Last December, I argued that deductibles are the preferred means of cost sharing for a given actuarial value if we are seeking to minimize the total amount spent by a chronically ill individual:
Deductible plans favor the sickest people as the low utilizers pay for almost all of their care via deductible cash. That means the proportion of the pool’s individual responsibility amount is borne by healthy people.
Co-pay only plans favor people who use highly concentrated cost services. A co-pay does not differentiate between a specialist visit with a contract expense of $200 and a specialist visit with a contract expense of $600. It is the same fee. So people who use very costly services but only rarely are best off. People who use a lot of fairly low costs services on a regular basis pay more proportionally.
Co-insurance only plans favor low cost utilizers. They are not paying full price via their deductible, and unlike co-pays, the individual cost per unit matters.
There are a pair of points about cost sharing on the Exchange that need to be tweaked.
First Louise Norris notes that the maximum cost sharing amount allowed on Exchange has increased over the allowable cost share amount for the HSA tax benefit:
In 2014, the out-of-pocket maximums for individual health plans under the ACA were the same as the limits on HDHPs: $6,350 for individuals and $12,700 for families.
But in 2015, the ACA began to allow maximum out-of-pocket limits even higher than those allowed for HSA-qualified plans. Under ACA guidelines, the maximum out-of-pocket for all plans in 2015 was $6,600 for an individual and $13,200 for a family. But HSA guidelines limited the maximum out-of-pocket on HSA-qualified plans in 2015 to $6,450 for individuals and $12,900 for families.
The gap increased in 2016. The maximum out-of-pocket for all plans under the ACA is $6,850 for an individual, and $13,700 for a family. But for HSA-qualified plans, the maximum out-of-pocket in 2016 is $6,550 for an individual, and $13,100 for a family.
And for 2017, the gap will widen even more. The maximum out-of-pocket limit on all plans will be $7,150 for individuals and $14,300 for families. But for HSA-qualified plans, the out-of-pocket limits will remain unchanged from 2016, at $6,550 for individuals, and $13,100 for families.
This means people who are buying Bronze plans probably can not benefit from the tax benefit of the HSA so their effective costs are higher than people who can afford to buy Silver or Gold HSA compliant plans if they both use significant services over the course of the plan year. The policy tweak would be to have Congress mandate that the HSA deductible limit be synchronized with the QHP out of pocket maximum limit.
The other issue that needs to be addressed with HSA’s and HDHP is that these plans key on deductibles. As I have shown before, there are lots of ways to get the same actuarial value with several different types of cost sharing:
Creating a deductible only plan was fairly simple. The insurance would pay nothing out until the person spends $3,725 on cost-sharing eligible services.
The co-insurance routine was a bit harder to build. There are a wide ranges of co-insurance rates that could be chosen. For simplicity sake’s I chose a $0 deductible and a 40% co-insurance rate to start with. That failed. I could not design a Silver plan using only co-insurance at 40% before I hit the maximum out of pocket constraint of $6,850.
A 50% co-insurance rate creates a 72% Silver plan while a co-insurance rate of 53% creates a 70% Silver plan. The out of pocket maximum for these plans are $6,850.
Those three benefit design choices all produce plans that have roughly the same actuarial value. However the deductible only plan design is HSA/HDHP eligible. The other two plan designs are not HSA eligible.
That is stupid.
That is fixable.
The fix is to tie HSA/HDHP tax benefits to the plan’s actuarial value independent of the cost sharing arrangements that produced the calculated actuarial value. The entire goal of the HDHP movement was to lower the actuarial value of coverage so that people could have more “skin in the game”. The tax benefit of an HSA would act as a bit of a cushion to the increased individual level risk. However as plan designs have gotten a bit crazier and esoteric, the HDHP goal of lower actuarial values is being achieved but the tax benefits are idiosyncratically applied.
low-tech cyclist
In other health care news, per Jonathan Chait:
Paul Ryan’s Promised Obamacare Replacement Plan Shockingly Turns Out Not to Exist Again
Well, knock me over with a feather.
Like the old saying goes, fool me once, shame on you. Fool me 2 raised to the power of the cardinality of the continuum times, shame on me. (OK, that’s not quite how the old saying goes. Just felt like letting my geek flag fly.)
Smedley Darlington Prunebanks (Formerly Mumphrey, et al.)
Hey, I wanted to let you know that after three tries with the people at Healthcare.gov, or whatever it’s called, we got our insurance back. We got a new policy with the same company, beginning in July. Because of all the yooooge hassles we went through trying to get it put back into effect, the last lady I spoke to told me we can even ask the I.R.S. not to charge us for not having insurance for three months, since struggling to get the company to give us our policy back would qualify as a hardship. I have nothing but good things to say about the people at healthcare.gov. And thank you for your help, too.
StringOnAStick
My husband plans to quit his job at age 60 (2 years from now) and become a contractor for his company because that is the only way to actually go to part time. He works well over 40 hours now and their official part time is 32, and given the professional OT expected, part time is definitely not part time. They are already expressing worry that he’ll retire and his level of institutional knowledge of their comp!ex software isn’t replaceable, so that’s nice. What isn’t nice is being 60 and needing to buy health insurance for both of us.
I plan to complete my structural repairs with a knee replacement this Oct, but I wonder if when we start shopping that I will look like an undesirable high user. Oh well.
Richard Mayhew
@StringOnAStick: it will not matter that you are a high user. They will need to enroll you
Morat20
My company transitioned us all to HDHP’s last year. I maxed out my HSA, took the second lowest deducitble….and spent 13k out of pocket. (on a 10,100 OOP max. There was a in-network/out-of-network confusion that cost me 3 grand. I still think I should have won that appeal).
So that was my introduction to HDHP. “Congratulations, you’re getting one whether you like it or not. Your HSA starts from zero”. I spent ALL LAST YEAR scrambling to find money. I was lucky I had sufficient savings and a line of credit I could use to pay for crap until my HSA deductions caught up, and then savings to cover all the stuff over the HSA.
It’s unlikely, in the future, that we’ll have a year with 3 surgeries and several other massively expensive procedures, but…it could happen. And my HSA can’t go high enough to cover my risk. And that is, in fact, BS.
Worse yet, I couldn’t deduct the almost 8000 dollars in health expenses over the HSA, due to the way health care deductions are handled. So I got 6600 tax free, then spent 8k I had to pay taxes on. Health care should be tax exempt or it shouldn’t. (And good lord, if it is, why can’t my insurance company just submit a form listing my OOP expenses? They track, to the penny, how much I pay out.).
That’s how we need to simplify the tax code. Make healthcare expenses tax deducible. Have your insurance company be able to send your out-of-pocket expenses to you, and have the IRS accept it. Healthcare expenses from insurance, minus HSA withdrawals = deduction.