but aren’t most of annual healthcare cost either low that is in the range where most people can pay or high that is above $30,000 in which case insurance helps. I could see people not wanting to insure for lifetime under $350,000. (I read that $350,000 is average lifetime medical costs).

      I think of $1,000 deductible as a low deductible plan. The example could be a $10,000 deductible and a procedure moves from $11,000 to $12,000. I have a $10,000 deductible policy.

    • This is Pricing Health Benefits for Actuaries 101, the higher the deductible the higher the trend. It’s especially true for catastrophic stop-loss plans, the type that an employer who self insures might purchase. But there is a simple answer, deductibles should be indexed. Not increasing the deductible over time is quite simply an increase in benefits.

      Like steve said, people wouldn’t like it, but it’s basic math. Your own spending on health care ought to increase as total costs increase.

    • One of the things I worry about here, is that if providers know what levels of deductibles people are going to carry if everyone is going to buy $5700 plans, is setting the prices of procedures above the deductibles. There will be no motivation to set prices below the maximum deductible most people carry.

      Steve