In Part 1, we established a platonic price of a single premium fee for service plan. The goal of pricing is to attract enough low cost buyers to cover the costs of admin and the medical expenses of the high cost buyers and leave a little left over for a profit. This is dramatically incomplete, as there are still a ton of decisions that need to be made before a new plan can be sold. This post will look at some of the member side decisions that have to be made. Finally as a reminder, the medical expense is price per service times the number of services summed over all services.
The biggest decision on the member side is what type of plan is to be offered. How restrictive will the fundamental plan design be? An HMO requires the member’s primarcy care provider (PCP) to approve high end care. An HMO will not pay for normal out of network care (they will pay for out of network emergency care and out of network very rare care). An EPO is a bit looser than an HMO in that a PCP approve high end care. However an EPO will not pay for normal out of network care. PPOs are the least restrictive as they won’t require PCP approval but they will pay some money towards normal out of network care.
The more restrictive the plan design, the more likely utilization of services, will, all else being equal, be lower when compared to a less restrictive plan. All else is seldom equal as members will self-sort into different plan types. People who think they are likely to be high utilizers of services are more likely to buy PPO or EPO plans than HMO plans. Low utilizers are more likely to buy restrictive HMOs than other plan designs.
The next big decision is to decide what type of cost sharing and at what level is appropriate for a given revenue point. A plan with a $6,000 deductible will have much lower premiums than a plan with a $250 deductible for two reasons. The first is that a $250 deductible plan will have the insurer paying out on some claims for most members at some point during the year. A plan with a $6,000 deductible will see most members never reach that number so the insurer’s medical expense for those members is near zero and the admin expense is fairly low. Secondly, and more importantly, people will again self sort. Twenty three year recently graduated college atheletes can be fairly secure in predicting that their costs are expected to be low, so they’ll buy the cheap high deductible plan while mid-40 somethings with more puppies than sense and less coordination than looks may assume their expected costs are high, so they’ll buy the low deductible plan. Deductibles are primarily aimed at usage reduction. Co-pays are also aimed at usage reduction.
Co-insurance is slightly different. Co-insurance is a percentage that the patient pays for a covered service. A no co-insurance plan design will make patients completely cost insensitive to the services that they choose. A 50% co-insurance plan design will strongly encourage people to look to get a service done at the cheapest spot possible for a given quality level. (Yes, I know trying to get pricing out of medical providers in an actionable manner anywhere other than Massachusetts is an absolute bitch, but this is a theory post not a practical post). High co-insurance designs also act as de-facto deductible extenders as well.
Most of these efforts are efforts to reduce utilization. Co-insurance is the only major standard plan element that focuses primarily on service pricing, but it is a light constraint due to informational limits. One thing that is slightly more complicated that is exclusively focused on price minimizatoin without changing incentives for using a service is reference pricing. Reference pricing gives a member a fixed sum to get a procedure or set of procedures done. If they go to a provider that charges at or under the fixed sun, the member pays nothing beyond normal deductibles and co-insurance. If the total charges go over the fixed sum, the member is responsible for the incremental cost. This gets around the informational problem as the insurers have to get seperate contracts to make this work, and they know who is involved in the program.
So to recap, on the member side, less restrictive plans will be more costly as utilization will be higher in general and they tend to pick up sicker people than very restrictive plans. High deductibles depress utilization and costs but make the value proposition of why the hell should I buy insurance a lot weaker. High co-insurance makes people be aware of how much a service costs, but it is a weak nudge.
Tomorrow we will talk networks and provider side cost variables.
Auntie Anne
Richard – this is the best explanation I’ve encountered yet of the reason co-insurance exists. Thank you very much. I do benefits communications for a living, so this series is very helpful to me.
Fair Economist
So now that some data is coming in: How well do the old models cope with the Obamacare purchasers? Is their behavior indistinguishable from traditional clients, or do their finances and experience levels cause differences?
Richard Mayhew
@Fair Economist: I’m replyin generalities right now.
a) Right now, Year 1 is in the books and most of claim run out is happening…. but it is still a beta test year. We knew going into Year 1 that Year 1 enrollees would be fairly sick, and the pharmacy data strongly supported that… How much of this is long term baseline care versus catch-up care — I don’t know.
b) Year 2 is up in the air as the new enrollee pool is overwhelmingly comprised of people who did not signup for coverage in Year 1 as the value proposition was not good enough for them as they perceived themselves to be heathier.
c) Ask this question in Q3 2015 for better information.
Leah
Richard,
The Daily Mail has a story out claiming that a CBO study indicates that in the next decade every American who gets health care under “Obamacare” will cost American taxpayers $50,000.
I know you have more parts to your current excellent post, but I’m hoping you’ll be able to take a look at the claim and let us know what the Mail is talking about; I’m sure you know that it’s a rightest rag courtesy of Rupert Murdock.
mazareth
Good Morning Richard,
I know you’ve mentioned it in past posts, but the current system really doesn’t work for people with chronic conditions – in my case thyroid cancer. My employer provided plan has a $2900 out of pocket maximum for 2015 (up from $1900 for 2014) and a 10% co-insurance.
This past June I had a recurrence of the cancer with a well differientiated distant metastasis, which bumps my cancer from a stage I to a stage IV. Thankfully my long term prognosis is good, but it looks like I’m going to be having a lot more diagnostic tests going forward.
Knowing the above, I maxed out my FSA contribution for 2015.
I had a pre-registration call about an hour ago for a scan I’m having next month. As part of the overall procedure, I’m having two rTSH injections, pre and post-scan blood tests, a scanning dose of I-131 and a whole body scan. My coinsurance will be about $1000.
Where I live there are two provider groups that can do the above. Both are in network, as far as I know there’s not a large price difference between the two. If the rational for coinsurance is for me to price shop, that’s not an option in my area. If lowering utilization is the rational, that’s also not an option for me. I have no choice about having these tests.
Finally, my primary care doctor and all the specialists I see are all with one provider group. Does my insurance company really expect me to price shop?
In my current situation, my primary care doctor and the various specialists are all in the same provider group. Everyone on my care team can see all of the doctor’s notes, test results, etc. In my situation, does shopping around for the best deal even make sense. If I’m hopping around between different provider groups, how does that impact collaboration between the members of my care team?
I don’t want to sound like a complainer because I’m doing pretty well in spite of the cancer. I could really do without the extra stress of having to deal with insurance company, budgeting for co-pays and coinsurance. It would be great if I could just concentrate on getting and staying well.
I’ll stop now, as this is already plenty long.
jl
Krugman posted a link to the CBO appendix that analyzes effects of ACA. Not sure whether it is part of yesterday’s budget outlook report (I don’t have time to search around to see what this is an appendix to). But might be related to commenter Leah’s question.
I suppose there will be a lot of odd reports about hidden awfulness of the ACA, and would be interested in Richard’s take on them. They seem counterintuitive to me, if the regulatory reforms of the ACA are strong enough to get close to other high income industrial economies, since nearly every country that has adopted reasonable provider and insurance market regulation, and some method to encourage efficient provision of care has seen better population level outcomes at lower cost and lower cost growth. So, would be interesting to see how scary forecasts get their results.
Updated Estimates of the Insurance Coverage
Provisions of the Affordable Care Act
http://www.cbo.gov/sites/default/files/cbofiles/attachments/49892-breakout-AppendixB.pdf
Richard Mayhew
@Leah: They’re using the headline of big numbers and counting on innumeracy.
1) $50,000 is over ten years, or roughly $5,000 per year.
2) most people won’t be on an Exchange plan for 10 years straight collecting a $5,000 subsidy check. People will get on Exchange, then go to a job with employer sponsored coverage, get old and get on Medicare etc.
It’s a faily basic “Look at what THEY are getting from hardworking YOU” article.
Richard Mayhew
@mazareth: Nope, no need to stop complaining as you’re right, for people in acute/high mortality/high sucking of quality of life diseases, the US insurance system now only sucks donkey balls instead of donkey dick. It’s bad, slightly better than it was 5 years ago when your employer would have a very strong incentive to find a way to let you go so their premiums next year could be affordable, but it is still bad.
Most of the competition arguments make some sense on deferrable care (ie most knee replacements it won’t matter if it is done this month or next month) but it falls apart when there is either minimal provider variation or it really matters that you have something done NOW.
jl
@Richard Mayhew: Wow. Thanks. That was simple.
Another Holocene Human
You know I had an odd idea the other day that changed my mind a little about coinsurance.
Coinsurance with medical providers has always been a scary crapshoot. About all it does is “incentivize” you to use the in-network provider, if available. And frankly, sometimes when I have the money I use the best provider and say fuck it. Because there aren’t a ton of doctors around here and a lot of them suck. I’ve been frustrated with the quality of care I receive.
But this year my plan initiated coinsurance for medicine. This is absolutely horrible because some people are on insulin, stuff like that. But in my case it led to a fruitful conversation with the pharmacist and a change in product. I do think the super expensive product worked better, mind you, but I felt good because I felt like I was making the pharmacist’s day, he was really angry about the pricing … $151 and it was a generic. Thankfully my daily asthma meds for my not-asthma were still very cheap, phew.
The problem is that in most states the Pharm doesn’t have the authority to modify your prescription in any way even though PharmD’s know hell of a lot more about drugs than your doctor does. Don’t look for a PharmD to do a diagnosis (ugh, there was murder case in Cali where a pharm pretending to be a doc misdiagnosed diabetic coma symptoms, the sad thing is he only did one year in prison, got out and did it some more), but they should be able to fix issues like that. In my case the thing he recommended was sold OTC, but so few things are.
It made me think because it did modify my behavior. I don’t know if it was in the best way but it “worked” as far as that goes. I don’t know if I’ll be back for expensive drugs at the end of the year when the deductible has been paid, cause, yeah, that might happen.
RSA
@Another Holocene Human:
Nice. I’ve found over the past several years that pharmacists are some of the best-informed and most accommodating people in medicine. I’d never thought about it before. But they’ve often made my life easier by knowing the ins and outs and telling me what the options are.
mazareth
@Richard Mayhew:
Thanks for the kind words Richard. I’m just past 3 months since my latest radiation treatment. All in all my quality of life is pretty good. My weight is within 5 pounds of my presurgery weight. I’ve been back at work for a month. Today I did a 5 mile run and averaged 12:30 mile pace.
While it’s been a struggle to regain my fitness, the financial stress was far more difficult. My employer offers a decent short term disability plan. But even with that, my income is down 25% vs. last year. On top of that, I had to make payments on my medical bills!
The ACA is definitely a help. Once the law was passed, my company got rid of the lifetime cap and preexisting condition exclusions for new hires. Having the lifetime cap gone is a huge relief. After two bouts of thyroid cancer, the aftercare, and an ACL replacement, I’m about halfway through the cap amount.
I know it would cause a lot of disruption, but we really need some form of single payer.
mazareth
@Another Holocene Human:
My maintenance medications are relatively inexpensive, especially if I opt for the 90 day supply through mail-order.
Re coinsurance: I have 10% coinsurance in network and higher out of network.
I realize that I’m a lot better off than many. My company still has a pretty good benefits package.
Violet
Richard, thanks for this post. Interesting assessment of the costs to the patient/insured. For those of us who have employer plans, we don’t get much if any choice on what kind of plan, and thus what deductible and co-insurance. The higher deductible plan may be great for younger or healthier people, but for older/less healthy people it’s a real pain, especially in January when the bills from the holidays are coming due. Larger employers have people of all ages in the company, but the plan is the same.
Is there any data available on how increased deductible plans lead to people delaying needed medical care and possibly lead to worse health outcomes? I know from my experience we’ve delayed medical treatments because of the high deductible. Couldn’t afford the out of pocket, so the procedure got postponed. I’m just one example but I feel like I can’t be the only person doing this.