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You are here: Home / Anderson On Health Insurance / Deductibles and distribution

Deductibles and distribution

by David Anderson|  October 8, 20186:15 am| 6 Comments

This post is in: Anderson On Health Insurance

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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.

 

 

 

Example plan designs are here:

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.

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6Comments

  1. 1.

    Big R

    October 8, 2018 at 6:30 am

    David, this post raises for me the normative question of where the risk of high-cost years should fall. That seems like an important piece of the puzzle, and the basic source of the fight. I wonder if there’s a messaging hook in that.

    “The GOP wants Wall Street bosses to profit from your worries; but when you get sick, they want you to bear the loss.” I dunno.

  2. 2.

    OzarkHillbilly

    October 8, 2018 at 7:44 am

    This is just an inkling without data to fully support that thought.

    Here is one point of anecdata. My wife’s employer provided insurance has shifted significantly to the higher deductible plans. This has the undesirable effect of causing this modest to moderate medical problem individual to avoid getting needed medical care for the plain and simple reason that after paying an arm and a leg for insurance we can’t afford to actually use it because the patient costs are all front loaded.

    For them this a feature, not a bug.

  3. 3.

    Bradley Flansbaum

    October 8, 2018 at 9:18 am

    David
    Is the AV being held “constant” then? For the hypothetical patient cases (pregnancy, typical diabetic) on which the models are designed and AVs derived, yes. But if the insurers are targeting not he the hypothetical populations but a cohort of 10s of thousands of healthy people,AV becomes less useful, almost a false constuct. AV needs to speak truth to power.
    Brad

  4. 4.

    David Anderson

    October 8, 2018 at 10:38 am

    @Bradley Flansbaum: Damn good question and point; as an analytical issue, I think AV is a useful enough concept in creating a language of comparison between benefit structures. ON a pragmatic basis, yeah, there are serious issues with AV as subpopulations will be segmented and sorted by benefit structure.

  5. 5.

    ProfDamatu

    October 8, 2018 at 12:38 pm

    If only it were typically a difference between $1250 and $1750 out of pocket! Even the Gold plans offered in my area have deductibles of $1500 and OOP maxima of $7k+. About $2k a year in OOP can be budgeted for by many middle class people; $7k per year and rising really can’t be.

  6. 6.

    ProfDamatu

    October 8, 2018 at 4:01 pm

    Thinking further, I know it’s unlikely to happen anytime soon given the current political climate, but one adjustment to the ACA that I’d really like to see would be addressing the ever-rising OOP maximum and deductibles. My understanding is that in order for the actuarial values to stay in the prescribed bands, out of pocket expenses basically *have* to rise every year, making the insurance worse every year. I realize that it’s not a big deal for most people, most years – but it’s an absolute disaster for the chronically ill, as well as anyone who needs consistent follow-up. Sure, many people can stand a one-off bad year, but it’s almost impossible to budget for several thousand in out of pocket expenses every year when you’re making less than $50k…as subsidized individuals are.

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