Tuesday, December 17, 2013

High deductibles versus no limit on out-of-pocket expenses -- pick your poison.

Question:  Consider two health plans.   The first plan with no deductible, pays 80% of all covered health expenditures.    The plan has no maximum limit on the amount the insured might have to pay.  A $1,000,000 treatment for a rare condition would cost the patient $20,000.

The second health plan has a $10,000 deductible and pays 50% of all expenses over the deductible until the maximum allowable out-of-pocket trigger of $20,000 is hit.  Once the patient incurs $20,000 in unreimbursed health care expenses the insurance firm pays all remaining health care bills. 

Under what circumstances, are out-of-pocket expenses under plan one less than out-of-pocket health expenses for plan two?  When are out-of-pocket expenses lower for plan two?  What plan imposes less risk for the insured?   

Answer:   First confirm that when total health expenses reach $30,000 out-of-pocket expenses under the second health plan reach their maximum allowable level of $20,000.

$20,000 = $10,000 + 0.5 x ($30,000 - $10,000) 

Out of pocket expenses for the first plan (20% of total health care expenditures) are $20,000 when TOT_EXP= $100,000.   

Out-of-pocket expenses are lower for plan one than for plan two if total expenditures on health care are less than $100,000. 

Out-of-pocket expenses are lower for plan two than for plan one once total expenditures on health care rise above $100,000.

Discussion:  Relatively few households will have more than $100,000 in health care expenses during a year.   I suspect that most people would choice plan one over plan two.  However, for some people this choice is a mistake.  

The choice is easy for a person in a household with income near the poverty level.  Poor households will not be able to pay routine medical bills with a $10,000 deductible health plan.  As a result, many doctors will not accept poor people with high-deductible health plans as patients.

The choice is more difficult for higher-income individuals.   Many medically-related bankruptcies occur among individuals with health insurance.  Often bankruptcies are induced by relatively small unexpected bills.  I suspect that more medically-related bankruptcies will occur under health plan two than under health plan one.   

However, potential unreimbursed health expenses are unlimited under the first health plan.  A person with a business, a home, and some assets to protect can reduce catastrophic financial risks by taking the plan with the maximum out-of-pocket limit.   Also, the person who chooses a plan with a limit on total unreimbursed expenses will have greater access to services should he or she get an extremely expensive medical problem.  

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