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Disrupting Deductibles: An Innovative Approach to HDHPs

screen-shot-2016-11-02-at-7-01-57-amHealth plan deductibles are on the rise in a big way. Deductibles, or the amount of money members must pay out-of-pocket before their health plans kick in, have soared a whopping 63% over the last five years. This is compared to the modest 19% growth in health plan premiums during the same time period. Rising deductibles represent a shift in who is being exposed to financial risk in healthcare. The burden of the spiraling healthcare cost problem in the United States is being shifted away from insurers and employers and more and more upon the shoulders of individuals and families in the form of out-of-pocket payments.

Insurers construct deductibles into their health plans as tools to prevent members from spending more on healthcare than they truly need. They reason that if members have ‘skin in the game,’ they will prudently shop around for reasonably priced healthcare providers, and not purchase more healthcare goods and services than necessary.

Regardless of whether or not this tactic encourages wiser healthcare purchase decisions, prices for healthcare goods and services keep rising at such a rate that shopping for the best bargain has become a penny-wise and pound-foolish task for consumers. In other words, the amount that healthcare consumers can save by tediously bargain shopping for the best price pales in comparison to the actual cost of the service. Furthermore, individuals are not well equipped with the healthcare knowledge and price information necessary to make informed purchasing decisions in most situations. Thus, health insurers should not force their members to struggle in choosing between any number of high-priced options, but should proactively expand their scope to lower-cost spaces outside of the traditional healthcare system to help their members manage the risk of major health issues and potentially prevent devastating healthcare expenditures in the first place. In doing so, insurers could potentially bear less risk when insuring their members by empowering them with tools to help maintain their health and wellness. This is an important distinction, as it’s everyday individuals who will have to play the defining role in curbing the continued growth of healthcare costs, by ultimately leading healthier lives.

Rethinking the deductible

Insurers are in an excellent position to actually use rising deductibles as a tool to motivate members to purchase health promoting goods and services. Health insurers could effectively lower members’ deductibles when they decide to make health-promoting purchases, by deducting the total (or a percentage of the total) purchase of pre-approved products or services from the member’s deductible. These types of products would include Fitbits, health club memberships, and meal plan purchases for those with dietary restrictions from companies like Blue Apron, Plated, or Jenny Craig.

For example, consider Sandy, who was recently enrolled in a high deductible health plan through her new employer with a deductible of $2,000 dollars. She has a condition that requires regular check-ups, compliance with a prescription medication regimen, a controlled diet, and maintenance of a certain level of activity. Despite being insured, she still has to pay $2,000 before her plan begins to fulfill the reason it was purchased in the first place.

Imagine if she were able to deduct the purchase of an activity-tracking device like a Fitbit and personalized meal plans from a meal and ingredient delivery service like Blue Apron from her $2,000 deductible. She would be better equipped with the tools necessary to be in compliance with the activity and dietary aspects of her health and wellness regimen, and in the meantime, she could end up cutting her deductible almost in half over the course of ten weeks. A lower deductible would then put her in a better financial position to save money on her doctor visits and prescription medications with actual assistance on her healthcare bills.

In the case of Sandy, and countless other Americans, the deductible deduction would give individuals an additional nudge to purchase products that can make it easier for them to maintain or improve their health. This motivation is greatest for those members who have a high deductible, and regularly meet their plan’s deductible each cycle. Even typical nonconsumers of healthcare would have added incentive to improve their health plan product and effectively lower their plan’s deductible. By decreasing the amount members must contribute before helping them with payments, insurers would be more likely to assist with the truly expensive burden of traditional healthcare costs—the reason the insurance was purchased in the first place.

Managing Risk

For insurers, deducting these purchases from a plan’s deductible is a lower-risk way of empowering health maintenance among their membership compared to covering these goods and services outright. This lower risk stems from the fact that not all members who take advantage of this feature will end up meeting their health plan’s deductible. In these instances the insurer does not end up spending more than they would have had they not offered the deduction, but their member is still better equipped with tools to manage their health. Thus, the deductible enables insurers to test which proactive health interventions improve health status in a cost-effective manner and which don’t. After aggregating evidence from the deductible arena, insurers can add even more value to their members’ health plans by reimbursing members for select interventions proven to improve member health and lower overall healthcare expenditures. These types of coverage benefits are already prevalent in select high-end health plans who cover gym memberships among other products and services (see Aetna’s coverage of Apple’s iWatch).

Leveling the playing field

The deductible deduction would add further power to the allure of conventional health and wellness products, nudging members most at risk of high healthcare costs towards purchases that enable improvement of health status and effective management of health conditions. It is also possible that widespread adoption of such policies could motivate innovation and entrepreneurship efforts in the health and wellness industry, which is a trend from which everyone could stand to benefit.

By giving those with high deductibles a constructive way to lower their deductibles, deductible deductions can play a role in reducing social and economic inequities between those with lower-quality health plan products and those with superior ones. These deductions can reverse the role of the deductible from compelling plan members to futilely pinch pennies when purchasing healthcare services, to encouraging the purchase of products that empower health and wellness.

Ryan Marling is a Research Associate at the Clayton Christensen Institute. 

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10 replies »

  1. Hey Jim, thanks for the comment, and I agree that most health ‘insurance’ companies need to be thinking about how they can change their role towards that of ‘health facilitators’ … You see these types of business models emerging through partnerships (akin to those of Harken Health (United and Iora) or any other Iora Health contract). Health coaches are employed to help patients stay on track with treatment compliance and more of a community approach is used to encourage continued engagement.

    The MLR regulations do really hamper profits gained by such a business model trying to lower spending over time with low-cost and proactive interventions, but it also presents an opportunity. If they come in below their MLR limit, their membership is more likely to be maintained (because members/employers receive a rebate check), and the next year they can expand their patient pool with more complex patients (attracted by a lower premium rate [you know you can afford to offer since you came in under MLR]). The goal to staying alive becomes long-term membership (and good health) retention, and those who can keep premiums down and keep patients healthy hold the cards in that arena. Those who don’t play by those rules will see their membership taken by lower premium offerings who move up market.

    Would love to discuss more! –Ryan

  2. Hi Joe, thank you for your comment, and you bring up two topics I considered while writing. First, helping to remove some of the financial pain of purchasing a gym membership, for example, does not mean the member will definitely make good use of the membership. That is absolutely correct. But, 1) it does chip away at a financial barrier that would prevent some who may be inclined to use the gym membership from even having the means to afford it in the first place, and 2) insurers (if they are attempting to mitigate risk and control costs) would want to accommodate for a wide range of preferences, so that if a gym membership is not a member’s cup of tea they can choose another service, for example, an ingredient delivery service catering to dietary restrictions. It’s about enabling members to better follow their physician’s prescribed guidelines, whether it be activity levels, diet, or prescription meds by chipping away at the financial barriers. What insurers need to discover in this space are which products or services effectively knock down the other barriers to behavioral change on an individual basis (not a one size fits all answer). For example, Iora Health attempts to get an idea of what may motivate change in their members with motivational interviews upon enrollment of each member. This then helps identify what tools can help make healthy changes stick and which to drop. If these methods keep people complying with doctor prescribed regimens that are supposed to improve health, and we see that health improvement, I’m not sure that lowering the cost of care is as important if its of high-value and providing a more comprehensive solution.

    In terms of the Medical Loss Ratio, which basically incentivizes insurers to make their 10-20% not paid out in ‘medical losses’ as large as possible (thus no need to control spending). Some insurers are beginning their push towards being able to mitigate risk. They see the threat of integrated delivery networks like Kaiser / Geisinger that have strong focus on membership retention, and employers self-insuring as a reason to at least somewhat control their spending and keep premiums in check in areas. CMS’ recent efforts with population-based payments also present some concern for them, because some would believe that “As Medicare goes, so goes the nation”.

    Thanks again for your comments and would love to discuss further! –Ryan

  3. Thank you for your comment, Anish. Great point about the stress test, and although studies of some of the wellness routines seem to show little benefit at the end of the day it would be prudent for insurers to include many different health and wellness options for patients to be inclusive of individual preferences and interests (I’m not aware of the fitbit study, but a RCT cannot with random sampling and assignment to groups could not take that into account). Ultimately, I think the plan has an interesting mechanism of chipping away at the financial barriers for people to purchases goods and services that chip away at environmental, functional, or any other barriers to managing their health. Basically, making it easier for the 50 year old to choose to do the right thing.

  4. Thank you for your response Dr. Palmer. I originally thought of this as an impediment to the idea, but it occurred to me that one of the functions insurers spend a lot of time and effort on in purchasing clinical services is retroactive review of their purchases (utilization review) or even proactive review. The same process of review can be used in these inexpensive and much less complex than clinical cases to make sure that members are purchasing products that fit the means to an end. This would prevent purchasing from the company store and give members the freedom to purchase products that best fit their needs, as that will likely affect whether they will effectively utilize the purchase later on.
    In terms of these purchases getting in the way of prescribed course of treatment, I see it as a way of promoting compliance in many cases. For example, if a certain level of daily activity and eating a specific diet is also part of the course of treatment, deducting products or services that meet these needs would not only help them stay in compliance with these measures, but also lower their deductible so the plan will better help them afford the expensive part in many cases — medication or treatment regimens.
    Thanks again for your comment and would love to discuss more!

  5. Hi Jonathan. Thank you for your comment. I agree wellness requires cultural change at a population level, and environment is a big part of that, but some services warrant consideration that may be part of the environment, but not in the traditional sense. For example, food delivery services like BlueApron (that take advantage of the transit and delivery infrastructure in our environment) can deliver ingredients to your door, saving you the time of having to struggle to the nearest health food store and even any of the 20 fast food restaurants closer to you. Ingredients could be catered to one’s health needs.
    Apps that take advantage of habit-forming behavior constructs or that may be flat-out fun are a great tool also in promoting wellness. At the end of the day I feel like it comes down to breaking down the barriers (whether it be environmental, financial, etc.) in the way of people changing their current habits to healthier ones, so that it doesn’t warrant a religious awakening of sorts to overcome the barrier (and I feel insurers are uniquely positioned in today’s environment [deductibles are much higher now than in early 2000s] to make some headway).
    Thanks again for your comment!

  6. The reduction of the deductible for health and wellness is a variation on a health and wellness tactic that was tried many different ways in the 2000s by self-funded corporate plans. As Al Lewis will gladly say, in more colorful terms, those strategies almost never moved the needle on reducing health care costs. The upshot is that giving wellness benefits might help from a marketing perspective and/or from the perspective of retaining healthy people who aren’t using their benefits for medical care, but I don’t know of any reliable long term impact on health care costs or overall health coming from health plan incentives for wellness tools and apps.

    Wellness requires culture change at a population level, and it requires environmental changes to make exercise and eating right easier. Even the way our cities are built gets in the way of healthy lifestyles. No app will make Atlanta walkable, or change the fact that there are 20 fast food restaurants closer to you than the nearest “health food” restaurant. At an individual level, a healthy lifestyle typically results from a revelatory experience, almost a religious awakening, that one has valued the wrong things in life. In some ways it’s like an alcoholic deciding to quit.

    An app has a better chance of changing behavior without the other changes I just listed, albeit temporarily, if it is an intrinsically enjoyable thing to use. In other words, fun and engrossing. Fun makes a bigger impact than a lower deductible (see Pokemon Go).

  7. When people are paying down their deductible they have to use providers in the same plan? Correct? This means they are buying into an oligopoly, I.e. they are buying serviices that are regulated in some ways by the plan…probably prices and quality or both. The oligopoly is really the subset of docs in the narrow panel open to the subscriber.

    This must be true because these covered services have to be used in the calculations to determine actuarial values and loss ratios and plans could not accurately measure deductibles spent on providers who have no connection to the patient’s plan. They would have to have singular cooperation from all the doctors offices in the entire market area in order to do this.

    This means that shopping while spending down deductibles really cannot occur because the patient is forced to buy in the company store. At least effective shopping. If the patients are actually shopping outside the plan, it also means that certain courses of treatment–that must be controlled by the patient’s doc–might have the front end costs spent on interventions that are not appropriate to the course of treatment designed by the assigned doc.

    I wish there were truly effective ways and incentives to allow shopping whilst paying down deductibles…but alas…

  8. Interesting – but why not? Perhaps an extra impetus to get people choosing healthy things- though actual benefit in studies (of fitbits for example) seems to be low.. Which would play on insurers willingness to pay. It’s the rare 50 year old who is able to unlearn unhealthy habits. Doesn’t mean we shouldn’t try – better use of a deductible than a stress test he doesn’t need.

  9. I’m traveling so this will be brief.

    While I agree with Joe that gym memberships in and of themselves have had virtually no impact on claims costs and health status, the author has a point about what should and should not be in deductibles. Insurers should be much smarter about how they structure that and can do some good there. Actually my view is that insurers should get out of the business of “managing” care and move over to the patient side of the equation, facilitating better health and care and make that their value prop. The author might want to sharpen that up better.

    Which brings us to the very badly thought out 85/15% provision of the ACA. Insurers spending more to reduce claims expense squeezes what they can spend on operating expense and profits, or for non profits, contribution to reserve. And Joe, while of course there are some insurers which think and act as you say concerning “profit,” most do not and are genuinely interested in lowering the overall cost of healthcare. Not only do many insurers actually try to do the right thing, but reducing claims expense makes them price competitive. Increasing operating expense makes them price uncompetitive. Bad incentive. So in a weird way, I agree with Joe but for different reasons. And I know how hard it is not to vilify insurers. Just sayin’.

  10. via e-mail

    The author is making several assumptions. One is that these various expenses themselves actually work to lower healthcare costs. Going to the gym regularly might, maybe, paying for the gym does not—and any gym franchisee will tell you that their business model depends entirely on the fact that almost all gym memberships go unused. Changing to a lifestyle that includes regularly going to the gym, doing yoga, and making the kind of dietary and consumption changes that work with that — that will improve your health and might even lower your healthcare costs. But helping that lifestyle change happen is nowhere near as simple as just paying for a gym membership or a Fitbit. Doesn’t work. Doesn’t help.

    Second, and more important, the author seems to assume that health plans are actually interested in lowering the overall cost of healthcare. They are not. Their profit (or margin) and all that goes with it is defined in law as a subset of the 15-20% that they can keep after paying out for “medical losses.” In other words, it is tied directly to the actual aggregate cost of medical care per capita in each of the regions they serve. If medical care actually cost half as much, their profit (margin) and everything that goes with that would be half the size. Their only way out of this conundrum is to grow their market share so that even a lower cost per capita adds up to a much larger margin/profit in aggregate. To that end, they would be interested only in things that grow their market share. So yes, offering things that sound great like gym memberships and Fitbits as a deductible off of your deductible might help them grow their market share. But no, these things will not actually lower the cost of medical care, and the beneficiary still has to buy them, so the financial effect is the same as if they just spent down their deductible on medical care. Such offerings will not reduce the actual aggregate cost of healthcare, nor will they reduce the financial pain to the individual beneficiary.

    It’s not an answer or even a partial answer to the problem.

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