Employer-provided high deductible health plans (HDHPs), sometimes referred to as catastrophic-coverage plans, and their associated Health Savings Accounts (HSAs) have become commonplace in the past several years. Like many other Americans, I have recently chosen to enroll in an HDHP with an HSA. The (highly recommended) non-profit financial website “Bogleheads” summarizes an HDHP as:
“…a health plan which pays nothing except for preventive care until the deductible is met. If your plan meets IRS requirements and you have no other health insurance, you are allowed to invest in a health savings account (HSA), which allows you to deduct contributions to the account from your taxes, pay medical expenses from the account tax-free, and invest unused money for future medical expenses.”
An HSA is summarized as:
“…a special account which is used in conjunction with a high deductible health plan. Contributions to the account are tax-deductible on the federal and most state tax returns, and withdrawals are tax-free if they are used for medical expenses. Unlike a flexible spending account, unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing.”
By placing additional cost considerations on the consumer or patient, high deductible plans and health savings accounts were highly touted as a way to reduce health care costs by at least three proposed mechanisms: 1) increased comparison shopping for health care services, which would encourage providers to reduce their cost; 2) reduction in frivolous or unnecessary consumer spending; 3) encouragement to both the consumer and the insurer to support preventative care as a way to save on future costs.
I have long wondered (as have many) just what effect HDHP/HSA plans actually have on consumer behavior. In fact, there has been a lot of data that, yes, people who have an HDHP actually do spend less on health care. But good data is lacking on specifics. Obtaining detailed information is complicated by the fact that different people have very different plans available to them, and also different motivations for switching to an HDHP. For example, those who are younger, healthier and more affluent benefit disproportionately from an HDHP/HSA type insurance plan, and might be expected to preferentially choose such a plan if offered. Some may be forced to choose an HDHP because they can’t afford the up-front premiums of a traditional plan, while others may have only an HDHP option to choose from in the first place.
But we now have a fairly remarkable (in my opinion) research study which provides a good deal of insight into how people who have an HDHP/HSA behave relative to those with traditional insurance. The full study is titled “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics”. A plain-language summary is available here, and the full study is available for free here.
What’s special about this study is that the authors discovered a large employer who switched everyone in their firm from traditional insurance over to the HDHP (as the only option). This allowed for a before-and-after comparison of essentially the same group of people, who had no choice but to all switch at the same time. But there were additional features of this changeover which made the comparison particularly useful. First, the original health plan had no copays, no out of pockets costs, and the premiums were entirely paid for by the employer. That is, all health related spending was paid for by the employer. Second, with the new plan, the employer contributed an amount equal to the deductible into the employee’s HSA. The net effect of these changes is that the employee, on average, would not be worse off under the new plan. However, they could potentially benefit by being able to keep any unspent money in the HSA account. Note, this is a simplification of the HDHP plan. For complete details, see the full paper.
The punch line of this study is that people do not appear to be rational spenders of health care dollars. Although spending was decreased overall, this was because people obtained less care of all kind including free preventative care such as mammograms and colonoscopies. In addition, there was no evidence of comparison shopping, even though they had been given tools assist in such comparisons of cost. This includes imaging studies such as MRIs and CT scans, which tend to be similar between facilities but for which there is considerable cost variation.
Furthermore, even those with chronic, expensive illnesses who had always exceeded their out-of-pocket maximum (and thus depleted their employer provided funds) delayed their spending each year as long as possible, even when there was no financial incentive to do so. In addition, this group with high annual health care spending did not learn. That is, in subsequent years they continued to delay health care utilization early in the year, only to accelerate it after the out-of-pocket maximum is met.
The authors of this study did not speculate about any underlying reasons behind these observations. But I, on the other hand, am happy to do so.
Let’s start with the group of people who are healthy, and in any given year would be expected to need little to no health care spending. Even though the employees in this category have their health spending essentially paid for, they get to keep any unspent funds. So psychologically, this money is “theirs”. This money is in their accounts, it appears in their balances, and likely gets figured into their perception of their net worth. If unspent in any given year, it can be spent in any subsequent year tax-free. If one reaches age 65, it can be withdrawn in the same way IRA funds can be withdrawn, with no requirement that it be used for health spending. In fact, given that HSA money can be invested in stocks and bonds, I assume many people consider their HSA accounts more like retirement accounts rather than an account to be used for health spending. I’ll admit, I’m basically in this category. This group might be expected to behave, from a sheer financial perspective, as if they had no insurance at all. This certainly would explain why people choose to avoid care.
On the other hand, the authors of this study found no evidence of comparison shopping. From a purely financial point of view, one would expect people to attempt to minimize their spending after having made a decision to seek care. But they didn’t. Personally, I find it’s very hard to comparison shop in medicine. Even as both a physician and personal financial planner, I find that I have little insight as to what any given office visit or procedure might cost. In fact, at one point in my career I asked my employer (a major academic medical center and university) what a patient might pay to see me for an office visit (just a few ballpark examples, such as the “cash price”, one or two contracted insurance rates, and Medicare/Medicaid prices). Despite the fact that I needed this information for a research study I was conducting, the administration refused to provide this cost information to me, saying that such information was “proprietary”. I was not given this info even though Medicaid and Medicare rates are public information, and I was eventually able to find the Medicaid and Medicare rates for an office visit with me online. But if even I can’t easily find out what my own patients are charged, how can a consumer hope to find out, in advance, what they might be charged? The people in the study were even given a comparison shopping tool. In my limited experience with such tools, however, I have found them to be clunky and frustrating. I wonder if others had the same experience and chose not to use them or did not find the tool helpful.
I believe most patients simply don’t bother to shop around, as this study shows implies. It is much easier to avoid an office visit or other non-emergent procedure altogether (and thus save 100% of the cost), than to spend hours and hours of (potentially futile) comparison shopping to save perhaps 2% to 20%. Alternately, once one has decided to obtain care, it might be that cost is not the main factor, but rather other factors drive the decision, such as appointment availability, choice of physician, location, etc.
But I’m not sure I can explain the fact that those who know they will exceed the deductible and out of pocket maximum each year still delay their health care spending as much as possible. It can’t be a cash flow issue, because the money for the deductibles have already been put in a dedicated account by the employer. I can only speculate that perhaps there is some HOPE that one won’t need to spend as much (despite past experience).
I think the most interesting take-home point from this study is that when folks have a financial incentive to delay or avoid care, they actually do so. We might assume that this is bad for their health. But we don’t really know. It may be that those who avoid care might actually have better health outcomes. There is data which shows that more interventions and more testing leads to worse care and worse outcomes. In fact, one study found that greater patient satisfaction was associated with greater medical spending and that those who were more satisfied with their health care were more likely to die. But that is a topic for another day.
I’m often helping financial planning clients and friends make decisions about their health insurance, and I typically approach it from a financial perspective. But I had always suspected (partially based on my own situation) that people alter their behavior (for better or for worse) depending on their choice of insurance plan, but perhaps in irresponsible or irrational ways. This new study provides substantial evidence for this. So when discussing health insurance options with my clients, I have begun to routinely point out the non-financial or psychological “pros and “cons” between various insurance options in addition to the standard cost projections and break-even points.
In my opinion, the number of people covered under high deductible health plans will continue to increase. It can only help to have as much information as possible about how people actually behave when insured under an HDHP, and this new study helps to fill in some big gaps in our understanding.
I’ve admitted that my health/medical behavior has changed now that I have an HSA. Previously, when I had traditional health insurance, I rarely hesitated to seek care when I thought I needed a physician visit. I had already committed to large premiums for the privilege of low co-pays and minimal out of pocket costs. Thus, the cost to me (for example) for an ophthalmology evaluation when I had blurry vision, or a perhaps dermatology visit for a suspicious mole, was a just small copay. In one sense, I had pre-paid for medical services. Thus the biggest “cost” to me was the inconvenience of the appointment itself. But now that I have an HSA, a routine office visit might result in a payment of as much as $400. If any labs or procedures are performed, the cost might end up being several hundred dollars more than that. So I am very reluctant to visit a physician when I’m under the deductible, because I perceive the cost to me of any doctor’s visit to be “higher” when compared to traditional insurance, due to the fact that I’m going to get a big bill in the mail which is triggered with each “touch” I have with medical care. This is despite the fact that I have had a huge upfront savings on premiums.
Delaying or avoiding care may be medically unwise, and this is not what I expected my behavior to be when I chose the HDPH/HSA plan. I had performed a detailed cost summary analysis comparing my high-deductible plan to a traditional insurance plan. I had calculated that with an HDHP/HSA I could spend up to $4000 per year out-of-pocket and yet still come out ahead compared to my other options. Because I’m otherwise healthy and it would be very unlikely to spend much in any given year, I figured I would continue to obtain all the routine care I needed and still come out ahead. And yet here I am, making justifications and rationalizations to avoid spending $100-$400 on a routine office visit, despite having “baked-in” those costs in my decision. As with the participants in the study, it seems I am also a “non-rational consumer of health care”.
In my case, I suppose it’s because I feel that the money I saved in health insurance premiums and the HSA contributions (some of which is paid by my employer) are mine (which technically, they are). So even though I come out way ahead by having selected the HSA, I naturally want to come out further ahead by limiting my health spending whenever possible. For me, the easiest and most direct way to limit spending (in the short run?!) is simply to avoid care.
Few people want to go to the doctor in the first place due to the time involved, potentially unpleasant experiences, missed work, etc. But HDHP plans add in an increased, direct financial incentive to avoid care. For better or for worse, I’m not surprised that people do so.