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Controlling Health Care Costs With Medical Savings Accounts
Why Low-Deductible Health Insurance is Wasteful
Because employees (through their employers) are able to purchase health
insurance with pretax dollars, but individuals are not allowed to self-insure
(personal savings) for small medical expenses with pretax dollars, people
often buy low-deductible health insurance and use insurers to pay for small
medical bills that would be much less expensive if paid out-of-pocket.
The Cost of a Low-Deductible Policy in Cities With Average Health Care
Costs. The cost of catastrophic health insurance is usually quite low.
Consider a standard individual health insurance policy for a middle-aged
male in a city with average health care costs, such as Indianapolis. [See
Table III.] If the policy has a $2,500 deductible, the policyholder is at
risk for $2,500. The insurance company, on the other hand, is at risk for
$1 million. Given an average premium, this health insurance costs the policyholder
about 6/100th of one penny in premiums for each dollar of coverage.
Now contrast this policy with a $1,000-deductible policy which has a 20
percent copayment for the next $5,000 of expenses. In theory, the $1,000
deductible gives the policyholder $1,500 of extra insurance coverage. But
because of the 20 percent copayment, the additional coverage actually is
only $1,200. 7 People who choose the $1,000 deductible will pay about $255
in additional premiums in return for $1,200 of additional insurance coverage.
As a result each additional dollar of insurance coverage costs the policyholder
14 cents. 8 Table III also shows the marginal cost (premium increase per
additional dollar of coverage) of buying down the deductible even further.
As the table shows:
The Cost of a Low-Deductible Policy in Cities with High Health Care Costs.
In general, the higher the health care costs in an area, the more expensive
low-deductible health insurance becomes. Table IV, for example, shows the
costs of a lower deductible for a middle-aged male in a city such as Miami.
As the table shows:
In general, buying a $250-deductible policy rather than a $500 deductible
is a good deal provided that the policyholder is confident he will have
at least $500 in medical expenses. Even in that case, the gain is a small
one - a dollar's worth of medical expenses for each 77 cents in premiums.
For the vast majority of people, however, a low-deductible policy is quite
wasteful. Considering the administrative expenses, insurers on the average
will pay out only 54 cents in claims for each 77 cents in premiums. Policyholders
as a group, therefore, will pay far more in premiums than they will receive
in benefits.
The Cost of a Low-Deductible Policy Under Blue Cross Plans in California.
Southern California has among the highest health care costs in the nation.
As a result, Californians who buy low-deductible policies are being especially
wasteful. Table V shows what policyholders would pay to reduce the deductible
under Blue Cross plans currently sold for individuals and families in different
age groups. Even lowering the deductible from $2,000 to $1,000 is a bad
buy in many cases. A deductible of less than $1,000 is always a bad buy:
Opportunities for Premium Savings. Because low-deductible health
insurance is so wasteful, in most places people would realize substantial
premium savings if they increased the deductible. For example, the average
employee in the U.S. economy has a deductible of about $250. 9 If it were
increased to $1,000, the employee would lose $600 worth of coverage (80%
x $750). Figure III shows the potential premium savings based on individual
policies sold in Indianapolis (an average health care cost city), Dallas
(an above-average-cost city) and Miami (a high-cost city). As the figure
shows:
In most places, the savings for families who choose higher deductibles are
even greater:
Yet under current tax policy, if such policies are purchased by employers
who attempt to pass the savings on to employees in the form of higher wages,
up to half the premium savings will go to government in the form of taxes.
