Why High Deductible Plans Matter

Someone once showed me an analysis that demonstrated that the sum of workers’ salaries and benefits has stayed remarkably constant in real terms over the last two decades.  This means that companies have compensated for the increasing cost of health insurance over time by holding back on wage increases.

You can understand this.  After all, if companies are not able to increase the price of goods and services they sell to the public, they need to hold factor costs relatively constant.  So if it was costing them more and more to provide health insurance to their workers, an offsetting amount would have to be removed from possible wage increases.

This dynamic is still in place, but it is showing up in a different way, by shifting costs to workers in the form of higher deductible health insurance policies.  Deductibles are different from co-pays, where you plunk down $15 or $20 for each appointment or prescription.  With deductibles, you pay the first costs incurred as you and your family make use of the health care system, the entire cost of the office visit or of the prescription, until a preset amount is reached.  After that level is reached, you still pay the co-pays.  A recent story in the Washington Post documented this trend.

Currently, this kind of high-deductible policy is often combined with health saving accounts that are funded by the employer.  These accounts let patients buy medical services and drugs with pretax dollars.   So, although your insurance plan might require you to pay more of a deductible out of your own money, you could still use the HSA to cover those out-of-pocket expenses.

But the article suggested that this remaining employer contribution, the HSA, is likely to evaporate over the coming years.  “Half of all workers at employer-sponsored health plans — including those working for the government — could be on high-deductible insurance within a decade, according to a new paper from Rand Corp.”

Is this good or bad?  Supporters of high deductible plans say that the only way to make sure consumers have some “skin in the game” when it comes to society’s rising health care costs is to assign some of those costs to the consumers.  If you know, for example, that you will pay for the first $1000 of your annual health care costs, perhaps you will shop around when you need that MRI.  Instead of going to the local hospital, you will go to a specialized imaging center.  Perhaps, too, you will be less likely to go the emergency room for something that could wait a day or two.

On the other hand, opponents say that this kind of approach is unfair to people with chronic diseases like arthritis or diabetes.  They argue that these people make fewer discretionary choices when it comes to treatment.

Some people suggest that companies are “word-smithing” the trend to make it sound like it is in the public interest, even though it is really driven by corporate finances.   The article quotes Jonathan Oberlander, a health policy professor at the University of North Carolina. “Employers like it because they’re providing less coverage. If they can relabel it as consumer-driven then it even sounds good.”

One variant on high deductible plans is to allow consumers a lower deductible if they get their medical care at a “limited network.”  This would be a group of doctors and hospitals that agree to charge the insurance company less than a group of higher paid doctors and hospitals in the community.  You, as consumer, would choose.  If you really wanted to go to Dr. Really Famous at the local academic medical center, you would be responsible for the much of the cost, but if you went instead to Dr. Relatively Unknown at a community hospital, you would only be responsible for a small co-pay.

Perhaps, too, your deductible would be waived if you agreed to participate in an annual health care assessment.  The Post article told of one such plan:  “Chrysler introduced a preferred-provider plan with family deductibles as high as $3,400 for salaried workers…. The deductible falls to $1,000 for in-network care if employees receive a physical and take other steps such as completing an online health assessment.”

Of course, none of this works at all if the rates and charges assessed by doctors and hospitals are not transparent to the public . . . and if we have no quality indicators that tell us what we are getting for our money when we choose between Dr. Famous and Dr. Unknown.  Thus far, where such information is available, it is woefully out of date, often two or three years old.  If high deductible plans are coming our way, we should be demanding of our state government that both real-time price and quality data be available for all to see.

Paul Levy is the former President and CEO of Beth Israel Deaconess Medical Center in Boston. For the past five years he blogged about his experiences in an online journal, Running a Hospital. He now writes as an advocate for patient-centered care, eliminating preventable harm, transparency of clinical outcomes, and front-line driven process improvement at Not Running a Hospital.

27 replies »

  1. You can’t be a smart shopper if you can’t dictate a price. The fact is with an HDPD you don’t have bargaining power and refusal to pay an entire bill like the insurance company does. If a consumer has a way to battle frivolous charges from a doctor or hospital then it has a chance to work.

  2. Good, maybe he will actually price things what their worth when a lot of people start coming in. I know several people who just tell the hospital they have no insurance when they have a high deductible plan. Saves then 80%. I don’t do it, but I hear people laughing about all the time.

  3. The real problem with high deductibles is the issue of doctors billing unnecessary fees. For instance, I go to a specialist and pay $175 for the visit. He looks at me ( by look I mean sits ion his chair and uses a stethoscope once. Then I get a bill for $35 after the visit. Maybe he was upset because I cancelled the visit since he wanted a return visit of $1200 to put a camera down into my stomach to figure out what’s wrong.

    The big issue is that patients will start toughing it out instead of paying ( bargain shopping as it’s called by non-high deductible employees ). I never checked out my stomach and with a history of cancer I will probably find out I have stage 4 cancer again next year.

    In other words, high deductible is survival of the richest. Until the health industry gets a lot of regulations, doctors will bleed employees dry of their wallet.

  4. thank you Barry!

    it is high time that someone provides solid actuarial proof that the Republican litany of “more skin in the game” is so much baloney!

  5. I have lots of clients on high deductible plans. It is a good way to save middle class Americans money on their monthly insurance costs and still covers doctors visits, and in a catastrophic situation they will only be out the cost on their deductible and not up to hundreds of thousands of dollars.

  6. “In his libertarian book The Cure, David Gratzer used an illustration where the premium would drop from $8000 a year for low deductible policy down to $3,000 for a $2500 high deductible policy”

    Bob –

    This defies common sense. Experts have told me in the past that if you take the first $5,000 of medical claims incurred by an insured population, including the first $5,000 for the very expensive cases, it would amount to between 25% and 33% of total medical claims and probably closer to the lower end.

    Presumably, insurers expect to earn the same profit margin from its high deductible and low deductible plans and should price them accordingly. Under PPACA, insurers must spend at least 80% of premiums for medical claims with a maximum of 20% left to cover administrative costs and profit (15% for large groups). If a $5K deductible would only lower projected medical claims for an insured population by 25% vs. a low deductible plan and medical claims account for 80% of premiums, then the price difference between the high and low deductible plans can’t exceed 20% and could easily be as low as 15%.

    When I was pricing Medicare supplemental plans last year, if I remember correctly, the premium difference between the $2,000 deductible Plan F policy and the zero deducible was $800 per year at most. No insurer in its right mind would offer a premium discount for a high deductible policy that exceeds the incremental deductible over the more comprehensive plan.

  7. I just went onto ehealthinsurance.com, and I plugged in an imaginary family of 2 forty year olds in good health and two children.

    For a premium of $650 a month, they could get a policy with a $4,050 deductible.

    For a premium of $360 a month, they could get a policy with a $14,200 deductible.

    Several thoughts come to mind–

    a. on the latter policy with the huge deductible, I assume that the insurance company makes out like a bandit. They will almost never have to pay a claim.

    b. This sure was not what the early advocates of high deductible coverage had in mind. The selling point for the John Goodman/Heritage crowd was that you could take your premium savings and use that to fund your HSA.

    In his libertarian book The Cure, David Gratzer used an illustration where the premium would drop from $8000 a year for low deductible policy down to $3,000 for a $2500 high deductible policy……I could go for that myself!

    What has happened here? I would be curious as to any answers.

  8. Without employer assistance or government subsidies, people buy what they can afford.

    It is no different than food or cars.

    A person whose income is $2000 a month can afford about $150 a month for health insurance. Go on any health insurance website, and the only plans available for that amount will have very high deductibles.

    The ACA has a million imperfections, but one thing to its credit was that it at least acknowledged the inadequacy of the free market. If the ACA subsidies survive, then the person making $2000 a month will pay $150 and then the government will ADD another $500 a month so that this person can afford a decent policy.

    I just shake my head when I read what Republicans say about the current state of affairs. To a large extent, Republicans only talk to seniors or to well-connected corporate employees or to entrepreneurs who make far more than $2000 a month. If those are the only people in your universe, then the scandal of mis-placed high deductible plans is not on your radar.

    Dick Armey is the poster child for this studied ignorance, Read his comments on health insurance any time for confirmation.

  9. Don’t know who sells them. I agree, they don’t work at all if you don’t have a lot of money.

  10. Who’s selling these plans? Sounds like the health insurance equivalent to predatory lending.

    That’s how I see these plans, great for financially secure people but a joke for those people without enough disposable income to make the plan work for them. I have a HD home insurance policy, but I have ample resources to cover an initial loss.

  11. I was at a small, rural hospital a few weeks ago talking to the CEO. He said a lot of families in his area are buying high-deductible plans (up to $10,000 in a deductible). Really bad for his hospital because they don’t have the 10 grand and when they come to the ER and get treated they don’t have much if any money, can never meet the deductible and his hospital ends up eating the loss for people who are supposedly “insured.”

  12. Steve –

    I’m all for listening to customers (patients) and trying to be responsive to their needs and concerns. Unfortunately, commercial payers historically considered the employer to be the customer and not the member. Employer and member priorities can be quite different and often in conflict. Public payers respond mainly to lobbyists for the various healthcare industry interest groups in formulating coverage and payment policy.

    If patients expect their needs to be addressed going forward, I expect them to develop some consistency between what they want and what they’re willing to pay for. Significant tradeoffs are inevitable and people must be prepared to make them. It’s unacceptable to just expect someone else (presumably the rich) to pay for or at least heavily subsidize the cost of unlimited care from a broad network of providers.

  13. Going for major healthcare procedures requiring extensive hospital inpatient care is not like running down the street for a gallon of milk or loaf of bread. We can’t afford a convenience store model of health care delivery, e.g., a tertiary care facility on every other block. To Steve’s point, the 79 year old patient with a spouse and pet at home will have to make arrangements, hopefully with the assistance of a health plan or hospital care manager, for transportation and other related costs.

  14. Maybe, but it would likely require several trips a day. Lots of older family go home during the day and come back so that they can take care of the family pet. I suppose we could then pay for pet care also, but really, my point is just that if we want to change things, we really need to know what patients and families actually want and do.


  15. Steve –

    I hear you and I appreciate your perspective from the trenches.

    I think we will have to move away from the fee for service payment model over the intermediate to longer term. I could envision large hospital systems owning enough physician practices, labs, imaging centers, physical therapy centers, etc. to provide a complete but narrow network within its region. It may be able to perform the insurance function itself and sell policies directly or partner with an insurer with more expertise in risk assessment and estimating likely medical costs for a population. It would, in effect, then bid against other similar organizations for business including Medicare Advantage business. There would need to be a mechanism to provide risk adjustment payments for above average risk populations which would be financed by assessments on insurers and ACO’s with below average risk populations. This, I assume, is what a global payment approach would look like. The ACO could still run a fee for service system internally if it wants to track each doctor’s utilization of resources. Care delivered out of network under emergency conditions and/or outside of the member’s home area while traveling would be reimbursed at Medicare rates.

    With better care quality data and more widespread use of electronic records, high cost systems would presumably find it difficult to compete for insured members over time and would need to find ways to reduce their costs, shrink their physical and employment footprint or go out of business altogether. While I’m a big believer it price and quality transparency, I agree that it won’t be nearly enough to get us to where we need to be on the healthcare cost front.

    Separately, the 79 year old wife of the heart patient that you alluded to in your last comment could be transported via car service from home to hospital and back every day of the patient’s stay and the system could still save money if the price differential between the South Jersey and the Philadelphia hospital were large enough.

  16. No one seems to be addressing my point yet, which is this;

    how many people have a high deductible plan with no HSA whatsoever?

    This may be a hard statistic to find, I understand that.

    But I do think it is an important one.

    As someone who has sold insurance to small groups, I will testify that plenty of them offer a high deductible with zero financial support.

    Bob Hertz

  17. “We need transparency at all levels. I dont see it happening without legislation requiring it.”

    Right on steve! Docs don’t want to talk price, just treatment. So will our “free enterprise” Republicans force transparency – from their lobby groups? Not likely. HDHP is only a marketing tool to hide the real issue – IT”S THE PRICES STUPID” and no one wants to confront the price drivers – docs, hospitals, corporate medicine. Hell, even Medicare was outlawed from negotiating price. Ever try to bring up price with your doc – how’d it go?

  18. When high deductible health plans were first rolled out about ten years ago, they were intended to be coupled not only with health savings accounts but with additional consumer shopping tools to help consumers make better decisions about health care. Larger health insurance companies such as UnitedHealth are deploying next-generation tools to provide consumer transparency into the costs of health care, not only for individual providers but at the episode of care level, to help us fully realize the benefits of more informed consumers making decisions about health care knowing that their financial resources are being spent via the health savings account.

  19. @Bob Hertz: America’s Health Insurance Plans Center for Research and Policy produces an annual report that explains the enrollment of HSA/HDHP plans across the US. Plans that combine these “products” have grown over 120% in the past 5 years, and growth has been seen across the US. Plans offered by small groups have grown about 66% in the same time period, so HSA/HDHP plans offered by smaller companies are still growing, just not to the same extent as larger companies.

  20. High deductible health plans have been the only market-based approach that has gained traction so that patients have some “skin in the game”. This is important because you see providers and payers being squeezed economically. Furthermore, I would say a large percentage of providers resent the fact that they are more responsible for patient outcomes, even after patients leave the clinic/hospital, even though they can’t control what happens outside of their institution.

    As the article notes, the HSA/HDHP approach requires greater price and quality transparency as well as an educated public, and companies like Castlight Health and Sprig Health are helping to create a more transparent environment. Companies like HealthGrades among others are working to create a doctor review system. These are the keys to transitioning to a more consumer-based experience in health care.

    But there are downsides to the system as other people have commented. Has anyone seen another market-based approach to bringing down health care costs and doesn’t potentially jeopardize preventative care?

  21. I have lunch every now and then with our marketing guys. All policy people should, IMHO, do something similar. What they always tell me is that it is very difficult to move market share. People, and insurance companies, are not moved very much by lower costs or quality or even by advertising with the best looking nurses. Geography and referral patterns are everything.

    We try to keep all of our heart patients within our system. That is what everyone does. It might be cheaper for the system as a whole if those cases were done elsewhere, but it would be loss for the referring hospital. The only cases we send to Penn are those needing a VAD or a potential transplant.

    Last of all, just to address the issue of going to other hospitals for lower care, it will always be more difficult that you think. We internet pundits think in terms of dollars. If you sit down with the folks actually having these procedures, you find out that their concerns are different. They want, in many cases need, for their family to be able to make it home after a procedure. If you are an 80 y/o guy having a CABG, do you really want your 79 y/o wife driving to and from some place in South Jersey in the middle of the night? Then, how do you do follow up? I can tell you it is no fun having someone show up in your ER for emergency surgery when they had their original procedure done in another state. You always have imperfect information. (In one case, the family told us the patient had inoperable lung cancer. The patient was very unstable and we had to make a decision quickly. We thought the story didnt quite fit, and the family seemed, to be frank, pretty clueless, so we rushed him to the OR anyway for a dissection. The family was wrong. Pt did well.)

    Still, I think higher deductibles can be a part of the solution, along with transparency. I just dont expect a lot from them.


  22. In his excellent article, Paul notes that “this kind of high deductible policy is supplemented by health savings accounts funded by the employer.”

    This is not true in much of the country, and it is totally untrue in the individual market.

    Paul may only be exposed to larger and more generous corporations, and that is not his fault but it leads him to under-estimate the problem.

    I sell high-deductible insurance, and the vast majority of buyers that I see are going “naked” on the first $2500 or $5000 of exposure.

    The main reason is that the darned high deductible coverage is still eating up much of the household budget.

    Picture a family with an after tax income of $3000 per month. The high-deductible plan itself could cost $800 a month for the family. Where is the money supposed to come from for an HSA?

    This should improve if the ACA subsidies can survive. If they do, then the family noted above should see their premium top out at $300-$400 per month, and then maybe they can do an HSA.

  23. Steve –

    I agree that the 50% of patients with the lowest health care costs consume only 3%-4% of total healthcare resources. Indeed, according to the Kaiser Family Foundation, in any given year, 25% of the population consumes no healthcare whatsoever.

    I think the potential savings from skin in the game, high deductible insurance plans, HSA’s, etc. are comparatively marginal in the scheme of things. The real savings will be driven by doctors doing a better job of ensuring that high cost patients get appropriate and necessary care from the most cost-effective, high quality providers.

    In your own group, if a patient needs a CABG, a hip replacement or other expensive care, how do you decide where to send him or her? Do you have any idea how much more the same care costs at Jefferson or Penn vs. less expensive hospitals that are not part of those two systems? Perhaps there is a good hospital in Southern NJ or Delaware that could do a good job for much lower cost. This is why doctors need robust user friendly price and quality transparency tools. If patients insist on going to the more expensive hospital because they incorrectly think that more expensive care is better care, they should pay significantly more out-of-pocket for the privilege.

    Of course, doctors employed by Jefferson or Penn or other big name academic medical centers are expected to refer patients within their own system no matter how much less comparable care costs elsewhere. That’s a separate issue. Maybe it can be addressed through global payments, bundled payments and ACO’s instead of fee for service. I don’t know.

    The dual eligible population is also a fertile ground for cost savings as well. The name of the game there is much better care coordination though even Medicare and Medicaid pay some hospitals considerably more than others in the same city. Within this population, Medicare is paying mainly for acute care while Medicaid is paying mostly for care in skilled nursing homes. Different strategies are needed for each of those but again price and quality transparency tools could play an important role in reducing costs.

    The bottom line is that price and quality opacity are greatly complicating efforts to drive better value in healthcare. We need price and quality transparency, especially for doctors to help them make their decisions on where to refer patients and whether or not some expensive tests can be eliminated.

  24. We need transparency at all levels. I dont see it happening without legislation requiring it. Exchanges should give us better transparency when it comes to buying insurance. That needs to be legislated so that insurance companies will be required to list products so that they can be compared in a meaningful way. Then consumers need to be able to determine prices at the local level. Still, we should remember that this is not likely to give very large savings. 50% of people consume 3% of health care. For these people, it will save some money. For those with chronic illnesses or with limited time but very large expenses (think chemo or major surgery), they are going to blow past any reasonable deductible.


  25. If we are to ever get good value for our healthcare dollars, price and quality transparency are absolutely critical. Both patients and referring doctors need easy access to this information. It’s disappointing to me that state legislators and/or regulators haven’t been more aggressive on this issue. If legislative action is needed to prohibit confidentially agreements regarding insurance company contract reimbursement rates, state legislators need to pass the legislation and the governor needs to sign it. Just steering more appropriate and necessary care toward the most cost-effective high quality providers could result in significant cost savings, in my opinion.

  26. Great article. I’d add that the big issue with healthcare is the ‘relative elasticity’ of medicine to consumers. HSAs seem like the best solution yet, but are not ideal. My thought is that, when faced with a choice between spending pocket money or not, many people might avoid preventative care – which is much more economically advantageous – but will spend everything they have when faced with acute or critical care. In other words, HSAs give consumers choice around the one part of healthcare that they should be always making a choice for. An ideal plan would reward employers for changing their lifestyle and increasing wellness activities and better nutrition – and punish those employees who refuse to address their voluntary actions which increase their co-worker’s premiums. ‘Skin in the Game’ shouldn’t be so much focused on selecting the cheapest health services, and more about linking individual health choices with cost of coverage.

  27. I totally agree that high deductible plans have to be paired with better price/quality transparency. If not, we will be sending ‘consumers’ into a world that is at best incredibly hard to navigate and at worst, an impossible situation. I’ll be interested to see if price/quality transparency companies like Castlight Health can make it possible to actually be a smart health care shopper. If not, high deductible plans will only further muddy up our health care system.