Why I Don’t Like Deductibles
I am associated with Health Savings Accounts (HSAs). And HSAs are associated with high deductibles. They are more than associated with them. Federal law requires an across-the-board deductible in order for a plan to qualify as eligible to be combined with an HSA.
But I am no a fan of deductibles. In fact, more than a decade ago I wrote a paper on “Designing Ideal Health Insurance“for a Regi Herzlinger conference in which I argued there was no need for a deductible. Or co-insurance. Or co-payments. There are simply better ways to design health insurance.
What brings this to mind is a recent ruling by Health and Human Services Secretary Kathleen Sebelius on the matter. Under current law, it is illegal for a drug manufacturer to offer to pay a copayment for a Medicare or Medicaid patient in order to sell a drug. However, the Secretary has ruled that it is legal for health plans sold in the new health insurance exchanges to do that. Similarly, it will now be legal for hospitals to not only waive deductibles and copayments, but actually pay the premiums (for exchange-based insurance) for uninsured patients. (See this post, but note that the Secretary is not encouraging such behavior.)
The incentives are clear. Say a drug manufacturer sells a brand drug for 10 times the price of a generic (which may be produced by the same manufacturer!). A copayment could discourage the more expensive choice. So the manufacturer waives the copayment on the brand and reaps the cost of doing so many times over. This practice is apparently not that unusual in the private sector, although the third-party payers don’t like it. As the WSJ reports:
The pharmaceutical industry spent about $4 billion on copayment assistance to patients in private health plans in 2011, according to an estimate by Amundsen Group, a consulting firm.
But the subsidies have drawn the ire of health plans and pharmacy-benefit managers, who say the aid undermines the use of copayments to steer patients toward lower-price generic drugs.
Which brings us back to the more fundamental question: why have co-payments at all?
Most people who defend deductibles and co-payments argue that these devices give patients incentives to make better decisions. But, if that is the goal the means to achieve it are too crude and too weak. In the case of the deductible, the incentive to economize vanishes once the deductible is exceeded. In the case of coinsurance, the incentives are incredibly weak. If I have a 10% copayment, my incentive is to consume care until it’s worth 10 cents on the dollar to me. At 20%, my incentive is to consume care until it is worth 20 cents on the dollar. Can’t we do better than that?
In thinking about ideal health insurance, I want to make two distinctions:
- Is the procedure one for which it is appropriate and desirable for patients to make their own decisions, independent of every other participant in the insurance pool?
- Is the procedure one for which it is practical for patients to pay the full cost (rather than the marginal cost) on their own?
If the answer to these two questions is yes, then I see no reason why patients should not pay the entire cost from their HSA. In other words, we should carve out whole areas of care and make these 100% the responsibility of the patient. For example, I would start with a generous HSA and make the patient responsible for almost all primary care, most diagnostic tests, and about 90% of everything that is done out-patient. For seniors, this would mean that patients would be responsible for almost all of Part B spending other than the doctor’s fee on in-patient care.
An exception to this rule would be any preventive procedure that “pays for itself.” This includes pre-natal care for at-risk mothers, vaccinations and smoking advice. It’s in the self-interest of a health plan to make procedures available at no charge (and maybe even pay people to obtain them) if that brings down the overall costs for the whole insurance pool. Also, you don’t want patients paying doctors’ fees separately if it makes more sense to bundle all the aspects of some types of care into one package price.
Now what about more expensive care, such as elective surgery? Although it is desirable for patients to make a lot of these choices on their own, it is often not practical because of the large expense. The appropriate technique here is value-based purchasing. As previously reported here, WellPoint in California put quality parameters around hospital options, but then let enrollees make their own choices (and pay the marginal cost of those choices) for hip and knee replacements.
[Since “in-network” choices have an expected cost of $30,000 or less, enrollees can go out of network, provided they pay any additional cost above $30,000.]
What about drugs? In general, I would apply the same rules. Patients should pay the full cost of inexpensive drugs ― especially where drug therapies compete with other, out-patient therapies. For expensive drugs (including a lot of cancer drugs), I would reimburse for generics only ― letting the patient pay out-of-pocket for brand drugs where there is a generic alternative. Where expensive drugs compete against expensive hospital therapies, I would try the value-based purchasing approach.
But since I also believe in the promise of personalized medicine, I would give patients and their doctors procedural steps to obtain waivers.
There you have it. These are the outlines of ideal health insurance. And the fun thing about designing insurance plans at a blog site is that we haven’t put any investor capital at risk.
Annual deductibles, are designed to increase spending and increase insurance company profit. A more rational health plan design is a monthly budget plan, which consists of either a monthly deductible, or a monthly co-insurance.
This post is what makes this blog so much more interesting than other conservative blogs.
Gary, I think you can eliminate the word “conservative” without changing the meaning of your comment.
The concept, I think you are describing, can best be labeled as an “after payment.” That is, provide a payment for the lowest cost available Rx (usually generic) and allow the patient to pay any extra costs if they want a more expensive (but not more clinically effective)medication. In medical and surgical procedures this has been called reference pricing. With this process in place, I’ll bet the pharmaceuticals would provide a payment for the after pay to encourage brand name drugs of little extra value.
BTW, I also hate the concept of high deductibles. HSA eligible plans do not have to have high out of pocket costs if there are enough rewards and incentive provided for wellness, compliance, and maintenance of good biometrics. Allowing a “shared savings approach” with an HSA eligible High Deductible Health Plan may in fact mean that there is NO DEDUCTIBLE – just more money in the HSA account under patient control.
Paying costs that would normally be covered should have the corresponding premium reduction the next month due to increased insurer reserves. In a sense, low claimants are renting the reserved for paying out of pocket claims that would normally be covered.
That is what we will do at National Prosperity Life And Health in the next few months after getting our insurer license from the Tex Dept of Ins
Don Levit
President of NPLH
John, you write — “In the case of the deductible, the incentive to economize vanishes once the deductible is exceeded.”
That seems logical and it is one of the arguments opponents of HSAs have used a lot. However, that has not been the reality in the market. In real life, the economizing behaviors used below the deductible seem to continue after the deductible is met.
This has surprised even me. But it shows the advantage of empirical research over hypothesizing — even the smartest of us get fooled by actual behavior in the market. It is one of the great advantages of trying things out on a small scale before making sweeping policy decisions.
Excellent point, Greg.
If this is truly a health blog, it needs to cover alternatives to insurance. Health insurance is not health care.
I will not participate in Obamacare, finding self-pay, especially for treatment overseas, far more practical. HSAs, which don’t have the insurance element, are better than insurance, though their tax-favored status that represents a transfer of wealth from the poor to the rich should be eliminated.
As a self-pay patient, I think the cures for American healthcare are:
1. Forced publication of all pricing.
2. Forced most-favored-nation status for all patients, except for limited discounts for cash, volume, etc.
3. Gummint subsidies limited to the indigent (i.e. no general pregnancy subsidy for breeders).
4. Eliminate certification of medical providers (docs, nurses, devices, drugs, hospitals) as Milton Friedman advocated.
Jimbino,
I find your comment “I will not participate in ObamaCare” perplexing.
Do you mean that you will not participate in the exchanges because you are already covered by an ACA approved policy or Government program?
Or do you mean that you will purchase an ACA approved policy directly from an insurer and pay more than you would in the exchange?
Or do you mean that you will purchase a non-ACA-approved policy and pay the ACA penalty?
Or do you mean that you will not purchase any policy, pay higher rates than those insured, and in the event of a catastrophic event which you cannot afford, the ACA, the government, the providers, and the public be damned? Help me out here.
Also, your Item #4 is interesting. Does that mean just anyone can practice medicine? That’s the bee’s knees.
One other problem with deductibles is that they are per-year (calendar or plan), which can put people in a bind when things happen towards the end of the year. I actually put up a guest post on my blog today, a family with a $10,000 deductible got hit with that at the end of the year and then again at the beginning of the year: http://selfpaypatient.com/2013/12/18/two-gall-bladders-a-paradigm-and-a-sharing-ministry/
It’s something the sharing ministries generally seem to have solved by having their ‘personal responsibility amount’ apply per-incident, not dependent on the year the costs were incurred.
Sean, wouldn’t it make more sense if the post deduc
Sean, wouldn’t it make more sense if the post deductible time period only started when the deductible was met and if the period were extended to 3 (or another choice) years?
John, where do the uninsured and low income fit into the HSA equation?
Excellent article. Only the free market can bend the cost curve and free market principles require that purchasers have a financial stake in the buying decision. The higher the stake the more attention they will pay to affordability.
“carve out whole areas of care and make these 100% the responsibility of the patient”
Under the conditions given, I think this is a good idea.
“Incentives to make better decisions” was not the original reason insurance policies included deductibles and co-pays. But over 40+ years, as medical costs reached multiples of their earlier levels, the original reasons for deductibles and co-payments have become way less important and in effect no longer exist. So why keep them?
Isn’t Why keep them? a much more creative question than Why change them?
This applies to many other problems of management. For example, consider what happens when bureaucracies try to force spending reductions by using budgets – for example, the sequester. The traditional approach is to cut spending by x% across the board. That always means: cut the necessary along with the wasteful; reward the profligate; and punish the careful. Doesn’t this approach always produce dysfunctional bureaucratic behavior? Won’t it always produce the same? So why keep it? How about instead – identify some discrete projects or even whole departments that can be entirely eliminated. Then eliminate them and leave the others [relatively] alone. I know that’s not on point with the post, but it just seems so similar in concept.
Agree entirely in a conceptual sense but from an insurer’s point of view there are some practical issues – especially for many populations. For example, if the population is relatively mobile and employees and dependents are moving from job to job and plan to plan, the idea of paying for preventive steps to avoid later catastrophic costs does not necessarily work because the original insurer (which often is the employer if a self insured plan) will not actually reap the savings (or more correctly, will not benefit from ‘avoided’ costs).
I strongly object to the concept of providers or nonprofits selectively paying premiums or discounts on higher priced services and goods (a/k/a drug manufacturer discounts the brand name drug compared to the much cheaper but equally effective generic) because there is no longterm commitment to the payment. The potential for various kinds of abuses that are truly antithetical to the concept of a free market are obvious. For example, hospital A identifies those at high risk of needing high cost care and pays the premium for a plan from which hospital A is not in the network to assure that the individual will go to a competing hospital B that is in network for care instead. Or the ‘charity’ receives a ‘donation’ on the condition that certain specified individuals will have premium(s) paid by the charity. So hospital system A makes a donation to a charity with the understanding the charity will pay premiums for certain high risk individuals in a network that covers a competing hospital but not the donor hospital.
And before others contend that I am imagining these scenarios I will ask – why do you think hospitals brought forward this issue to be allowed to pay premiums for some individuals? Why do drug manufacturers of brand name drugs offer coupons for a higher cost drug? Finally, how do either of these approaches comport with those who contend it should be a ‘free market’? I have the same problem with critics of insurers offering narrower networks when those critics claim to advocate a ‘market’ approach. The concept of offering a narrow network is closer to a market approach than broad networks.
We absolutely need more flexibile qualifying HSA plan designs, and you are absolutely correct that todays insurance plan financial incentives are “crude and weak”. John, thanks for your constant stream of good thoughts that contribute to getting cost and quality going in the right direction. I agree that reference pricing is a very bright spot. Notice too concierge medicine can be coupled to wrap insurance (evidently allowed by the ACA). I’ve suggested (and Jim Pendleton) that insurers deposit a fraction of savings consumers achieve below a reference price into an HSA. This would promote competition and lead to efficient focused factories. Keep the good ideas coming.
Cosmetic medicine is an area of medicine where deductibles are absent; but so is coverage above the deductible. It’s a medical market where patients exclusively pay cash out-of-pocket.
Although cosmetic medicine has experienced a huge increase in volume during the past 20 years, it has experienced only a modest increase in price (lower than the consumer price index).
The entire article presumes the existence of the current pre-paid healthcare scheme of “insurance.” Fact is, real insurance with moral hazard issues, like car and home insurance, include deductibles. Co-payments are not addressed because real insurance doesn’t generally see the insured come back to the trough over and over again. Mr. Goodman’s problem isn’t with deductibles. His problem is with pre-paid health care. I thought I could count on him to make the distinction. Evidently not.
Your complaint about Dr Goodman brings up an important but largely overlooked point about health insurance. With the exception of catastrophic policies health insurance policies are prepaid healthcare with a lot of bells and whistles, financial and clinical, to discourage utilization and expense to the insurance companies. They are less and less about protecting the insured from catastrophic loss due to a rare event and more and more about getting people to pay in perpetuity for services many won’t use. The policies also provide financial cover for people who won’t take responsibility for their own unhealthy behaviors.
Unfortunately, Obamacare only exacerbates the current situation and approach to health insurance.
Will return to a previous argument – would prefer that we establish a national reinsurance (a/k/a stop loss) fund that covers catastrophic costs above a certain threshold. While there are details to be worked out, these cannot be as complex as the details in PPACA.
The reason everyone spends so much time designing complex structures is mainly so that whomever is designing the feature does not end up paying the catastrophic costs. That is the principal reason for creating preexisting condition limitations. We could instead have a backstop for catastrophic costs but let the rest of the healthcare costs be handled in a market like fashion.
Same issue with deductibles and copays – if we can protect against catastrophic cost exposure, we do not need many convoluted and conflicting incentives and disincentives – most of which end up cancelling each other out along with driving a high cost of administration due to complexity.
Patrick:
Good point about everyone paying catastrophic care premiums.
At National Prosperity Life and Health, the catastrophic premium is a separate charge.
Paid-up benefits build below the catastrohphic premiums and stop-loss insurance insures the difference.
Those with low or no claims see their premiums reduce every month, so that in 36 months, one could be paying catstrophic premiums at a 60% discount and, at 60 months, at an 80% discount.
Don Levit
Tpabenefit.com
President
Natonal Prosperity Life and Health
John and Friends:
This topic needs much more attention, as the analysts in HHS think they know what “value purchasing” but they don’t. Today, methods of insuring and paying for healthcare is in a state of flux, with few points of agreement across sectors. One variable not included in this discussion is the psychology of particular patient types. Let that variable ber represented by a surrogate–education. A whole class of citizen believes healthcare should be free. They do not believe they should be responsible for healthcare costs–whether premiums or deductibles. Insurance is not a great vehicle for getting them to use the right amount of healthcare per their risks. Another variable is family status; people with good family support get some free care that others have to pay for.
Someone, perhaps your orgnization, might serve us all if they were to construct a matrix with service intensity down the left in increasing order, as with:
minor, short term curable illnesses; first diagnostic stage of a chronic condition, management of 2 or more chronic conditions, an elective procedure that reduces pain and increases functionality; a procedure that preserves life or cures a condition that threatens life or prevents normal living; and a tertiary phase where many services are provided at once and over a long period. Across the top, the chart would deal with payment type, as in cash, monthly payments, memberships in a designated practice; capitation for all care; capitation for specific episodes of care against a care protocol; insured payment for catastrophic episodes of illness where there is danger of death or permanent disability, and periodic interim payments for stages of one or more chronic conditions. You get the idea. I started such a chart, if anyone wants to pursue this.
It is particularly irritating to have a $5 or $10 co-pay as though that would determine whether I needed the visit or not.
The mode of payment should take into account the way computer technology is advancing in the non-health sector: fingerprints, card swipes, palm prints, etc will get you your groceries, your electronics, your new TV–anything that is still on paper is obsolete. As a transition step, how about a visa card with embedded visits, meds, diagnostics, etc, already priced and authorized, and available to pay for each event of care. It would send a summary report to the patient and the medical professional, who could quickly determine which patients were up to date on their care plans.
Wanda J. Jones, President
New Century Healthcare Institute
‘are”, not “is”…sorry.
WJ
Replacing most of Medicare Part B with HSA’s is a terrific concept. I have been studying Medicare’s fiscal problems for several years, and there may indeed come a time when Part B must be terminated in some way.
But I do not know how you get every 65 year old to have a balance of $80,000 or whatever in their HSA when they start Medicare.
I think you need some form of forced savings to start much earlier in life. Singapore and other nations are not shy about forced savings.
This would go against the libertarian bent of some the good writers on this blog, but I for one am not bothered. There has to be some coercion somewhere to maintain a modern health system. If we do not force businesses and individuals to save, we later have to force them to pay higher taxes.
I realize that Medicare needs substantial reform to its benefit design, financing and fraud removal. There are four changes that could be made to core Medicare (as a part of any broader reform) that would have profound impacts for Medicare Advantage plans.
(1) Fraud elimination
(2) The 150 day limit on hospital stays (Part A) needs to be removed,
(3) Provide a maximum out of pocket level for physician services (Part B), and
(4) HSA contributions should be allowed for Medicare beneficiaries.
Criminal fraud has become so large that Sam Palmisano, CEO of IBM, offered his company’s technology as a free public service to find and stop $900 billion in Medicare Fraud.
The greatest fear of the elderly is outliving their assets. Hospital Part A exposes beneficiaries to the full cost of any hospitalization beyond 150 days. Basic Medicare should eliminate the Part A day limit.
Medicare Part B exposes beneficiaries to an unlimited 20% cost share for approved provider services. Placing a Part B limit of $5000 MOOP (similar to employer-based plans) would eliminate that risk.
Every Medicare Advantage and Medigap plan covers unlimited hospital days. Several years ago the CMS actuary priced out the extended Part A hospital cost for all Medicare at ¼ %. The CMS hospital outlier reimbursement formula is currently based on hospital charge masters rather than a true cost. A change in the outlier reimbursement could be used as a cost offset.
Allowing HSAs for Medicare beneficiaries would generate saving in the same way employers are experiencing savings with HSA eligible plans. About 20% of Medicare beneficiaries or 9.2 Million have Medigap. $200-300 per month premium translates into $22–33 billion that beneficiaries could be put into Medicare HSAs.
All Medicare beneficiaries would have the fear of extended hospitalizations removed regardless of whether they chose Medicare, Medicare Advantage, or Medigap. With the hospital day change, Medigap plans would prove uncompetitive in the market. Sales of Medigap would diminish dramatically. Medicare Advantage benefits provided by the efficient cost controls and provider access would be highlighted as the best buy in the comparison on the three options.
By making these improvements to Medicare, we can support increased health security, lower costs, promote more private market coverage under Medicare Advantage, and diminish the sale of Medigap plans – the worst health insurance buy on the market.
Ron,
I have one of the very few Medicare MSAs in the country, and I love it. It is offered by Geisinger in Pennsylvania. No additional premium, $3,000 across the board deductible, $1,500 annual federal MSA deposit, 100% coverage over the deductible. Easy to understand and solid stop-loss limit.
I would change two things — Make the deductible $4,000, and allow personal contributions to the MSA.
Dr. G., what do you think of Value-Based Insurance Design?
J.
Plan design can and does influence consumption of medical care, however our problem is much deeper than this. Anyone old enough to have turned on a high beam with their left foot remembers when the product was medical care, not healthcare and therein lies the problem.
What we buy in the US is “healthcare”. Loosely, this means health insurance, or healthcare finance. When the product is the financial instrument, rather than Medical care, then medical care becomes a byproduct to be used to increase the profitability of the financial instrument. At MediBid, the product is medical care, and the market principles of transparency and competition are applied. This is the way in which healthcare costs can be controlled.
Note to Ron:
Thanks for the solid suggestion to get rid of Medigap.
Do you what the cost would be to the program if a firm cap of $5000 out of pocket was installed for Plan B? Might be a lot, not that we should not do it.
I had CMS estimate the cost of a combined Part A and B maximum out of pocket at $10,000 and the amount was about a 3.5% increase in Part A & B costs. This didn’t include costs for part D.
With HSAs allowed, incentives for compliance, rewards for selecting cost effective services and a focus on fraud and organized crime ripping off Medicare, we could net out the added costs of all my suggestions.
Note to Don Levit:
You mention that your proposed plan takes advantage of the reserves created for the insurer by having high deductibles.
And that these reserves are in effect recvcled to the insureds after a few years.
I do not fully track that.
Here is a crude example:
A company insures 100 people in a high deductible plan and charges $3000 each, so it collects $300,000 total.
95 of the insureds never even hit the high deductible.
But 5 of the insureds have major illnesses, which uses up the $300,000.
(in fact HDHP’s do have sizable year to year premium increases, I think for this reason.)
So how can the same reserves be in effect used twice?
Thanks for your help on this. Your plan sounds good in theory.
That is the nature of annual deductibles. You can continue trying to fix something which is fundamentally flawed over and over and over again, but you will continue to get the same results.
Monthly budget plans do work
Bob
The $300,000 of claims is paid from NPLH the stop loss insurer up to $25,000 and from the catastrophic insurer over $25,000
These are 3 distinct insurers with 3 distinct reserves
The 5 high claimants will be paying fully community rated premiums the same premiums they paid initially
The 95 low or no claimants continue to get monthly discounts because for their group our reserves are growing instead of being paid out in claims
They receive a portion of the increased reserves in the form of a premium discount priced AS IF the deductible was raised to their paid up benefits balance while the gap insurance up to $25,000 is lowered thus also providing a portion of their premium savings
Don Levit
Tap benefit.com
President of NPLH
But Don, the stop loss and catastrophic coverage is not free. Doesn’t the cost of that coverage eat into reserves?
I am an amateur here, but if what you say is true then every corporation in America should be self-funded and they would save hundreds of billions.
Instead I read that self-funded plans only save 6-10% versus full insurance.
Thanks
Bob
The stop loss and catastrophic coverage have separate premiums and separate reserves
The same is true of NLPH
If reserves of NLPH are reduced due to excessive claims our risk is reduced while the gap coverage up to $25,000 is increased along with their premiums
How about a case like this:
Elderly patient has a family member willing and able to take care of the elderly patient but would need to take unpaid leave from work. The insurer will pay for nursing home care but will not compensate the family member.
Also travel to surgery center of OK City or to Mexico for care.
It seems to me that high deductibles would help in these two cases.
If patients could afford to pay full out of pocket, why would they need insurance? Thought the purpose of insurance
was to off-set the high cost of medicines and medical care.
Some insurers get larger chunks on the price of generics were manufacturers get the lion share of “name brands”. If all parties put the patients first everybody would win.