Health Care Spending: The Impact of the Deductible

When an employee insurance plan switches from free service to a deductible, wouldn’t you expect recipients to become more cost conscious? They were but not entirely as we would have predicted.

Where are we going? To seeing what a deductible did.

The Harvard Study

Background

In a new working paper from the Harvard Kennedy School, three scholars from UC Berkley and one from Harvard described what can happen when a large self-insured firm switches from a free health care plan to one with a high deductible. As we might expect, they saved a lot of money. But the researchers wanted to know whether the results were beneficial. They wondered if employees spent less by cost shopping, by diminishing the number of wasteful medical procedures or simply by indiscriminately eliminating some preventive and active care.

The switch from a free health care plan to one that had a deductible was mandatory. Affecting approximately 56,000 high income employees (median income of $125,000 to $150,000) and their dependents, the “before” and “after” plans had identical services. However, because of the new plan’s deductible and co-insurance requisites, at certain times during the year, employees’ out-of-pocket expense was as much as 100 percent of the cost. But no one had to pay more than a $6250 annual cap.

The Results

People did spend less and the firm did save money. During one year, the firm enjoyed a 12 percent decline in health care expenses that totaled close to $100 million. But the surprising part was that people neither price shopped nor diminished the number of wasteful procedures like unnecessary MRIs. Instead, the savings resulted from indiscriminate reductions in all health care. When the deductible kicked in, even the sickest individuals did less of everything. Oddly, although preventive care like colonoscopies and mammograms were free through an Affordable Care Act mandate, they too were done less frequently.

Our Bottom Line: Unintended Consequences

When we use a deductible to encourage less health care spending, the results are not entirely predictable. While total short term costs will decline, unless the cutbacks result from price shopping, diminished waste and other prudent decisions, we might wind up with more problems in the future.