Last week, my son had an asthma exacerbation. We tried to drown it in albuterol but that was not working as well as he needed so we took him to the urgent care where he got a COVID test, a chest x-ray to check for pneumonia and then a scrip for some good generic drugs that have significant reduced the inflammation to the point where he could go to school this morning with just a case of the Mondays. That night, after I dropped him off at home and while I was waiting at the pharmacy for the prescription to be filled, I thought about health insurance and incurred but not reported claims (IBNR) as this is what I do. We’ve talked about IBNR before and I’m thinking about this for a potential project.
When I was working full time at Duke, the family was covered under my employer’s insurance. It was damn good insurance on a narrow network (anything with “DUKE” in its name was in network, anything else, YOLO) with very low cost-sharing. The entire episode would eventually cost me $75 in co-pays. When I became a student, my insurance switched to the student plan while my wife and kids went to her employers’ insurance. They now are covered by a national PPO high deductible health plan (HDHP) with a Health Savings Account (HSA). This means that the entire contract rate for the visit and services will be paid by us until we hit a deductible. The fundamental concept is that lower actuarial value plans with significant first dollar spending requirements will make us better and more discerning shoppers that reduce utilization for unneeded care and drive down prices for needed care. Yeah, my son likes to breathe. We like him to breathe.
As I was waiting at the pharmacy, I knew that I would get told exactly what I owed at the point of sale (~$15). That is information I can theoretically use to think about my incentives for the rest of the year. My family’s functional deductible is BIG NUMBER – $15. There was just enough lag in the system for me to convince myself that I really wanted the big bag of peanut butter M&Ms.
I have no idea what the actual visit will cost. I’m not worried, we have money in the HSA and given the procedures and location, it won’t be tooooo expensive (this is privileged as fuck, I know). But my family’s functional deductible at this moment is BIG NUMBER – $15 – [some unknown number centered on a distribution of $250 with a distribution skewed to the right]. Given that I think about insurance way too much, I am very confident that this equation produces a number well above zero. However, there is a slight chance (<1%) that my family will hit their deductible for the year.
I think that we can effectively act as if we still have a significant deductible left, but I am not certain. I am not certain if that deductible is big enough to make us be 100% responsible for an uncomplicated broken wrist or if it is small enough that another PCP visit or two for school yard crud diseases would eat it up. Given that it resets on January 1, I am assuming that the deductible’s incentive effects are going to be a near constant. If one of my kids or my wife needs medical services in the next thirty three days, we could face a shadow price that differs from the actual price if our deductible is fully met. I don’t think that is the case, but there is a possibility that is the case.
But we are in a world of uncertainty due to IBNR. We know the claims are out there from both a personal, experienced level, and from a societal collective statistical level. We know that the claims will eventually be paid. We just don’t know when any particular claim will be submitted. This creates a moment of fuzz and uncertainty as some of the incentive shaping structures fundamentally assume rapid claims payment or at least fully transparent and coherent pricing information that integrates very nicely with accumulators of previous claims payments. Price transparency rules are likely to not be harmful to this problem. But even full price transparency at the point of service without immediate claims submission and claims processing in the amount of time needed to impulse buy something with both chocolate and peanut butter in it only does so much. Even in a much lower friction universe, there is significant IBNR challenges.