Higher Deductibles Should Be Welcomed

Higher Deductibles Should Be Welcomed

The Affordable Care Act was supposed to expand access to health care -- and it appears the uninsured rate has indeed fallen. But new concerns have arisen about patients' ability to sustain the high-deductibles and coinsurance now dominating coverage on ACA exchanges.

Commentators have dubbed the phenomenon "underinsurance" -- see Aaron Carroll highlighting the issue, and Brian Eastwood on how Americans are delaying medical care as a result -- arguing that despite the ACA's insurance expansion, high deductibles and out-of-pocket limits are a worrying sign of underlying unaffordability. Certainly, spending 10 percent or more of one's annual income on health-care costs (a common definition of underinsurance) is undesirable. Yet there's far more to this story than simply high deductibles on exchange plans.

The fear is that these deductibles may lead patients to delay or forgo needed health care, leading to more expensive long-run complications. But rather than attack high deductibles per se, critics would do well to understand the core forces driving the present market.

First, insurers are limited to offering products within the ACA's regulatory constraints. Pre-ACA, insurance premiums in the individual market more closely reflected the underlying health risks of prospective patients, as well as the benefits provided. The ACA's limits on age-based rating, elimination of risk-based rating, and mandated generous minimum benefits have forced premiums to rise. Deductibles and out-of-pocket costs are higher now as well: cost-sharing offers insurers a sharp tool for varying the amounts that consumers pay.

Second, the ACA's structure -- with subsidies tied to the price of the second-cheapest Silver plan in a given rating area -- further encourages insurers to tinker with cost-sharing in order to get premiums for their plans as close to the benchmark as possible. This aspect of the law, however, isn't necessarily bad for consumers. Far from it.

Focusing solely on out-of-pocket costs, after all, offers a misleading measure of total health-care costs, which equal out-of-pocket spending plus premiums. Consider a hypothetical choice between two plans, one for $400 a month, the other for $200 a month. The former offers a $1,000 deductible, the latter a $4,000 deductible. Assume annual health-care spending of $780 (the 2012 median for insured individuals under 65, based on a federal survey). Under the less expensive plan, total health-care costs equal $3,180. Selecting the more expensive plan with a lower deductible would cost $5,580. For the lower-deductible plan to be worthwhile, one would have to incur $3,400 dollars in spending in a given year -- sufficient to place in the top 25 percent of all health-care spenders.

For the relatively healthy people who currently constitute at least half the insured population, even high deductibles can therefore be worthwhile. Indeed, even for someone confronted with a string of expensive events over a multi-year period, the odds are that a high-deductible plan will worthwhile in the long run, at least until the person reaches their late fifties. In general, for those without high-cost chronic conditions, taking savings from premiums over time and storing them away for a rainy day is a viable option.

Importantly, higher cost-sharing also incentivizes consumers to seek more cost-effective options. For instance, thanks to cost-sharing for branded drugs and tiered formularies, over 80 percent of drugs sold in the U.S. are generic. Elsewhere, retail health clinics offer cheaper alternatives to doctors' offices and hospitals for certain acute care, while telemedicine makes simple care more accessible (and less expensive), particularly for working parents. Such competition, produced by newly price-sensitive consumers, should be welcomed.

Finally, high deductibles, such as the $4,000 deductible in our hypothetical plan, are also partly due to the high prices Americans pay for their health-care system. Limiting cost-sharing and deductibles won't begin to address such costs -- and may, instead, exacerbate them by boosting demand for health care.

Of course, there are good ways to make cost-sharing more affordable. Reducing tax breaks for employer-sponsored coverage more aggressively, which the ACA avoids until 2018, would create some additional revenue to spend on those faced with high out-of-pocket costs.

Moderating the ACA's regulatory excess is another approach. The law's "essential health benefits," while giving states some flexibility, still have been estimated to increase premiums by 3 to 17 percent. Loosening EHB requirements (for instance, by allowing insurers to vary the benefits covered rather than requiring them to cover ten categories of benefits) would allow premiums (and by extension, deductibles) to vary more.

Allowing insurers to vary prices by age to a greater degree -- say, letting them charge a 64-year-old five times what they charge a 21-year-old, instead of the current limit of three times -- would similarly allow premiums to vary more. In particular, savings would accrue to younger people who might be entering the job market with little savings. A more controversial approach would allow some minimal risk rating, perhaps with front-end subsidies covering higher costs for those with illnesses (on the condition that they maintain continuous coverage).

The point: Current high deductibles on ACA exchanges, as well as rising deductibles in employer-sponsored plans, are driven not only by the U.S. health-care system's existing high costs, but also by new ACA regulations. Trimming the worst ones will relieve pressure on consumers.

Yevgeniy Feyman is a fellow and deputy director of the Center for Medical Progress at the Manhattan Institute. Aobo Guo is a Manhattan Institute intern and undergraduate student at Yale University.

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