Sunday, December 15, 2013

Health Plan Comparisons

Question:  Consider two health plans.   The first health plan has a \$5,000 deductible and a \$5,000 out-of-pocket expense limit.   The second health plan has a \$2,000 deductible, an 80% coinsurance rate, and a \$5000 out-of-pocket limit.

How do these health plans differ in the following respects —(1) the incentive for households to reduce consumption on health expenditures, (2) their maximum exposure to the insured, (3) the payout from the insurance company, and (4) the premium paid by the insured.

Answer:   Denote INS_PAY as insurance payout and EXP_TOT as total health expenditures.

Incentives to economize on health care expenditures:   The incentive to economize on health care expenditures depends on projected health expenditures for the year.  Households who know their health expenditures will be less than the deductible have a strong incentive to limit their expenditures on health care.

Under plan 1, Households who know that their health expenditures will remain under \$5,000 have a strong incentive to restrain their spending on health care.  At \$5,000, these households no longer have any incentive to restrain spending.

Households in plan 2 who know their health expenditures will exceed \$2,000 but be less than \$17,000 have a small incentive to economize because they are responsible for 20% of the bill.

Summary of incentives to economize

Both plans have identical incentives to economize if health expenditures are expected to be less than \$2,000.

Incentive to economize is greater for plan 1 than plan two when health expenditures are between \$2,000 and \$5,000.

Incentives to economize are greater for plan 2 than plan 1 when health expenditures are between \$5,000 and \$17,000.

Incentives to economize are identical if expected heath expenditures exceed \$17,000.

Maximum Exposure to insured for the two health plans:

Both plans have a maximum out-of-pocket expense limit of \$5,000.

Insurance Company Payouts:

Insurance company payouts vary with the total health care expenditures incurred.

Plan 1:

INS_PAY= \$0 for EXP_TOT<=\$5,000

INS_PAY=(EXP_TOT-\$5,000) for EXP_TOT>\$5,000

Plan 2:

INS_PAY=\$0 for EXP_TOT <=  \$2,000.

INS_PAY= 0.8 X (EXP_TOT- \$2,000)   for \$2,000<=EXP_TOT<=\$17,000

INS_PAY=\$12,000 + (EXP_TOT-\$17,000) for EXP_TOT>\$17,000

Insurance payout levels are obtained by plugging health expenditure into the insurance payout functions.

 Health Expenditure Plan 1 Plan 2 Difference \$0 \$0 \$0 \$0 \$3000 \$0 \$0 \$0 \$5000 \$0 \$2400 -\$2400 \$17000 \$12000 \$12000 \$0 \$100000 \$95000 \$95000 \$0

Premiums:   Average premiums depend on average costs all insured individuals.  The actual premium charged depends on whether the plan is offered in a group or on the individual market and on the regulatory scheme in place.

In a group health plan all people in the group generally pay the same premium.

Young people who tend to be healthy are not likely to claim many benefits under a high deductible health plan  See table below for evidence on this point.

 Expenditure 23-32 53-62 Difference >=\$10,000 3.11% 9.52% 6.41% Mean \$1752 \$4609 \$2857 Median \$487 \$1705 \$1218

In an individual market, younger people will only purchase a high-deductible health plan if their premium is substantially lower than the premium charged older workers.

The point that age-rated premiums are essential if one is to persuade younger people to buy a high-deductible health plan was a point I made in the article “International Transfers And Insurance Policy Design”, which was published in the North American Actuarial Journal.

It is also true that since money is fungible and lower premiums are perfect substitutes with higher out-of-pocket payments, age-rate premiums can make high-deductible health plans the most economically viable option.

Ironically, state exchanges created by the ACA are likely to facilitate greater use of high deductible plans and less use of comprehensive health plans.  This was of course one of the major objectives of the Republican health proposals that proceeded the ACA.