Do you remember the first time that you ever saw a mirage? For most of us, it was the illusion of a sheet of water on blisteringly hot pavement as we gazed toward the horizon. Now we know that it was the product of refraction, of light bending in the heated air, but the first time we saw it we were sure there was a lake up ahead. From time to time, what may appear to be obvious is really our eyes playing tricks on us. Similarly, when viewed from an economic distance, high-deductible health plans (HDHPs) can appear to be benign, and even progressive, but when we get closer to the anticipated savings – and the illusion of financial safety – can vanish like the water on a summer road.
As employers struggled with rising health care costs, benefits consultants advised converting to HDHPs, shifting an increasing share of total costs to employees. The rationale for the move to HDHPs included the presumption that patients would become more discerning consumers, particularly for lower acuity and discretionary services incurred prior to the satisfaction of their deductibles. Some employers used the benefit conversion to limit or even reduce the percentage of total costs that they underwrote, while other employers structured their HDHPs to be cost-neutral at the outset, funding health savings accounts to soften the initial impact of higher deductibles while anticipating savings when discretionary utilization declined.
The financial impact of significantly higher deductibles – specifically the ability of employees to absorb them – was assessed based on spending patterns across large populations of employees. Deductibles are not applied to groups of employees, however, they are incurred by individual employees and their families … and the ramifications for working households can be severe.
In any one year, fewer than one in five healthy beneficiaries will incur claims in excess of $2,500; 83 percent of a healthy population will not meet their HDHP deductible in any given year. At the beginning of any five-year period, however, a healthy individual has less than a 50 percent chance of avoiding major health expenses (exceeding their deductible) for all five years; the same healthy individual has an 85 percent chance of exceeding their deductible at least once in any 10-year period.
For a family, the risk of significant financial exposure is much higher than it is for individuals. Each member of a family covered by a HDHP has a large individual deductible (commonly $2,500). The family’s cumulative out-of-pocket exposure is typically $5,000 or more. Among households of three to four people, one in three families spend at least $5,000 in any single year; 86.5 percent of families will incur expenses of $5,000 or more at least once in any five-year period.
The Vizient Research Institute recently published research describing the impact of cumulative probability related to health care expenditures and annual deductibles. For working families earning between $60,000 and $100,000 per year, health care costs can be devastating. Roughly 50 percent of middle-income working families have insufficient savings to afford $2,500 in health expenditures in any given year, while two families in three would struggle to absorb their maximum out-of-pocket exposure of $5,000. Yet 51 percent of families will incur at least $2,500 in any one year, with a 97.1 percent probability of hitting that threshold at least once in any five-year period. Taken together, the rolling probability of significant expenses combined with the scarcity of household savings means that the majority of the middle class is at risk for what could be catastrophic financial losses in any five-year period.
An unintended consequence of higher deductibles is a phenomenon that actuaries call leverage. Insurance premiums are based on the portion of claims in excess of the deductible. A larger deductible leaves a smaller denominator over which incremental claims costs are spread. Increasing the deductible generates one-time savings but it accelerates the rate at which premiums will increase over time. The premium trend line shifts downward when deductibles are increased, but its slope becomes steeper.
In addition to their inflationary impact, higher deductibles can trigger binge spending once satisfied. Recall the days of unspent health savings account balances at the end of any benefit plan year. When patients realize that they have “use it or lose it” resources – or in the case of HDHPs, when they realize that the deductible clock will reset at the end of the year – discretionary spending surges. Unspent health savings led to vision exams and eyeglasses in December. The prospect of a new deductible of $2,500 or more next year can stimulate patients to fix whatever ails them once they have satisfied the current year’s deductible.
Until we have enough experience to recognize a mirage, optical illusions can be very compelling. That shimmering water on the road ahead looks real. Another mistake that a driver can make is to be looking in the wrong place. Implementing HDHPs is a bit like driving a car while looking at the tachometer instead of the speedometer. When the car shifts gears, the revolutions-per-minute needle moves down but the car actually speeds up. We can think we’re going slower when in fact we’re going faster. We’re still headed toward the same cliff – unsustainable health care spending – and for the passengers in the car who struggle between paychecks, we unbuckled their seatbelts.
