Spending distribution and subsidy distribution

In January, the federal government released a research brief by Dr. Emily Mitchell  that updated the thresholds for which people move between the different healthcare spending buckets. There is very little novel or new, but the facts are important as the trend continues — healthcare expenditures have a big right hand skew.

 

Lower Threshold	Upper Threshold	Lower Spending	Upper Spending
99%	100%	$72,212	a lot
95%	99%	$26,355	$72,212
90%	95%	$14,651	$26,355
70%	90%	$3,776	$14,651
0	50%	0	$1,317

There are a couple of big take-aways from this research.  In any given year, half the non-institutionalized population is barely touching the medical system.  From a health insurance policy point of view, these folks are likely to be benefit design indifferent as either they are not using any services so no theoretical cost sharing applies, the few services that they do use are already exempted from cost-sharing (flu shots) or the plans that they are offered have high enough cost-sharing that the difference between a $500 deductible and a $5000 deductible is completely theoretical retrospectively.

Another group is highly likely to be benefit design indifferent and that is folks with predictable high costs.  Someone who knows that they have a $75,000 per year condition will not be influenced directly by cost sharing tweaks for one plan that is a little heavier on deductible while another plan is heavier on coinsurance.  In either plan, they are extremely likely to hit out of pocket maximums and the difference in benefit design will only be on cash flow and cognitive complexity.

Cost-sharing is probably relevant retrospectively for individuals who are in the 50th to the 90%th percentile of spending.  This group, retrospectively, has ~32% of all medical spending in the country (Figure 1 of the brief).  If we think that optimal cost-sharing design can do something to healthcare expenditures, this is where the squeeze will be.

From an insurance policy perspective, we can look at this table and assume that people in the bottom 50% of the spending will more strongly benefit from a dollar in premium reducing subsidies than cost-sharing reductions.  People at the very top of the spending distribution are indifferent as to the form of assistance as they will get a full pass-through one way or another.  It is the people in between where a dollar spent in reducing maximum allowable deductibles instead of reducing premiums are in a complex situation.  Someone who has $5,000 in deductible eligible claims will be better off if maximum deductible is reduced from $5,200 to $4,500.  They are no better off if maximum allowed deductible is reduced from $8,850 to $7,500.

These spending distributions inform policy and they shape who wins and who loses from our choices.