Deductibles and Actuarial Value

Late last week, I saw the following tweet:

This is an alarming trend https://t.co/1rU2CwvCkn

— Mya Roberson, MSPH (@MyaLRoberson) June 16, 2018

I don’t think the deductible per se is the problem. It is the overall level of cost-sharing that is the problem with a secondary distributional challenge. Let’s think this through a bit with a two period model.

In period 1, there there is a 1,000 person pool with an average annual claims expense of $10,000 per person. This means that there is $10,000,000 in total claims. Let us also assume that this pool has 85% actuarial value insurance which is fairly standard US employer sponsored insurance. This means the insurer will pay $8.5 million in claims and the individuals in the pool will for $1.5 million in claims through the combination of deductibles, co-pays and co-insurance. We should also assume that this pool has fairly typical distribution of claims. Most people in the year barely touch the healthcare system. A dozen folks will have a six figure claim. In period 1, the deductible is low, the co-pays are fairly high and co-insurance is applied to most services up to an out of limit maximum.

The question on cost-sharing is who pays how much to cover the $1.5 million that is not covered by the insurer. On first order, the cost-sharing question is primarily a distributional question.

People who incur no claims (probably a fifth of the pool) won’t care as they have no claims to cost share on.

People who have a $100,000 claim year will max out whatever their cost sharing limit.

People who have some light contact with the healthcare system will care a lot about the distribution of cost-sharing elements. An individual who has a sick PCP appointment, a generic prescription and an urgent care visit is highly motivated by the benefit design. Deductible only designs will make light users pay for their entire medical utilization. Co-pay and co-insurance designs have the insurer pay for a significant proportion of the routine costs of “maintenance” healthcare. This means that the individuals with five and six figure claims have to pay more cost sharing to make sure that the pool puts up their $1.5 million dollars in cost sharing.

Now let’s go to Period 2. The employer group has shifted to a high deductible benefit design with an 80% actuarial value. The insurer says that there is a 10% trend rate growth in claims cost, so the total claims are $11,000,000. The individuals in the employer group are now responsible to cover $2.2 million dollars in the allowed claims expense through cost sharing. The distribution of claims is the same as it was in Period 1. A few of the super high cost claims are incurred by new individuals having a bad year who replace folks who had a bad year in the previous period and are having a good year in the current period.

The shift to a deductible heavy design means that the light users are paying almost everything out of pocket. The people with huge claims are shouldering a smaller percentage of the group’s total cost sharing obligations.

The pain point with the proliferation of deductibles is primarily having the light utilizers paying more while concurrently seeing actuarial value of coverage drop even as the cost of claims increase at a rate higher than wage growth, at a rate higher than GDP growth, at a rate higher than inflation. That is the pain.

Switching insurance designs from deductible heavy plans to coinsurance heavy plans will shift who bears the pain on first effect (let’s not consider immediate incentive effects). Switching to a co-insurance and co-pay heavy designs will make the expensively ill pay more and the relatively healthy/cheap pay less at the point of service but the group’s cost sharing obligation will still be there, and that is an increasing obligation. That is the problem, in my mind, more than the specific cost sharing design choices.