By Richard H. Thaler
The New York Times, November 4, 2017
If you get health insurance from your employer, you have to make decision every year about which coverage to choose.
So here is a warning: If you are simply sticking with an old plan with a low deductible, that may well be a wrong and costly choice.
Because of human quirks, lack of understanding and overly complicated plans, many people are paying more without getting anything extra in return.
Economists have a term for a situation like this, where one option is better than another under any circumstances, dominance. And that is what we see in many workplaces: The cheaper health care plan, at every level of medical spending, often has a higher deductible — a higher spending hurdle that must be reached before reimbursements begin.
(He describes studies showing that the high deductible plan is usually the more rational choice.)
There are, however, many financial incentives for going the high-deductible route. Some are embodied in health savings accounts, of H.S.A.s, which provide tax breaks and are only offered in combination with high-deductible plans.
There is another compelling advantage: Many companies contribute to these accounts for their employees.
I realize this is all complicated. Unfortunately, it is impossible to say which specific plan is best for your family without looking closely at the details.
If you want hints about how to crunch the numbers for yourself, the accompanying article may help you.***
Richard H. Thaler, a professor of economics at the University of Chicago, has won the 2017 Nobel Memorial Prize in Economic Sciences.
Which Health Plan Is Cheaper?
By Richard H. Thaler
The New York Times, November 4, 2017
But there is an imperfect, yet fairly, simple way to check whether a high-deductible plan might qualify for “no-brainer” status, meaning, it enables you to save on health care no matter how often you go to the doctor.
Start with your premiums
Figure out how much you would have to pay in total annual premiums for low- and high-deductible plans.
Do a zero-expense test
Then turn to the high-deductible plan. If your employer contributes to a Health Savings Account for you, subtract that amount — say, $1,000 — from the cost of the premiums.
Compare the result for the two plans. The high-deductible plan is bound to be cheaper. The difference is how much you would save if you have zero health care expenses.
Clear the high-deductible hurdle
Next, try a test that is more difficult for high-deductible health plans: Consider what happens if your expenses are exactly equal to the deductible for each plan.
For example, say the low-deductible plan has an annual premium of $3,650 and a deductible of $1,000. You’d pay $4,650 if your bills equal the amount of the deductible.
By comparison, the high-deductible plan has an annual premium of $2,000 and a deductible of $3,250. You would spend $5,250 if you hit the deductible, except for one important thing: Your employer contributes $1,000 to your H.S.A., so your total costs only come to $4,250.
That is $400 less than the amount for the low-deductible plan.
So far, in this case, the high-deductible plan is a “no-brainer.”
Do it all again
Finally, repeat these steps, using the maximum-out-of-pocket limit for each plan in place of the deductible. If the high-deductible plan is still cheaper, it may be a “no-brainer.”
That’s it. You’re done with the simple test.
A note of caution
Remember, these calculations are not perfect because there are complicating factors.
By Don McCanne, M.D.
Last month Richard Thaler received the Nobel Prize for his work in behavioral economics, showing that people are “predictably irrational, consistently behaving in ways that defy economic theory” (NYT, Oct 9). Thus he is quite qualified to explain to us why it is irrational to choose a health plan with a low deductible rather than a high deductible, though he does concede that it is complicated.
The example he uses shows that the employee will pay less for care that reaches the amount of the deductible providing the employer contributes $1,000 to the employee’s health savings account (HSA). Of course, the insurance actuaries do not assume that $1,000 of the deductible will be forgiven, thus the actual premium does not reflect that savings. In essence, by making the $1,000 contribution, the employer has reduced the deductible by that amount whereas the premium is set for a plan with a deductible that is $1,000 higher. There are many other potential variables that the insurance actuaries will not miss thus ensuring that the premium paid to the insurer is set at the optimum level balancing competitive pricing with insurer profits.
Thaler barely touches on a more important consideration here under behavioral economics. Faced with higher deductibles patients will reduce their use of often beneficial health care services which can impair their health outcomes. This is the opposite of what we should expect from a health care financing system. Instead the system should assist patients in receiving the care that they should have.
Imagine behavioral economics under a single payer system with first dollar coverage. With no deductible, the patient makes the decision to access care based on perceived need for that care. That is as it should be. There is no need to complicate that decision by adding consideration of out-of-pocket expenses for the care. The economic decisions are limited to investment of time, loss of hours at work, and perhaps incidentals such as transportation which still may be significant, but not a matter of health insurance design.
Thaler suggests raising premiums and putting the extra money into an HSA so that there is enough to cover the full deductible, or, even better, the employee’s maximum cost sharing so the individual would not have to worry about deductibles or other out-of-pocket costs. This would do what a single payer system with first dollar coverage would do except with much greater administrative complexity and consequent waste of resources.
Let’s take advantage of our understanding of behavioral economics and set up an efficient system in which individuals simply obtain the care they need when they need it, without any worry about how they are going to pay for it. A single payer national health program would do just that.
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