Americans are choosing a new kind of health-insurance policy – one that may appear to lighten their financial burden but, for many families, is actually increasing it, possibly to the detriment of this country’s overall health.
The new policy has grown popular because premiums for traditional policies keep rising. The alternative is what the insurance industry calls a “consumer-driven health plan” or CDHP. Its features are a high deductible before insurance kicks in, high co-payments and co-insurance after beneficiaries get beyond the deductible, and often a tax-advantaged health savings account (HSA) or a health-reimbursement plan funded by an employer.
“Consumer cost-sharing for medical care and medications is high and getting higher,” reported the Center for Value-Based Insurance Design recently. “The average deductible for employer-sponsored single coverage increased by more than 250% between 2006 and 2016.” In 2016 alone, the average deductible for employees with single coverage jumped 10.1%. according to a new report by the State Health Access Data Assistance Center (SHADAC) at the University of Minnesota.
Some 57% of large employers (at least 1,000 workers) offered a high-deductible (HD) plan in 2016, up from just 8% in 2005, according to the latest employer health benefits survey by the Kaiser Family Foundation. For all businesses, the proportion of enrolled employees in such plans jumped from 30% in 2013 to 43% last year.
The Kaiser study found that the annual premium for the average HD policy with a qualified HSA plan in 2016 was $16,246, or 13% less than a non-HD policy. Of that $16,246, the employee paid an average yearly premium of just $3,930, a 31% reduction from a traditional policy. (On top of that, employees contributed an average of about $100 a month to a tax-preferred HSA.)
These new HD policies have produced a revolution, but what are the consequences for America’s health?
Drug Insurance Has It Backwards
We can divide overall health-insurance coverage into three big categories: hospitals, pharmaceuticals, and professional and other expenses. The actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs.
This configuration makes little sense. Drugs are what you take to avoidhaving to go to the hospital. A rational health insurance plan would weight drugs at least equally and probably more heavily than hospitals and doctors.
Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6!
No wonder Americans feel so burdened by drug costs: Their insurance policies discriminate against medicines.
Dive deeper and you find the problem is compounded. The typical policy has its coverage backwards. Insured Americans pay from zero to a few dollars for a monthly prescription for generics, such as statin drugs to lower cholesterol, but they can face out-of-pocket expenses well into the thousands of dollars for a specialty cancer drug.
Isn’t insurance supposed to reimburse big, unexpected costs that you can’t manage? Your auto insurance pays you when someone wrecks your car, not when you need an oil change.
The few patients with chronic, complex illnesses like cancer and multiple sclerosis should be the ones who benefit from insurance; instead, they are the victims of an upside-down system, as
Adam Fein explains in the June 1 edition of Drug Channels.
The Tyranny of Tiers
Insurers, through their pharmaceutical benefit managers, apply different benefits to different “tiers,” or drug categories. As the tiers rise, patients usually shoulder a heavier burden in coinsurance or copayments.
The complete details can be found in the Kaiser Family Foundation’s Annual Survey of Employer Health Benefits for 2016. One highlight is that more and more insurers are adding a fourth, fifth, or even sixth tier. Last year, 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. Another highlight is that copayments (that is, what insured people pay out of their own pockets) are, on average, more than nine times higher for fourth-tier specialty drugs than they are for first-tier generics. That multiple has nearly doubled since 2004.
As a result, writes Fein, even if you have a good commercial insurance policy with your employer, you “would pay about $1,000 for a specialty prescription of about $3,500.”
Here is what insured patients pay for a month’s prescription in a typical five-tier plan, according to BCBS Network of Michigan website:
Tier 1: Preferred, commonly prescribed generic drugs: $3 to $5, depending on the terms of the specific policy.
Tier 2: More expensive generics: $10 to $20.
Tier 3: Preferred brand-name drugs: $35 to $47.
Tier 4: Non-preferred brand-name and generic drugs: 45% of the drug’s retail cost.
Tier 5: Specialty drugs: between 25% and 33% of the cost.
As you can see, these policies are exceptionally generous for the least expensive drugs and generous as well for “preferred” drugs, that is, medicines for which the insurer has negotiated lower prices than for clinically equivalent non-preferred drugs. But specialty drugs can require large outlays from insured patients.
One of the most-prescribed drugs in the U.S. is atorvastatin, the generic equivalent of Lipitor, for patients with high cholesterol. According to Drugs.com, an uninsured person can purchase atorvastatin for as little as $18.46 for a 90-day supply from a pharmacy. As a tier-1 drug, atorvastatin costs between $7.50 and $15 for the same amount of pills from a typical insurer. What is the point – besides marketing – of such a negligible reimbursement?
By contrast, Express Scripts, the largest pharmaceutical benefit manager, reports that in 2016, the average prescription for specialty drugs to treat inflammatory conditions like rheumatoid arthritis and Crohn’s Disease cost $3,600 per month, or more than $40,000 a year. The average specialty drug for multiple sclerosis cost $5,100 per month, or more than $60,000 per year.
Consider an anti-inflammatory specialty drug at $40,000 annually. Assume you have already met your policy’s $3,000 deductible. Your obligation is $10,000 and $13,333 for the drug over the course of year. Out-of-pocket maximum spendingper year in the Marketplaces created by the Affordable Care Act are $7,150 for an individual and $14,300 for a family, and, according to the Kaiser survey, one-third of HD plans have maximums above $5,000 and half have maximums above $4,000.
For most Americans, meeting such coinsurance requirements (that is, the part they themselves pay) for specialty drugs is a significant financial hardship.
Dangerous Consequences of High-Deductible Policies
The big problem is not merely the out-of-pocket cost itself. It is what patients do to avoid the cost. When it becomes too high, patients don’t pay it.
The Center for Value-Based Design notes that while “cost-sharing is a useful tool for payers and purchasers to encourage prudent use of health care dollars,” putting too heavy a burden on patients can have “deleterious consequences.” We will get to the question of “prudent use” shortly. Focus now on the “deleterious consequences.” Numerous studies show that patients tend to cut back on their use of medications, and result, says the Center, is often “increased acute care utilization and poorer health outcomes.”
Research has consistently found that patients simply don’t fill prescriptions when costs get too high – no matter how beneficial the drugs may be. A study in the Journal of Oncologic Practice by Sonia Streeter and colleagues found that “abandonment” rates for cancer-drug prescriptions soar when the out-of-pocket costs exceed $100. The researchers found that one-tenth of new oncolytic prescriptions went unfilled and that “claims with cost sharing greater than $500 were four times more likely to be abandoned than claims with cost sharing of $100 or less.” And this is cancer, a disease that everyone knows is frequently fatal.
Consider two studies of how patients with diabetes (America’s costliest disease, with $101 billion in spending in 2013) responded to policies with high deductibles.
Research by David Rabin of Georgetown University and colleagues, published in the journal Diabetes Care in February, found, “Private insurance with a deductible substantially and problematically reduces medical service use for lower-income insured respondents with diabetes who have an HD [an insurance policy with a high deductible: more than $1,000 for an individual and $2,400 for a family]; these patients are more likely to report forgoing needed medical services.” A separate study by James Frank Wharam and five colleagues, published in March in JAMA Internal Medicine, found that low-income Americans with a diagnosis of diabetes who had high-deductible health plans “experienced major increases in emergency department visits for preventable acute diabetes complication.”
Some 27% of Americans with a CDHP policy in 2015 did not file a single health-insurance claim. Take a look at Table 3 here. According to the Wall Street Journal, “The reason, say economists, is likely twofold: Healthier workers who need less medical care find high-deductible insurance more attractive, and higher out-of-pocket costs associated with the plans dissuade workers from seeking care in the first place.”
The latter reason should raise concern. The Centers for Disease Control, for example, found that 8.5% of holders of high-deductible policies said that they had delayed seeking care in the past 12 months; that is more than double the rate for holders of traditional policies.
How Does Cost-Sharing Affect Health Decisions?
A study in the Journal of Occupational and Environmental Medicine in 2009 analyzed claims from a national employer that started offering only CDHPs. The result was “lower utilization” for outpatient and inpatient visits and lab services and “lower adherence” for medications.
A more recent and more granular approach to the issue of HD policies and health-care decisions came in a working paper two years ago by four scholars, including Amitabh Chandra, director of health policy research at the Harvard Kennedy School of Government. Published by the prestigious National Bureau of Economic Research, the paper’s title was: “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics.”
The researchers received access to data from a business with 75,000 employees that had recently switched from an unusually generous self-insured health plan that covered all employee expenses to a more conventional plan with a $3,750 deductible. To ease the transition, the unnamed company – which was apparently Microsoft – subsidized each employee with $3,750 for an HSA.
Overall, employees reduced their spending by an average of 13% compared with spending under the previous plan. And the sickest employees reduced spending even more – by an average of 20%. Here is what was disturbing: the primary reason for the reductions was not bargain-hunting but cutbacks in care.
The authors of the study wrote, “We find no evidence of consumers learning to price shop after two years in high-deductible coverage” – despite their new incentive to find the lowest price for equivalent treatments and thus cut their out-of-pocket expenses. Instead, the research discovered “outright quantity reductions whereby consumers receive less care.” In other words, consumers avoided using the health-care system. One of the areas of cutbacks was preventive care: “Specifically, for example, consumers reduce colonoscopies by 31.6% and care that is considered preventive with a prior diagnosis (e.g. diabetes) by 12.2%.”
The most striking behavior was skimping during the period when employees were below the deductible. The authors calculated that the decline in spending during this period was 42%.
Even worse, employees who were sickest were the most likely to reduce care when under the deductible – even though they almost certainly knew that, based on their health history, they would exceed the deductible later in the year. In aninterview with Vox, one of the authors, Jonathan Kolstad of the University of California at Berkeley, explained,
“People who are the most likely to go past the deductible also cut back by the most, and they did that entirely under the deductible," Kolstad says. "They respond to the spot pricing [the price of receiving care right then], and that leads to a very large reduction in care. We don't find any evidence they look for a lower cost. They just don't go.”
Looking at all employees, the researchers found, “Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services).” Cutbacks averaged 9% for inpatient care, 9% for outpatient, and 25% for emergency-room care.
But perhaps most troubling was a reduction averaging 16% for pharmaceuticals. Medicines often prevent patients from landing in the hospital, where costs are especially high.
That result also emerged by earlier work by Paul Fronstin of the Employee Benefit Research Institute and colleagues, who looked at the effect of a change from an employer that switched to a CDHP-only plan on workers and dependents with one or more of five chronic conditions. These researchers looked only at use and adherence to medicines and compared their data with findings from a control group that stuck to a standard preferred-provider-organization (PPO) plan. The research, published in the American Journal of Managed Care in December 2013, found that a CDHP “full replacement was associated with reduced adherence for 4 of the 5 conditions” (hypertension, dyslipidemia, diabetes, and depression, but not asthma/COPD) when compared with the control group on the PPO. The conclusion: “If this reduced adherence is sustained, it could adversely impact productivity and medical costs.”
As for those medical costs: A study published in Health Affairs found that an extra $1 spent on medicines for patients with congestive heart failure, high blood pressure, diabetes and high cholesterol can generate $3 to $10 in savings on emergency room visits and hospitalizations.
A 2012 study by Ashish Jha of the Harvard School of Public Health and four colleagues found that “improved adherence to diabetes medication could avert 699,000 emergency department visits and 341,000 hospitalizations annually, for a saving of $4.7 billion. Eliminating the loss of adherence (which occurred in one out of every four patients in our sample) would lead to another $3.6 billion in savings, for a combined potential savings of $8.3 billion. These benefits were particularly pronounced among poor and minority patients.”
Research shows clearly that public-policy and industry practice should be directed at encouraging people to fill their prescriptions and take their medicines. We seem to be moving in the opposite direction.
Reconsider Whether These New Policies Help or Hurt
The trend toward high-deductible policies with insured families paying an especially large proportion of the bill for specialty drugs is accelerating. While there may be some benefits to this shift, there are potentially massive liabilities. The main one is that Americans – including the sickest among us – will reduce needed care, including medicines. This change in behavior could, in the end, lead to more spending, with later, more expensive interventions. It will certainly exacerbate the main driver of health-care costs: poor health.
Policy makers as well as insurers and providers should consider carefully whether it is time to discourage this trend and, instead, set good health – which in the long run will reduce overall costs – as the top national priority.
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