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.