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.