This article was originally posted at Forbes.com on May 11, 2018.
High deductibles are a fact of life. They are becoming higher and more prevalent with each passing day.
A Kaiser Family Foundation study finds that about half of all people with employer provided coverage have a deductible of at least $1,000 . An Avalere study finds that the average deductible for silver plans in the (Obamacare) exchanges this year is almost $4,000. Some employers of fast food workers are only offering plans with the maximum out-of-pocket exposure Obamacare regulations will allow. Currently, that’s a $7,150 deductible for an individual and double that for a family.
There has been a sea change in the way the health policy community thinks about this. When Gerald Musgrave and I introduced the idea of Health Savings Accounts 25 years ago, the reaction was almost uniformly negative – in the health insurance industry, among the professional societies, among the hospitals and in the academic world.
The prevailing view at that time was that patients are incapable of making good decisions about how to spend health care dollars and that these decisions should instead be made by managed care professionals. Today we find even liberal Democrats defending extraordinary out-of-pocket burdens faced by people who get insurance in the exchanges they helped create.
Despite this remarkable change in attitude, very few people seem to understand what is going on.
Rational reasons for a high deductible. Musgrave and I began by looking at health insurance prices. We discovered that if someone chose a $1,000 deductible instead of a $100 deductible, the reduction in premium was more than $900. In other words, if you were willing to take on an extra $900 of risk, you could put more than $900 in the bank – to cover that risk. We concluded: you would be foolish not to do that.
We also looked at economic incentives. If health care is free at the point of delivery, people have an incentive to consume it until it is almost worthless to them. This implies a great deal of unnecessary care. Take a $250 mammogram for a middle-aged woman with no symptoms. Odds are very, very high that the test results will be negative, and the patient will be able to set aside any worries she may have.
How much is that worth? Only the patient can say. But if she values the reassurance at only $50, she still has an incentive to get the test if it’s free. That implies $200 of socially wasteful spending. Alternatively, if we let her manage her own money, we can infer that when she spends a dollar, the care she gets will be worth a dollar – to her.
To anyone with training in economics, this is a very appealing argument.
Perverse reasons for a high deductible. When Musgrave and I were doing this analysis, the individual health insurance market was free to charge buyers premiums that reflected their individual risks. Employers also had a lot more freedom. Today, almost no one – certainly no employer and no insurance company – is allowed to charge a higher premium to an individual who is expected to have above-average health care costs. That means insurers must sell insurance to people who are expected to cost more than the premiums they bring to the insurance pool. And that means that insurers are required to take customers they don’t want.
This creates a perverse incentive to structure the plan so that it appeals more to the healthy and less to the sick. Healthy people tend to buy insurance based on price. Sick people, however, look at likely out-of-pocket costs for their illnesses and want broader networks. By choosing narrow networks and high deductibles the insurers can kill two birds with one stone: with lower costs (and therefore lower premiums) they can make their product appealing to the healthy and unappealing to the sick.
So instead of insurers providing what the market wants, part of what we are witnessing is a reaction to perverse incentives. As the Avalere report makes clear, this is happening in spades in the Obamacare exchanges.
How people respond to high deductibles. Every study that has ever been done on the matter has come to the same conclusion: when people are spending their own money rather than insurance company money, they consume less health care. For example, a review of the literature published in Health Affairs finds that high deductibles reduce both doctor office visits and preventive care.
Despite conventional wisdom, studies show that routine doctor visits don’t pay for themselves. Ditto for most preventive care. So, if there are fewer of these, we can be confident that total health care costs go down. And that’s a good thing.
The original RAND study found no ill health effects from high deductible insurance. But that was before modern regulations created so many perverse incentives. Today, there may be reasons to worry.
High deductibles with health savings. Suppose a mother wakes up in the middle of the night with a sick child. Should she take the child to the emergency room? Or should she self-administer care in the home? Clearly, no one is better able to make that choice than the mother herself. A typical emergency room visit costs about $500. So, the mother has to decide whether the problem is serious enough to warrant a $500 outlay.
A RAND study finds that among people with Health Savings Accounts, even the most vulnerable populations respond to economic incentives pretty much the same way everyone else does.
But suppose the mother doesn’t have $500?
High deductibles without health savings. A surprising number of families are living paycheck-to-paycheck. So, a mother who doesn’t have $500 in the bank can’t make a choice between $500 and a visit to the emergency room. In that case, she may forgo care that is worth a lot more than what it costs – just because she can’t pay for it.
A New York Times survey finds that women with symptoms of breast cancer are putting off diagnostic imaging and biopsies because of the cost. After cancer is discovered, they are delaying treatment for the same reason. That can’t possibly be good.
Self-insuring for the deductible. The Goodman/Musgrave approach to health economics was never about high deductibles per se. Our idea was to let patients, rather than impersonal bureaucracies, make the sometimes-difficult choices between health care and other valuable uses of money. But where is the money to come from? In the early experiments with HSAs, employers often funded the accounts. Sometimes insurers did that. But these days employers often do not fund the accounts. And funded HSAs are almost never found where the deductibles are highest — in the Obamacare exchanges.
If people were not required to buy plans with bloated (and often unwanted) benefits, they could deposit the savings from a lower premium in an HSA account. But Obamacare regulations don’t allow that.
Buying insurance for the deductible. One idea is to buy insurance to cover the deductible. Previously I wrote about a Houston firm called Health Matching Account Services that is doing just that (although for regulatory purposes their product is not technically called “insurance”). For a monthly “premium” of $140, within three years, you can spend less than $5,000 and get protection against a $10,000 deductible (essentially a 2:1 return on your money) – provided you don’t draw on the account to pay medical expenses during that time the account is growing.
Market responses to high deductibles. As more people become responsible for more of their own health care spending – especially for primary care – the supply side of the market is responding. In every case, the innovators are competing to reduce the money price and the time price of medical care. Walk-in clinics are providing high-quality primary care for less than half the cost of a typical doctor visit. Online mail order services offer drugs at lower prices and with a lower error rate than conventional pharmacies. The ability to obtain doctor consultations by phone is becoming increasingly common. Medical tourism is rapidly evolving – providing a national market where doctors bid for patients online.
One interesting innovation is the Uber-type house call. At nights and on weekends, people on the east coast and the west coast can use a cell phone app to summon a doctor – who usually arrives within 30 minutes and costs $100. That’s about one-fifth of what people on the average spend at hospital emergency rooms.
Public policy changes. Politicians have given very little thought to how we can integrate third-party insurance with individual self-insurance and meet the needs of a diverse population – including the healthy, the sick, the chronically ill, etc. Following the doctors’ dictum of “first, do no harm,” my best advice is to leave the private sector as free as possible to solve these problems on its own.
This article was originally posted at Forbes.com on May 11, 2018.