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You are here: Home / Anderson On Health Insurance / Profits of confusion?

Profits of confusion?

by | 14 Comments

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We’ve talked about dominated plans in the recent past.  I am curious how much profitability is driven by dominated plan choice.

A dominated plan is one where Plan A and Plan B have a set of relevant attributes where Plan B meets or beats Plan A on all of those attributes.  B dominates A.  Anyone who chooses Plan A is paying more to get the same benefits or paying the same to get worse benefits than Plan B.

A recent paper by Liu and Syndor looked at dominated plan choices in the employer sponsored insurance market **.  They wanted to see how much more people paid for low deductible plans versus high deductible plans.

We estimate that the HD plan financially dominates the LD plan at roughly half of firms across a wide range of possible health spending needs employees might anticipate. The expected savings from selecting the HD plan are typically over $500 per year, often with no increase in financial risk.

People making the dominated choice in this scenario spend more than $500 a year in additional premiums to buy the same financial protection.  $500 per member per year translates to $40 per member per month (PMPM).

$40 PMPM is a lot of money for an insurer.  When I worked at UPMC Health Plan, a contribution margin of $40 PMPM from a significant chunk of the covered population would make quite a few VPs very happy as this solves a reasonable chunk of their margin generation expectations.  The health plan would be providing the same services at the inefficienctly chosen plan’s higher premium level than they would have provided at the well chosen plan’s premium level.  The expense side is a near constant while the revenue side is gravy.

I am very curious how much cash flow is generated for insurers on both the premium side and the cost sharing side due to dominated plan choices compared to optimal choices.  My intuition is that in some markets, this wedge is notably large.

 

** Liu C, Sydnor JR. Dominated Options in Health-Insurance Plans [Internet]. National Bureau of Economic Research; 2018 Mar [cited 2019 Dec 11]. Report No.: 24392. Available from: http://www.nber.org/papers/w24392

Reader Interactions

14Comments

  1. 1.

    Sarah

    I just went through this. The lower premium  plan had a much higher deductible (more than double), and higher co-pays. I did the math a thousand times and couldn’t figure out what was best. I chose the higher premium version, but I might have saved a few bucks on the other one, if all goes well next year. It was agonizing – and I had help from a broker!

  2. 2.

    Ohio Mom

    Maybe the silver lining of having several pre-existing conditions is knowing it is extremely unlikely you are going to skip through the next year with only trivial medical expenses. There are no bets to hedge.

    It certainly has made clear what my choice will be for Medicare next year. No Advantage plan for me, I need to get on the Medigap train.

  3. 3.

    David Anderson

    @Sarah: That is a slightly different story (most likely) where there is a high premium plan with lower cost sharing and a low premium plan with high cost sharing… those are plausible trade-offs.

    I am referring to the situation where Plan X and Y are virtually identical but X just costs more than Y in premium

  4. 4.

    Another Scott

    How many plans are really “dominated” like this – identical in every respect but one costs substantially more?  Is it just the 6-sigma tail?  Do differences in “network” come into play – does one have to pay more to get Dr. Kildare or Dr. House on the team?  Is there an easy way for someone to know if they’re getting a “dominated” plan or not?

    Thanks.

    Cheers,

    Scott.

  5. 5.

    Jerry

    I’ve seen lots of friends here in NC nearly in tears over how much insurance is costing these days. I don’t think any of them can afford anything are all are probably just going to pay the fine.

  7. 7.

    David Anderson

    @Another Scott: Scott — these scenarios are more common than one wants to imagine.  It is not a 6-sigma event.  It is not even a 3-sigma event.  I can’t say much more as I am drafting a paper on this very issue right now so I can’t drop the results before we actually submit the damn thing.

  10. 10.

    laura

    @David Anderson: is it at all helpful to look at total exposure as a deciding factor? Where a HD would possibly expose a max out of pocket of X dollars per year (in premiums plus copays) versus the costs associated with a lower premium but higher copays and no max out of pocket, but no associated savings possible via a health savings account that could cover the exposure for part of plan year 1 and possibly all of plan year 2?

  12. 12.

    Another Scott

    Kinda-sorta related – RollCall:

    While three pillars of financing for the 2010 health care law would be repealed — the “Cadillac” tax on high-cost insurance plans, an excise tax on medical device manufacturers and a fee imposed on health insurers — the emerging legislation would also block Trump administration efforts to undermine the law in other ways.

    Under the deal, the administration would not be able to prevent automatic re-enrollment in plans purchased on the exchanges if a consumer does not select a new plan during open enrollment.

    The measure would also stop the administration from barring “silver loading,” a practice which allows insurance plans to add costs on to the silver-tiered insurance plans offered on the exchanges that are tied to the tax credits that help people afford their premiums. Insurance companies began doing that after the administration stopped reimbursing insurers for certain payments that lower out-of-pocket health costs for some low-income people. The administration has repeatedly threatened to block that practice, which keeps costs lower for consumers but drives up government spending.

    Generic drugs, Medicaid, Export-Import Bank

    A bipartisan drug pricing measure, which lawmakers have been pushing for years that would make it easier for generic drug companies to access samples of brand-name drugs, is also included in the deal, according to the Democratic aide.

    The spending deal would also extend, for two years, Medicaid funding for the U.S. territories, with a federal matching rate of 76 percent for Puerto Rico and 83 percent for other territories. The territories currently receive a 55 percent federal match.

    It would also extend, for a decade, the 2010 law’s Patient-Centered Outcomes Research Institute, which researches the effectiveness of clinical treatments.

    Sounds pretty good. I do wish they’d stop playing games with the Cadillac Tax and the other Obamacare taxes and fix the issue (if they repeal those taxes, then they need to get the money from the industry some other way).

    Cheers,
    Scott.

  13. 13.

    ProfDamatu

    @laura: I know I’m not David, but…I always have total possible exposure as one factor in my spreadsheet when I’m comparing plans each year. That said, that number is most useful to people who know they’re very likely to hit their OOP max no matter what, or who have a reasonable chance of doing so. It’s worth looking at – for example, in my 2020 calculations, the difference in total possible cost (premiums plus cost-sharing) was about $3k across the plans providing access to the network I need. But, differences in plan design mean that unless I have more than about $20k in allowed medical charges, the higher-premium Gold plan will cost me less than the Bronze with a lower premium and an approximately $2500 lower total exposure. You’d need to be getting into zero-premium Bronze territory before the total cost (premium + cost-sharing) would be better for the range of likely medical costs. So, that’s just one example of how it can play out – I like to look at total possible cost, just so that I have an idea of what I might be up against, if nothing else.

    As a side point, all plans that are ACA compliant have to have an OOP max…no such thing as unlimited cost-sharing in compliant plans.

  14. 14.

    kabiddle

    @Sarah:

    Go for the initial pay out. Apples to oranges each plan will force up front Payment. Put it in a contract. Any plan is going to do the ask of $10k up front. A good plan will reconcile preventive going to the doctor cost and provide that. But if the big stuff comes in then we shall see.

Comments are closed.