• Higher deductibles won’t be popular

    In recent weeks the commentariat has turned to the high deductibles consumers may face in exchange plans. Jon Cohn’s recent round up covers the bases and today’s column by Uwe Reinhardt is similarly themed.

    Over two years ago, I worried that consumers’ distaste for high out-of-pocket costs at the point of care may be the undoing of the consumer-directed health plan paradigm, of which high deductible plans are one component. The basic idea still applies today, as it did in the era of managed care: consumers and providers really hate health care cost control when it means getting less or paying more out-of-pocket.

    In terms of cost control, managed care worked. Maybe it worked too well, fueling the fire that consumed it. Will the consumer-directed paradigm suffer the same fate? The history of health care cost control is that nothing works, or not for long anyway. The optics of high deductible health plans won’t be aided by the possibility that they may lead to increased rates of premium growth. Don’t be surprised if ratcheting up deductibles which, in turn, leads to lower health care utilization and provider revenue, succeeds to the point of failure too.

    Health care cost control is hard and the history of failure is humbling.

    @afrakt

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    • Austin, this is an interesting issue. We will have to see how this plays out. I don’t doubt it will be the case that the high deductibles won’t be popular with some or maybe many people. I think there will be sticker shock. We have a paper in press know that shows people not familiar with health insurance, low income folks, buy primarily on premiums, and not copays and deductibles. So this could be problematic once they figure out how much out of pocket costs are.

      A second thought I have is that this seems ironic to me because for years the conservatives have been arguing the reform we need is to give people higher deductible plans to combat moral hazard. Well, now maybe we will be enacting this reform, this experiment, whether people like it or not. We’ll see how it plays out.

      Third, my view is that insurers in 2014 are using the high deductibles as a way to protect them against risks in a market where they don’t know much about what the pool is going to look like. As I look at premiums in some areas, they seem pretty low to me, or feasible (especially for bronze plans). So what we may see over time is the deductibles drop if insurers feel more comfortable with their risk pools.

    • Why not separate funding for extraordinary medical care and routine medical care, with private insurance for the former and public insurance for the latter. Private insurance thrives by avoiding care while public insurance thrives by encouraging care, so why not separate the two. Seems logical to me. [It’s Jon Cohn, not John Cohn, although he’s often been referred to as the “other Jonathan” at TNR, where he’s a regular contributor.]

      • Thanks. Typo already fixed.

      • That sounds pretty similar to a couple of ideas I’ve heard and read about before.

        One is the concept of value-based insurance design, where different treatments have different coinsurance rates based on the cost effectiveness of the treatment for the condition. We already kind of do that with the rules on certain things being considered preventative and subject to no cost sharing, but the vision I see is more fine grained with multiple stops between 0 and 100%.

        Another is a full plan I saw a couple of years ago that the authors called EMBRACE (no idea what the acronym stands for). They’d divide all care into 3 titers. Tier one is fully paid for by a public plan that everybody is in, no questions asked. Tier three is fully paid for by the patient. Tier two is eligible for partial or full payment by private insurers but can be paid by the patient as well. The tiers would be set by a board using evidence-based medical studies as the benchmark.

        • I don’t wish to be coy, so I’ll acknowledge that one of my main concerns is chronic illness. For most, high deductibles aren’t a big deal, since it’s an infrequent if ever occurrence. But for someone with a chronic illness, it’s permanent and recurring and will bankrupt all but the wealthy. I’ve commented before that ACA, while an improvement for those with chronic illness, doesn’t address their economic risk. And it’s the explosion in the number of people with chronic illnesses that is the source of the crisis in health care spending.

        • This makes sense but would be much easier to implement with single payer.

      • Excellent point about separating the insurance between preventive and catastrophoc care.
        That is exactly what we are attempting to do, over time.
        Each month one does not file a claim, his premium is priced AS IF his deductible is raised, with a corresponding premium decrease.
        While first dollar coverage is always available, by voluntarily decidig to not file claims (paying them out of pocket, or employer-employee cost sharing), premiums are reduced.
        Over 36 months, premiums can be reduced 60%; over 60 months, 80%.
        And, for chronic claims users – theuypay fully community-rated premiums, as the old Blue Cross policies used to offer – when they had federal tax exempt status for offering plans not commercially available.
        Don Levit
        President of National Prosperity Life and Health

    • I should also acknowledge what I consider a potential flaw in ACA, which is the annual open enrollment period that allows insureds to change plans, and not just change plans, but upgrade, so a healthy person can enroll in a bronze plan with a high deductible and then, if she suffers a chronic illness, upgrade to a platinum plan during the next open enrollment period (or even before if one of the exceptions applies). I say flaw because of what this could mean for platinum plans if they end up with all of the high risk insureds (i.e., those with chronic illnesses). The spread in premiums between the bronze plans and platinum plans may become so great that it eliminates the benefit (i.e., little or no deductible) of enrolling in the platinum plan.

    • One value of a bronze/silver plan that the article doesn’t mention – access to contracted rates.

      I do believe there will still be plenty of coinsurance shock, and agree with the sentiment; but “sticker shock” will be mitigated (somewhat, and perhaps further obfuscated) by giving the newly insured charges at a level that the insurer pays.

      Love the blog, by the way. First post.

      MP

    • I offered a detailed version of this public / private option to senators Clinton, McCain and Obama when they visited my state in 2008.

      What I have found is that no one is interested in a bipartisan, balanced solution. Back then, they were interested in their concept (maybe there were five or six distinct options at the time) and if they could not get their concept adopted/implemented, they preferred the status quo. It was only the election of Scott Brown that led, ultimately, to the PPACA/HERA we have today.

      Again, coming from the employee benefits side of this equation, I agree that a better health reform solution would have been one that borrows from concepts offered/proposed in the past by Bill Frist, Ted Kennedy, Jack King, and John Kerry … and Phil Bredesen, former Democratic Governor of TN.

      Define a baseline of coverage (a la CoverTN) that would be paid for by individuals coupled with a public reinsurance/stop loss program. Keep the exchanges or not. Individuals below a specific income level would be eligible for Medicaid. Others would be required to fund their coverage through the federal income tax system – where unpaid premiums accumulate as unpaid taxes.

      The stop loss / reinsurance coverage would have an individual attachment point of $25,000 a year), where the coverage (with minimal cost sharing to prevent abuse) would use Medicare DRG/RBRVS/Reimbursement rates/limits, and would be administered for a fee by the same insurance companies that administer Medicare today. The stop loss / reinsurance coverage, as a public plan would be funded through a new Medicare, per capita tax (not based on income, reflective of the nature of the coverage) – collected concurrent with income taxes.

      To that, add the employer mandate. The employer would be mandated to offer coverage to all employees (full or part time) and their spouse and dependent children (waiver allowed for those covered under a spouse’s plan, a former employer’s plan, etc.) where the coverage must meet the IRC 223 minimums. Employers need not contribute towards the cost of coverage, but if they do, they could vary their financial support based on hours worked. I’ll leave it to others whether or not tax preferences accorded employer sponsored coverage should be capped, or even eliminated.

      With the low attachment point, individuals and employers would find the coverage to be reasonably priced. With the public reinsurance, providers who treated individuals when they had private coverage could not discontinue services/treatment once reinsurance kicked in.

    • Here is the fact that should always be brought up in these kind of conversations. High deductibles will not work.

      I crunched the math for Medicare. Even with a 10,000 dollar deductible 50% of healthcare costs still must be paid for by the government. This 10,000 deductible, would leave many patients (>25%) exposed to huge costs on an annual basis and even in the best scenarios would only bring down health spending to above the level of other comparable countries. Is this kind of cost control worth it given the consequences?

      • I have seen it work where individuals start to accumulate monies in Health Savings Accounts.

        In terms of Medicare beneficiaries, they are not HSA-eligible.

        Certainly, “high deductible” health plans don’t work without saving during years where the out of pocket expense is minimal.

        Finally, today’s “high deductible” is anything but “high”. To save in a HSA, it must be $1,250 in 2014. That’s the equivalent to less than a $100 deductible for a comprehensive major medical plan in 1984 (when adjusted by the change in health care costs over the past 30 years).

      • My favorite TIE post confirms your view:
        http://theincidentaleconomist.com/wordpress/why-im-skeptical-that-increased-cost-sharing-will-work-to-reduce-spending-part-1/

        Shaving off a few dollars here and there isn’t going to make a dent in the real problem, which is serious illness. Most people, when faced with something that has a real potential to kill them or seriously destroy their quality of life, want the best medical care, not the cheapest. And they’re certainly not qualified to discriminate between treatment options.

        The other thing, is that a lot of “information” is advertising.

    • “Health care cost control is hard and the history of failure is humbling.”

      It’s difficult in only one developed country (which also spends massive amounts of public money on its war machine). Everywhere else, monopoly purchaser(s) negotiate and establish universal prices and manage health care within a budget. Most do so quite successfully and when they don’t, they hear about it. (Managing through the next 30 years will be difficult everywhere but the U.S. doesn’t appear to be better-positioned to weather the Boomer retirement.. War department cost management doesn’t seem to be part of that culture, either.)

    • I would think different types of costs control are better depending on someone’s income level.

      If people had to pick a poison, those with higher incomes would prefer a high deductibles since they are able to afford it and are more likely to utilize HSAs.

      Those lower incomes would prefer a manged care approach since the deductibles are unaffordable and dealing with managed care is better than nothing.

      • @Brian I agree 100%. IMO we might should cover the poor from the first dollar but encourage the middle-class and the rich to have enormous deductibles.

        Here is a plan that I think might work:

        The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty line income (say $25,000 for a family of 4) + $300. So a family of 4 with a trailing year adjusted income of $30,000 would have a deductible of $5,300. A family of 4 with a trailing year adjusted income of $80,000 would have a deductible of $55,300. Middle class and rich people could fill the gap with private supplemental insurance but this should be full taxed. This would encourage the middle class and rich, who are generally capable people, to demand prices from medical providers and might force down costs. They could opt to pay for most health-care out of pocket while the poor often less capable would be protected.
        It is not a perfect plan but it might help. Some deregulation of health-care would also help the poor gain access. The gauntlet that Doctors have to run these days to get to practice seems like an anachronism in today’s world. Let smart people get to practice medicine after on the job training. Let the medical businesses decide who is qualified to practice medicine. 12 years of training to tell if my child has an ear infection is overkill and reduces access to health-care for the poor.
        Another benefit of my plan is that it would encourage capable Americans (the rich and middle class) to be a counter weight politically against the providers.

    • What makes discussing this subject so frustrating is that critics of Obamacare were all in favor of high deductible plans, which they said Obamacare precluded, and are now all opposed to high deductible plans now that they are so prevalent under Obamacare.

    • One problem with high deductibles (and I’m a fan of them in general) is that they expect people to play the role of consumers in a system that lacks the price signals provided by normal markets. This isn’t because health care is too complicated for real prices (if that were the case, there wouldn’t be doctors and hospitals charging ‘package’ prices for procedures, see: , but because of the various perverse incentives that the dominant third-party payer system creates.

      Broadly speaking, paying directly for primary care and some relatively minor to mid-level treatments (hernia repair, for example) IF the person paying for it knows how to shop for it. If they’re simply going to walk into the local hospital and write a check for whatever the hospital bills – well, that’s a great way to pay 3-5 times what you should.

      One thing I suggest people with high deductibles consider when it comes to these sorts of relatively inexpensive treatments – don’t bother even telling the provider you have insurance, at least not at first. You might be able to get a cheaper price just for paying cash.

      • Sean. Why do we have to be exceptional in this respect amongst developed nations? Most people don’t have the cash to pay out of pocket for a 10,000 ACL surgery, even if the prices are published. The high deductible plan is a fetish of market fundamentalists, and especially for those who have never worked in a medical setting.

        • Furthermore how high do you expect deductibles to be? Even with a 10,000 deductible, which would bankrupt most medicare beneficiaries especially the 10% (4 million) with chronic conditions, half of medicare expenditures would still be the government responsibility.

        • Without getting into what my fetishes are and are not, I’ll just point out what I’ve always thought is the obvious flaw in this sort of critique of high-deductibles. The critique assumes that a majority of people will, in some fashion, be paying for their own health care in premiums to an insurer, in salary/wage reductions for employer-sponsored care, or taxes for a government program. This holds true whether you’re talking about the pre-ACA system, the ACA, single-payer, or some other model.

          So why is it imaginable that someone paying $10,000 for health care (combined premiums, employer share, and taxes) for ‘free’ at the POS but not imaginable that this person could pay $2,000 for catastrophic premiums and then save $8,000 in an HSA to pay for the day they have that $10,000 ACL surgery?

          I’ve way oversimplified of course, and I’ll be the first to say that not everybody is going to be able to manage this and it’s appropriate to talk about how to make sure the indigent, for example, are also taken care of. But it seems absurd to think that someone paying for healthcare through premiums, reduced compensation, and taxes is necessarily going to be economically incapable of using the savings from their lower premiums to simply pay for most of their needed care directly in a reasonably well functioning market.

        • Most Americans can amortize $10,000 loans for cars and homes. Health is more important than homes are cars. If a person cannot amortize a $10,000 bill the after an illness the are probably in the bottom 20% of earners and if so the illness will probably bankrupt them with or without the bill.

      • You need to get the in network contracted rates, and the out of pocket costs need to accumulate towards the out of pocket maximum.

        • Well, ‘need’ is probably the wrong word. Most people will never hit their deductible in any given year, so staying in-network really isn’t as important as it may seem, at least if you can find something cheaper elsewhere. I’d rather pay $800 out-of-network for a colonoscopy than $3,500 in-network.

    • This a good exchange and I will add more details later…..

      but let me offer one observation now:

      America expects the individual patient to be the kamikaze of cost control.

      Our politiical class does not have the willl to impose maximum prices on hospitals or drug companies…..due in large part to campaign financing laws.

      In other nations, schoolteachers and union reps are elected to Parliaments, with few campaign debts, and they are not cowed by organized medical cartels.

      Bob Hertz, The Health Care Crusade

    • Although I am a leftist, I was never opposed to high deductibles if they went along with tiny premiums. The whole HSA approach by the Heritage types made some sense — if your insurance premium fell to $100 a month, then you could put money aside and after a few years you could handle a
      $5000 deductible.

      What I find appalling about some of the ACA exchange policies is that they are ‘catastrophic insurance at premium prices.’ A policy with a $5000 deductible should be close to free, and not just if you get subsidies but close to free for anyone.

      I have not gone onto the exchange, but I read anecdotes in places like Naked Capitalism that a Bronze policy can cost up to $500 a month at older ages in some locales.

      I suppose I am showing my naivete, but in my mind $500 a month for an indvidual should get you an old-fashioned Blue Cross plan with a $250 deductible and 80/20 coinsurance up to maybe $2500.

      Are these awful rates due to guaranteed issue? Are they due to unlimited lifetime maximums? It does seem to me from my reading that the Exchange policies are great if you get cancer, but leave you with large bills if you just have a baby.

      It may be a case of the perfect being the enemy of the good.

      • It must be guaranteed issue. I have a 200 a month bcbs with 300 deductible and 2500 cap. I still have it but the closest I see on exchange is 350 a month.

      • The reason that there are high deductible plans without super low prices is, in my guess that the people who advocate for high deductibles didn’t look at actuarial data.

        Half of all Americans spend less than $300/year on healthcare and most expensive 5% account for half of all spending on healthcare. If you effectively incent the least expensive 50% to spend 10% less on health care, you’ve saved a measly $30/person. The most expensive 5% have blown through their deductible, no matter how high and/or gone bankrupt. And that’s still 50% of all spending.

        • The savings may be $30 for the individual, but it is more for the insurer. At NPLH, we will be offering discounts every month for low or no claims.
          These accumulate to 50% off of the traditional premium in 36 months, and 80% off of the traditional premium in 60 months.
          The chronic claims users pay a fully community-rated premium, what the Blues used to do before they lost their federal tax-exempt status for not offering products which were not commercially available.
          This patented product wil be commercially available in the spring of 2014, but only for self insured employers of 300 or more employees.
          We will be available in Texas, and other states for fully insured plans in 2015.
          Don Levit
          President of Natonal Prosperity Life and Health

      • It’s a mix of things, including guaranteed issue and community rating (although for older people, the community rating is more a help than a problem). There’s also “free” preventative care – in the past a high deductible plan wouldn’t cover anything (in most cases) until the deductible was reached, now there are a bunch of treatments that are covered for “free,” thus driving up premiums. There’s also all the added cost of having insurance companies reprice services that the patient is paying directly for, a waste in my opinion but insurers do seem to love their networks.

        Take ‘free’ birth control (I’ll leave out the discussion of whether that’s good policy or not). Every insurer is looking at their expected costs and figuring that a lot of females between 18-40 are going to get birth control pills. Let’s suppose they think half of them will. They’ll whip out their calculators and do the math, and determine that they need to add, say, $10 month to every policy premium, regardless of deductible. Then they’ll do the same for 3 ‘free’ primary care visits, and everything else. It adds up, and viola, eventually we have what you reasonably enough call catastrophic coverage at comprehensive prices.

        • Yes, Sean, that is the typical way insurers price benefits
          covered at first dollar. We will be ” EDUCATING” OUR POLICYHOLDERS
          TO VOLUNTARILY PAY FIRST DOLLAR COVERAGE OUT OF POCKET (COULD BE
          SHARED BY EMPLOYER OR EVEN PAID IN FULL BY EMPLOYER). DOING SO
          REDUCES THE EMPLOYER’S RISK AND ADDS TO THE RISK FOR NLPH, AS WELL
          AS REDUCING THE EMPLOYEE’S PREMIUM. DON LEVIT

    • Simon, thanks for bringing up high risk pools.

      If we had national high risk pools supported by taxes — or if we just allowed high risk people of any age into Medicare — then the cost of these pools
      (at least $100 billion annually) would be borne by all taxpayers according to their income.

      Wealthy seniors would help pay, well-insured corporate employees would help pay, etc. Some of the persons would be Democrats incidentally.

      Instead, the costs of high risk insureds are being forced onto a small subset of persons above the subsidy level in the individual market.

      I sympathize with a lot of the complaints we are hearing.

      • “Instead, the costs of high risk insureds are being forced onto a small subset of persons above the subsidy level in the individual market.”

        This is only true to a certain extent. The cross subsidy is more visible in the individual market but that doesn’t mean it doesn’t exist in employer healthcare. You just can’t see it because its disguised as less wages or higher premiums there.

    • Pres Obama is finding out that in American politics, visible is bad.

      The Republicans in 2003 enacted the ultimate invisible subsidy in Medicare Part D.

      It was not paid for at all, not even with hidden taxes.

      • Bob: Excellent point. Part d is paid for 75% by the federal
        government and 25% by the participant. What a deal, huh? Every
        dollar paid by the federal government is added to the deficit.
        There are enough people to have a label (the Trust Fund
        Perspective) who believe that Part D is fully paid for, because
        Treasuries are as good AS CASH – ACTUALLY BETTER THAN CASH
        FORTREASURUES (WHICH ARE UNFUNDED) PAY INTEREST! Don Levit

    • Sean, I sometimes think that the drafters of the ACA must
      have all come from government employment. i.e. they had to know
      that mandates plus guaranteed issue would drive up premiums. A
      freshman course in health policy would have made that very obvious.
      But their next thought must have been that employers would just
      adjust to higher premiums and still protect their workers. This is
      working out very different in flyover country.

    • But from what I understand people who pay directly for their own insurance buy high deductible policies, so it looks like the problem is that people want low deductible because they do not know how much they cost

      Angus Deaton said the below here:
      “So people don’t perceive the cost of health care and they don’t understand that it’s making their wages lower than they otherwise would. And so they think this health care is coming for free, and so that takes a lot of the pressure off to reform it and get rid of this absurd system we have. So that’s the bit I 100% agree. It’s clear that–the CBO (Congressional Budget Office) and other people have put together estimates of what the income distribution would look like if you impute those things back in again. So, people are getting a lot of health care through the government, through Medicare and Medicaid. And if you add those back in, valued at something or other, then there’s been less increase in inequality, less decline in real wages, if you like the compensation basis where you add the benefits back in. The problem, though, you could imagine is if we get to a state where 50% of the economy is being sucked up by health care then you can’t– Russ: [?] good news. Guest: Right. And also you can’t eat the health care for breakfast; you can’t feed[?] your kids on it. And so it may be worth something but at some point it becomes not worth very much if it’s bankrupting you at the same time. And you can’t really do what a lot of economists do which is add the value of that back on and say, okay, you are all right because you are getting this huge amount of medical care. Okaaay, but I don’t want that huge amount of medical care; I’d much rather have something else. So, that’s sort of a problem, I think, in the way people do these calculations.”

      And the PPACA penalizes employers for not providing health insurance! USA politics is very corrupt!

    • Note to Floccina on amortizing $10,000 in medical costs:

      You are on a good track here.

      However, a medical loan will be unsecured, so it might carry horrendous credit card interest rates.

      I have proposed that Medicare make interest free loans to patients who are underinsured or uninsured.

      The hospital or clinic would be paid upfront, according to the Medicare fee schedule not the chargemaster.

      The loans would be repaid by payroll deduction, and/or forfeitures of future refunds.

      I think this is a win win proposal.

      Instead for forcing 20-30 million people to buy insurance, which is doomed, you help the 3-5% of them who get sick in any one year.

      Bob Hertz, The Health Care Crusade

    • The person who just got done with a major medical procedure may be the worst credit risk possible.

      We do need government and charity.

      Although considering the awful status of student loans in the US, maybe just charity.