High Deductibles Don’t Create Efficiency

Sarah KliffLast week at Vox, Sarah Kliff wrote, This Study Is Forcing Economists to Rethink High-Deductible Health Insurance. High deductibles were supposed to be a way to keep healthcare costs down by incentivizing patients to get cheaper care. This is what “health economists” thought. It goes along with something that should have been clear for a long time: most economists are so far removed from reality as to be useless.

Think about deductibles. They don’t cause people to shop around. For one thing, it is hard to shop around (I’ll come back to this in a moment). But more to the point, this isn’t how people look at their deductibles. If people have a $1,000 deductibles (roughly half of Americas have deductibles this high or higher), then they see it as something getting in the way of their insurance. It is just a barrier that stops the insurance company from actually providing care.

But most economists are above such real world considerations, so they had to study the question. And a great opportunity came back in 2013, when a company decided to shift “tens of thousands of workers into high-deductible insurance plans.” But to offset the cost, they provided “new shopping tools” that allowed the employees to compare prices. So at least the study did look at the question of whether or not people would shop around if they had an easy way to do so — the way they do when buying groceries. And the result was clear: no.

The new paper shows that when faced with a higher deductible, patients did not price shop for a better deal. Instead, both healthy and sick patients simply used way less health care.

And it is worse than even this. What the company did was provide health savings accounts for the employees. So they really had an incentive to shop around! Generally, you get to keep whatever you don’t spend (although you would have to pay taxes on it). This is, of course, the Great Conservative Idea™. High deductibles and health savings accounts would solve all our problems — or so the story goes. But that story comes to us from reality deficient economists.

The new policy did work in that it reduced spending. And let’s face it: that’s all that conservatives care about. But it didn’t reduce spending because it made the market more efficient. And remember: that’s the key issue. We pay roughly twice as much for healthcare as people do for equivalent care in other advanced economies. So the fact that we can bring healthcare costs down by forcing people to consume less of it misses the whole point. By that logic, we should eliminate all healthcare availability — that would really bring down costs!

The study also found that the sickest people were the ones who reduced their spending the most. Again: this wasn’t because they were getting a cheaper MRI, but rather because they were getting no MRI at all. So the reduction in healthcare spending resulted in a reduction in health. This is not a solution to our healthcare problems — unless your point is to appear to be addressing the problem but to actually do nothing.

After sick patients reached their deductibles, however, they spent normally. Kliff wonders why this is, and presents a few possible reasons. But is it really that complicated? Isn’t it just that humans aren’t that rational? They don’t live in a world of perfect competition and information. And they have other things to do besides try and hunt down a great deal on their next procedure. Not surprisingly, one of the economists who did the study thinks it might just be a matter of time before people get used to the system and it starts cutting down on costs the way it was intended. Because we should never forget: people serve markets, not the other way around.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

15 thoughts on “High Deductibles Don’t Create Efficiency

  1. “After sick patients reached their deductibles, however, they spent normally. Kliff wonders why this is, and presents a few possible reasons. But is it really that complicated? Isn’t it just that humans aren’t that rational? ”

    Surely they are behaving rationally (in their own self interest). Once they’ve reached their deductible, all the extra expense is born by the insurer. At that point, they’ll want the quickest, easiest, and best (if they have any meaningful information about that) treatment. A deductible’s obvious effect is to stop small claims below the amount. Above the amount, sick people are hardly likely to be worried about saving their insurer money when they want to get well rather than do the insurer’s job for them.

    • I knew when I wrote that I might get called on it, but I didn’t want to get sidetracked. I should have put a footnote in. What I’m talking about is sick people who know they are going to use all their deductible, but still hold back spending. Although you could say this is just “hope springs eternal.”

  2. I remember when the big thing was “you can keep your doctor!” And how the Republicans were so happy that thanks to the greed of the private insurance industry, Obama’s promise of keeping your plan if you like it turned out to be totally empty. Yet you are supposed to shop around for care.

    Which means the patient are supposed to want to keep their doctor (who they like and presumably trust) but then totally ignore what their doctor tells them in terms of seeking someone for further care like a specialist in favor of looking for the cheapest option. Meanwhile they are also suppose to know if that cheap option is a great doctor or provider of care. And also since you get what you pay for you should not expect it to be good care.

    It is insane and make zero sense. However you go about it, the point is to just hand over money to a company and never expect to get anything in return.

    • Also, in this neoliberal world, we are supposed to have infinite time to make the best decision. All this does is allow the rich another leg up because they can hire (usually in a tax deductible way) someone to do the research for them. We already work enough. But the neoliberals want us out being good consumers. That’s because the neoliberals think we are only economic entities.

      • I have yet to see someone spouting blood from anywhere say “wait! I need to do a search to see what the cheapest doctor for this is.”
        I have seen someone refuse to go to the ER because they cannot afford the bill. “you have a broken femur!” “I can’t afford to go the doctor. I am sure WebMD can tell me how to fix it.”
        I exaggerate but I have seen people refuse emergency care because of the worry about cost. It is one of the most annoying things in the world that we could have had a single payer cradle to grave system as far back as 1945 but Congress refused to go along with it because they were super duper scared of being called commies by the AMA. Somewhere, between when that happened and now, we have devolved into this nation that only thinks about people in terms of the economic value they bring to the community as you point out.

        • What really bugs me is that the Marshall Plan paid to start the UK system, and we still don’t have it!

          • If it would make you feel better (and it won’t because you are sensible and caring and not about people as numbers on a screen), the NHS is apparently slowly being shoved into a stupid system like ours. Which is sad since this means I cannot marry some poor sad Devonshire bloke to get free health care as I get older.

            It is weird, for a country that does not have our forgetful mindset about history since practically everything in that country is historical, that they would be so quick to forget why something like the NHS should be government run.

            • I have an article coming out on Wednesday about how deeply undemocratic it is in the UK. The Conservative Party got 37% of the vote, but 51% of the seats, which basically means 100% of the control. And they are horrible. The UK has been US-lite for a long time. And just as our Democratic Party has moved to the right in a feeble attempt to remain competitive, so has Labour. Of course, NHS isn’t the best system in the world — social insurance seems to work better. Of course, that isn’t what’s happening there.

              • I look forward to it. I have noticed there is something very odd about how the UK picks its House of Commons members and it is hard for me to wrap my head around.

                • I was surprised after the election that I was one of the few people who thought it was odd that getting 37% of the vote gave you control of government. My article is mostly just a presentation of CGP Grey videos. In his more recent video on the UK election, he shows that the error (difference between votes and seats) has steadily climbed since the 1950s. It’s shocking.

                  • It shouldn’t be that odd because of our experience with primaries. In most states since the primary picks the general winner because of how lopsided most districts are drawn you have tiny numbers of people who are picking the people who refuse to compromise in Congress. Apparently in 2014, only 18 million out of 125 million eligible voters voted in a primary, which is what? 14% turnout?

                    Even when there is an enormous amount of interest and effort expended, you still get low turn out-Ferguson had 30% turnout which was higher than normal but still not that great.

                    I don’t know what the solution is (it is not open primaries since that does eff all to really change anything.) Mandatory voting?

                    • I don’t like open primaries, because I think that parties ought to be able to decide on their own candidates. A lot of people talk about this or that not being in the American tradition, but I have to say that I agree when it comes to mandatory voting — even though I like the idea because I think that citizenship should come with responsibilities. But above all, we should make voting easy. No voter ID, and automatic registration. Also: no lines.

                    • The only part about automatic registration that may be a problem is getting people to update their address with any agency. However since the days of someone getting a shot every time they vote are long since over, I don’t think it is that much of a concern.
                      So mandatory voting and it should probably be vote by mail since that has shown to increase turn out.

                      Which reminds me, I need to go fill out and drop off my ballot for the umpteenth override vote.

                      Yay, the Liberals won in Canada!

  3. I have also read this argument framed as ‘reducing unnecessary care’, as if America was wracked by an epidemic of Munchausen’s syndrome. Certainly the framing of prodding people to price shop as if they were buying tomatoes is equally ridiculous. Nor can patients be expected to know if they are being sold ‘too much medicine’. If the concern is about only buying the necessary care at the right price this can be done on the insurance company side without burdening the patient. Don’t allow balance billing for denied procedures. Many plans already do this. The provider can fight with the insurance co over what is covered, the rate is usually established before either party agrees to do business. If the happy radiologist can’t get paid for doing MRIs for the hell of it, he’ll stop. Or he will learn to fake his coding of the claim to get past the payer’s claims processing software. Or he’ll take the payer to court or arbitration. I worked in healthcare admin for about ten years, six of those as a business analyst for a hospital professional services group. This is a fair fight between institutions, who can generally be assumed to be locked in an struggle to cheat and chisel each other.

    • A lot of conservatives (especially libertarians) seem to think that reducing care fixes our overpriced healthcare system — as though people in Japan and France are using less care and that’s why they pay half as much. The truth is that the conservative approach to healthcare “reform” is just to get it out of the public eye. If they could just ban people from talking about it, that would be enough.

      What you are saying about institutions negotiating with each other is exactly right. This is also why we need unions. It is also why we by and large don’t have them.

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