• Why buy insurance for the little, predictable stuff?

    In recent weeks, I’ve noticed the reemergence of the question of why people insure for relatively low cost, predictable health expenditures. This has come up in the context of contraceptive coverage, but it applies to many other things like routine prescription drug use or physician office visits. There are a variety of reasons why insurers might want to provide coverage for routine care. Many boil down to the fact that it might be cost effective to do so if encouraging policyholders to consume such care offsets a greater amount of more expensive care in the future. Certain types of coverage may also serve to attract certain types of (cheaper) consumers.

    But there are other reasons, pertaining to why consumers might want coverage for routine health care use. First, if it’s through an employer, the consumer benefits from the employer-sponsored health insurance tax subsidy. That makes covered care cheaper than it would be if consumers paid for it with after-tax dollars on their own.*

    There’s another reason too. Not recently, but in past years I’ve blogged a lot about the bargaining power of health insurers, that they act like bulk purchasers to negotiate volume discounts. Buying coverage for routine care is like prepaying for access to lower prices. This idea is the subject of a recent NBER paper by Robin McKnight, Jonathan Reuter, Eric Zitzewitz titled Insurance as Delegated Purchasing: Theory and Evidence from Health Care. Turns out, according to their work, this delegated, bulk purchasing function is a pretty big deal.

    First, we highlight the fact that insurance provides an incentive-compatible means of engaging the services of an expert buyer. Second, we demonstrate that the discounts obtained by insurance companies are economically meaningful. When we study drug prices, we find an average discount of approximately 10%. When we study the prices paid for other medical services, such as doctor’s office and hospital outpatient visits, the average discount is even larger.

    This suggests another limitation of self-insurance.

    [A] form of self-insurance that has expanded recently is high-deductible health plans, which have grown from 4% to 17% of enrollees from 2006 to 2011 []. In these plans, households are responsible for the first $2,000-$5,000 of expenses, with a median deductible of about $3,500 []. Had all households been enrolled in plans with a $3,500 deductable, 38% of households would have failed to meet that deductable, and the average household would have borne 62% of expenditures (using our weighted MEPS data, and adjusting to 2011 dollars using the CPI – Medical Care). Advocates of these plans [] highlight the beneficial incentives they create for consumers to control their own health care costs. Set against this incentive, these plans weaken the price-negotiation incentives for insurers even more than employer self-insurance, as individuals have less ability to shift away from plans administered by insurers who negotiate poorly. Whether the benefits of stronger incentives for consumers will offset the weaker cost-minimizing incentives for insurers is an open question; the answer may differ for different types of care, depending on the potential for overconsumption, postponability, and price shopping.

    I assume that it is typically the case that consumers paying out-of-pocket in the deductible range have access to the insurer’s price. If that’s so,** one thing that might help is more price transparency. Even if consumers are paying their own way in the deductible range, they do care about price (especially those who do not predict that they will blow through the deductible). If they are aware of how much better the insured vs. uninsured price is, then the pressure for plans to negotiate vigorously would remain.

    * However, care purchased with dollars saved in a health savings or flexible spending account would be bought with pre-tax dollars.

    ** If this is not so, it drives me crazy. Why not? Anyway, can anyone tell me if this is typical, universal, rare, or what?


    • Consumers would pay the negotiated price for care in the deductible. This is one of the major reasons that providers remain in the loop for so much of the insurance paperwork. If provider prices were known and transparent, an insured could pay the provider and then only submit the claims if the insured met the deductible. Since the price is unknown until after the claim is submitted to the insurance carrier, the provider or the member always needs to submit billing information.

      The effect price negotiation can have on the effectiveness of deductibles can be large. One of the drivers of the different plan designs in this Kaiser Family Foundation paper is the overall negotiated provider reimbursement rate.

    • Your assumption that consumers (patients) paying for services in the deductible range would know the price is fallacy. At least, up front knowledge of prices. As an example, when I was a patient in the ER recently, I had no idea the cost of the hospital bill, ER doc bill, and the radiologist bill in advance. Considering I work as an ER doc in that very same ER, how could you expect a regular patient (consumer) to have access to that info?

      Luckily, my insurance “discount” was nice.

      • I have a high deductible PPO policy, and have visited providers and asked about the price upfront. They always say that they can’t tell me until after the visit, because the price depends on the diagnosis. So, I don’t learn the cost until after I get the summary of benefits from the insurance company (in about a month) and then it usually takes another month before I get the bill from the physician’s office.

        So no, price shopping in PPO-land is impossible unless your insurer makes available a database of prices, and mine doesn’t.

    • How common is it for insurers to negotiate separate networks for their high deductible plans? What benefit would there be in that, versus giving them the same network their PPO or other plans use?

    • ** Yes. Patients pay their deductible at the same negotiated rate as the insurer, at least they do so in my area. Of note, most HSAs are done through an insurer, so HSA patients also pay at the discounted rate obtained by the insurance company with which they work.

      Of note, the high deductibles are causing problems for us. We are having to spend a lot more time and effort tracking down the payments. We are having to write some off as not collectable.


    • “I assume that it is typically the case that consumers paying out-of-pocket in the deductible range have access to the insurer’s price.” You assume correctly. I believe this is universal.

      The question of price transparancy – my understanding is that the providers are disinclined to allow price transparancy, because it removes their bargaining power with the insurers. That is, if it is public knowledge that the provider will take $x as full compensation from insurer A, insurer B has a stronger case for not agreeing to $x+1. Then too, insurer B loses some sales when it becomes known that their contracts aren’t as good. It does seem like it would benefit consumers, however.

    • The current system has one health insurance plan for families – either group or individual policies. People are given little incentives not to use their benefits.
      Here, we are discussing whether people should file small claims or not.
      What if there was an insurance policy for individuals and families in which each monthly payment provides a paid-up policy? Yes, the benefits would be minimal initially, depending on contributions made.
      But, if they continue making payments without making claims (particularly small claims), their paid-up coverage continues to build.
      Here, the question is framed “Should we take advantage of small claims, particularly if the prices are negotiated lower for us?”
      Maybe the question should be reframed: “Should we voluntarily not make small claims, and pay out-of-pocket?”
      Yes, the minimal savings are postponed, but what do we get in return?
      In 2-4 years, the paid-up policy could be worth $50,000, at very affordable contributions.
      Then, we are not looking at saving small amounts immediately. We are looking at saving 80% of the premiums a bit later, over $11,000 every year for a family!
      I and 3 others are working on the actuarials for this program with Milliman, an actuarial firm.
      After 2 productive meetings, we should have some tangible figures to work with in 3-4 weeks.
      Don Levit

    • It’s always better to get the insurance price, so you have the provider submit the bill to your insurance, who will reject it as part of your deductible, and then the provider will bill you. Note how this delays payment well beyond what would be acceptable in any other business.

      Further, your insurance won’t process late claims, so a bill you paid won’t count towards the deductible, unless submitted promptly. So, the insured has every incentive to have the provider submit to the insurance company, even if he knows it’s well within the deductible.

      My mother, on Medicare has had some hospital bills where the discount was nearly half the price. My take was that it was a symptom of wonky accounting rules for hospitals, not great bargaining power on Medicare’s part.

      I did attempt price comparison for orthodontia, but until the orthodontist does a complete evaluation of the mouth, you don’t know the price, so the orthodontists have a tendency to keep the price of the initial exam low (but still pricey enough that you aren’t encouraged to get more than one).

      The problem with price comparisons is that few health care providers want to compete on price, hence they do little to make the prices public or provide estimates. In fact, low cost tends to be taken as a signal of low quality.

    • **
      -I have a $3K deductible via an employer plan (employer kicks in $1500 per year and the unused balance accumulates) and pay the negotiated prices for in-network care.

      -The insurer (Aetna) provides an indexed database of in-network prices. I haven’t had any reason to compare prices since I haven’t had any expensive, non-urgent medical procedures done – but if I ever have to get something like an ACL repair done I’ll be doing a fair bit of comparison shopping.

      -Bulk price negotiation services are separable from other insurance functions, at least in principle. There’s no shortage of bulk price/discount negotiation mechanisms at work in markets where insurance plays no part in the purchase (AAA, Costco, etc). If insurance is ever decoupled from employment, I can easily imagine insurers also competing on that margin.

    • To JayB’s point on decoupling insurance from the expert buyer / price negotiation feature, keep in mind that leverage in negotiation depends not only on volume but on what we call “degree of control.” If a negotiator cannot keep its members from purchasing the product even if a suitable agreement is not reached (e.g. if Costco cannot reach a deal and doesn’t stock the product but the customers all go to another store to buy the product ), then the negotiator cannot credibly threaten to reduce the sellers’ volumes. Similarly, a managed care organization’s negotiated discounts/rebates are largely a function of the degree of control it exerts over its members and their purchases. If paying for the service (e.g. insurance) were de-coupled from the negotiation, I’m not sure if any control over members would remain.

      For example, consider the “prescription discount cards” of the 1990s, which were voluntary and provided no insurance but provided some drug discounts. They were later found to offer substantially inferior discounts to private insurance. Similarly, the VA gets substantially better drug discounts than other public and private payers but maintains a much more restrictive drug formulary.

    • The purpose of all types of insurance is to provide peace of mind and financial security for your family, its helps your children’s education or planning for a comfortable future if the worst thing happen and you are no longer around to support them.