Hidden Costs of High-Deductible Plans

During the last two decades, increases in healthcare costs have outpaced GDP for many countries. This is true in the United States, where healthcare spending has increased from 12.5 percent of GDP in 2001 to 16.4 percent in 2013. In this context, several initiatives have been undertaken to reduce healthcare costs where both supply and demand are concerned. Efforts to increase healthcare efficiency on the provider side include initiatives such as Accountable Care Organizations, which are institutions that seek to connect provider reimbursement to quality metrics. On the demand side, these efforts focus on deterring the use of cost-sharing policies where patients pay “out-of-pocket” for a portion of healthcare costs that are not covered by their insurance plans.

Health programs, both in the public and private sector, have been moving toward cost sharing policies such as copayments, where the patient pays a fixed amount for services, and deductibles, where the consumer pays for services before the health insurance plan kicks in. For example, the percentage of covered workers enrolled in a plan with a general annual deductible of $1,000 or more has grown from 10 percent in 2006 to 41 percent in 2014, with the average value of the deductible more than doubling from $584 to $1,217. The evidence so far indicates that, when faced with higher prices, consumers reduce their spending. However, this effect is not entirely clear—are consumers spending less because they are choosing less expensive procedures, or are they cutting back on expensive services they actually need?

To study these questions, a group of researchers from the University of California, Berkeley and Harvard University conducted a study on a large self-insured firm that switched its insurance plan from one with free medical care to one with high deductibles, where access to providers and medical services remained the same. This situation allowed researchers to assess how consumers respond to cost sharing. The firm had between 35,000 and 60,000 employees, plus dependents. Most of these employees can be described as high income, with 92 percent earning over $100,000 per year. The researchers had access to individual information on health history and claims, in addition to demographic information. Altogether, these data covered six years in total—four years of data prior to the insurance policy change, and two after the change. Although this sample of employees is wealthier than the US population overall, this test population offers insight for other companies transitioning to higher cost-sharing insurance plans that have similar employee bases.

Results indicate that the switch to high deductible care caused a reduction in health spending between 12 percent and 14 percent the year after implementing the policy, which persisted during the second year. Researchers estimated the effect of the policy on health spending by holding all other variables constant, allowing them to infer a causal relationship between the policy change and reduced health spending among employees. Furthermore, corrections were made to account for inflation, aging over time, and the anticipatory increase in health spending in the months just before the plan shifted.

The results also show that this reduction in spending could have a negative impact on patients’ health. After looking at the reduction in health spending among employees, the authors discover that the decrease in spending was mainly due to a reduction in the quantity of health services consumed, as opposed to choosing cheaper providers and services to cover the same healthcare needs. For example, employees were electing to receive fewer cancer screenings to save on cost rather than choosing cheaper cancer screening options. If increased health is the goal, this is not the desired result. Spending changes on various aspects of healthcare are summarized in the chart below.

Many of these behavioral adjustments in response to the policy change could be considered highly irrational. For example, the sickest employees of the firm were often the ones foregoing important medical screenings, even though the majority of these sick patients would have met the deductible. This suggests that consumers respond heavily to upfront prices at the time of care, not taking into account the true price, which is much lower and accounts for employer contributions and insurance. This may also suggest that consumers may not understand the complexities of their insurance plans due to inadequate information from their employers or the insurance providers themselves.

High deductibles are a powerful incentive to reduce spending, but they may also discourage the use of necessary services. Is it a matter of the inherent complexity of these plans? If this is the case, more education, together with resources, would be beneficial to enhancing effective price shopping. Otherwise, supply-side mechanisms may prove more helpful, such as value-added assessments or the services provided by Accountable Care Organizations.

Article Source: Brot-Goldberg, Zarek C., Amitabh Chandra, Benjamin R. Handel, and Jonathan T. Kolstad. “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics,” National Bureau of Economic Research, No. 21632 (2015).

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