Deductibles and distribution

The Kaiser Family Foundation and the Peterson Center on Healthcare tracks cost sharing and premiums for employer sponsored insurance (ESI).   I am using their Table 1 data to look at the distributional consequences of benefit design changes.

The blue line is the actuarial value.  It has hovered at about 85% over the decade of data.  Insurers pay roughly 85% of the incurred claims.  15% of the claims are paid by individuals through cost sharing.  The implied challenge is that medical costs are growing significantly faster than wages so total spending (both premiums and cost sharing) are going up quickly for people.

The orange line is the proportion of the cost sharing that is taken up by the deductible.  That has changed dramatically. It went from roughly 30% of cost sharing was borne by deductible payments in 2006 to slightly more than 50% of cost sharing was paid through the deductible in 2016.  The other two types of cost-sharing are coinsurance which is a percentage payment based on the contracted amount and co-pays which are a fixed per unit fee.

Deductible market share went up 23% points, coinsurance increased its share by a  smidge, ~2% points while co-pays lost 25% of share over the decade.

If we hold actuarial value constant, deductible heavy cost sharing arrangements are good for people with very high expenses and bad for people with low but non-zero expenses.  Co-pay designs are good for people who use few services.

In 2018,  I have had a $144 urgent care visit and a $6 generic prescription.  This is a very common archetype of low but non-zero utilization.  A friend of mine has cancer.  She has routine $10,000 treatment months in 2018.  That is a common profile of a very high spender.

Under a deductible heavy scheme, I am kicking in $150 to the cost sharing pool.  My friend is maxing out her deductible in the first month of treatment.  If urgent care has a $50 co-pay and generic drugs are no cost-sharing, I kick in $50 instead of the $150.  That other $100 has to be made up somewhere and that means it will be made up from people with frequent interactions with the healthcare system which means it will increase cost sharing for very sick individuals.

I wonder if part of the political anger and angst on healthcare is the transition from a cost sharing regime that is heavy on co-pays and light on deductibles to the opposite.  The original baseline is pretty good for the bottom 50% to 60% of the healthcare spending distribution.  Their out of pocket costs were fairly low the few times that they touched the system in a year.  A $20 or $40 charge was what they saw.  Now, under a deductible heavy, co-pay light system, they are seeing their cost sharing increase significantly so they don’t see the value of their health insurance when they pay $144 for the urgent care visit.  Holding actuarial value constant, it is a change in regimes that is good for very expensive individuals but those are the folks who are not high in number nor particularly price sensitive as their treatment choices are pay or die.


8 replies
  1. 1
    Dan Mulligan says:

    I know this is an issue for us. We are older now but have been light users for many years. So, many years just a $10 – $20 copay for me for the whole year. My wife needed sinus surgery (polyps) some 8 years ago. Cost $10 to do in the hospital on an outpatient basis, plus $5 for the meds. She has to repeat now at $1000+ (only because it can be done ALMOST as effectively at the doctors office now; if done in the hospital would have cost $6000).

    It is a big deal. Thanks for making it clearer, even though it doesn’t make it easier.

  2. 2
    Luthe says:

    As someone who can best be described as a “moderate” utilizer of health care, increasing deductibles mean I get increasingly screwed. I take three medications daily. Two are cheap generics for which the pharmacy charges me market price because it’s frequently lower than the copay. One is an expensive generic where the full price is somewhere in the range of $150/month. I also need between 2-4 specialist visits a year for med checks. A $2,000 deductible which doesn’t go to copays on prescriptions until I hit it is nearly impossible to reach anywhere before maybe November. Anything higher and I am seriously unlikely to hit it anytime during the year. So I get stuck paying out-of-pocket for everything unless I get hit by a meteor early in the year. My only hope are plans with separate prescription deductibles.

    Tell me, doc, is there a way to fix the system for those of us in the middle of utilization curve?

  3. 3
    daveNYC says:

    Thing with the move to deductibles is that depending on the details, you can end up paying for health insurance that doesn’t actually pay for anything. At least not until you get hit by a buss/cancer/have a kid/etc. That will tend to make people grumpy.

  4. 4
    gene108 says:

    If we hold actuarial value constant, deductible heavy cost sharing arrangements are good for people with very high expenses and bad for people with low but non-zero expenses. Co-pay designs are good for people who use few services.

    Actuarial values may work out like this, but even if you make out your deductible, it’s still a fuckton of money for most people. A $3000 deductible, for example, being maxed out hurt your pocket book.

    The healthcare system, with its ridiculous inflation rate, is choking this country. I don’t know how to make it stop, but somehow we have to start spending less on healthcare.

  5. 5
    p.a. says:

    What is driving the change? If the AV is staying the same, as far as the insurance companies are concerned what does it matter where the $ is coming from?
    What difference does it make to the employers?

  6. 6
    dnfree says:

    This is an excellent point. When my employer changed to high-deductible insurance, back in the mid-1990s, that’s what people complained about. It also front-loads your out-of-pocket cost. I had a co-worker whose son broke his arm in early January. So there she was with the entire expense of that on top of the Christmas bills. Co-pays tend to spread themselves out a little more.

  7. 7
    RobInAtl says:

    @p.a. For employers it’s moving more of the cost share to employees (overall) and incentivizing those who might be low users to be zero users as the first X dollars comes direct from their pocket (or if they are lucky an HSA).

    Overall I do agree with David’s thought that the shift to high-deductable is one of the bigger grip factors for lower and medium users. Not only is it more money out of pocket, but it tends to cluster more strongly, e.g. as @dnfree said a 1 or 2 time hit for something like a broken bone can throw a monthly budget out the window.

    Throw in stuff like urgent care going from a couple bucks higher than an office, to twice as much to $500 deductable (on my previous insurance) and you can see where someone with normal means who doesn’t typically interact much with “the system” can get hit painfully. And let’s not even get to trying to base ER visit coverage on final diagnosis or non-covered expenses – even if you don’t have any the fact that you have to think about the possibility is pretty stressful to anyone who spends even 5 seconds looking at their insurance.

    Shifting the pain around can only go so far. At this point in American healthcare there might still be some room on the edges. But overall pots getting closer and closer to boiling due on account of exceeding inflation so much, and we’re the frogs.

  8. 8
    Fred Fnord says:

    The other two types of cost-sharing are coinsurance which is a percentage payment based on the contracted amount and coinsurance which is a fixed per unit fee.


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