Deductibles are part of the cost sharing structure for plans. A deductible is what a person pays first before they get any additional help from the insurer on their claims. Copays and coinsurance make up the rest of the out of pocket spending portfolio. The design of the cost sharing attributes has significant distributional impacts when we hold everything else equal.
We’re going to look at two plans both with 88% Actuarial Value as calculated by the 2019 CMS ACA AV calculator. We’re going to assume that these two plans have the same network and are priced solely on the actuarial value. That is a simplifying assumption that waives some incentive effects but it is a good first pass.
Plan A: $500 deductible, 20% coinsurance for a maximum out of pocket spending cap of $1,750.
Plan B: $1,200 deductible and no other out of pocket expenses for a maximum out of pocket limit of $1,200.
We’re also going to assume that there are a few classes of people:
- People who have no cost sharing service utilization in a year (~20%)
- People who have very light use (for example 1 urgent care visit and 1 generic antibiotic prescription) (30%-40%)
- People with light to modest contact with the healthcare system ( non-complicated broken ankle treated with a cast and PT, well controlled asthma, well controlled high blood pressure etc) ( 30%)
- People with heavy contact (knee replacement surgery, Hep-C cures, heart attacks, epilepsy drugs etc)
Folks who have either no cost sharing services in a year or who barely touch the system don’t run up enough charges to exhaust their deductibles under either plan. Since their premiums are the same, they are indifferent and face no changes in incentives or total personal expenditures.
Now let’s assume that someone has a straightforward broken ankle that runs up $2,500 in charges. The plan design matters to her:
Plan A: $500 deductible + 20% * $2,000 = $900 out of pocket expenses
Plan B: $1,200 deductible and $1,200 in out of pocket expenses.
A low deductible plan with a comparatively higher out of pocket maximum is in this person’s best interest.
Let’s look at the last case when someone has a $50,000 charge because of a failed assassination attempt by their cat led to significant shoulder reconstruction and a new knee.
Plan A: $500 Deductible + 20%*6,250 +0*43,250 = $1,750 out of pocket expenses
Plan B: $1,200 Deductible = $1,200 out of pocket of pocket expenses.
People who have a strong reason to suspect that they will have very high cost years will have a strong preference (holding actuarial value constant of course) towards plans where deductibles are the overwhelming form of cost sharing.
The trend towards higher deductibles in the employer sponsored market is a distributional and incentive shift rather than a reduction in average actuarial value. It is shifting more costs due to the benefit design choices onto people who have modest to moderate medical problems than they otherwise would have if the cost sharing design choices had been frozen in amber in 2006.
I am speculating here, but I have an inkling that this risk shift towards a broader cohort of people is what drives a lot of the frsutration over health insurance over the past ten years as actuarial value has been constant but the combination of growth in medical prices AND more cost sharing in deductible is inflicting more modest to severe pain pokes to more people. This is just an inkling without data to fully support that thought.