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Controlling Health Care Costs With Medical Savings Accounts
Opportunities for Premium Savings in Large Groups
Considerable savings are possible for individuals and families who choose
higher deductible policies for two reasons. First, when policyholders spend
more of their own money on small medical bills, they are more prudent consumers
- holding down medical costs and, therefore, health insurance premiums.
Second, when people have the choice between higher and lower deductibles,
healthy people tend to choose high-deductible policies while less healthy
people choose low deductibles. Thus, those who choose high deductibles are
a less risky group.
Suppose, however, that an employer with a large group of employees increased
the deductible for every member of the group - the healthy as well as the
sick. In this case, any reduction in total medical expenses would be due
solely to changes in the employees' consumption behavior. But even if there
are no behavior changes, health insurance premiums can be cut substantially.
The Experience of Large Groups. Many people - including representatives
of large employers and large insurance companies - question whether there
are substantial savings in raising the deductible. On the other hand, the
claims experiences of large groups show that substantial savings occur.
The reason for the confusion is that apparently contradictory statements
can be made about the distribution of claims. Consider the following statements:
The distribution of medical expenses in Figure V is a reasonable representation
of what happens in both large groups. In this case, 50 people spend $60,000,
or $1,200 per person on the average. A small percentage of people spend
most of the money and at the same time two-thirds of spending is on medical
bills below $5,000. If the example were broadened to include a much larger
group, the extremes of the distribution would become more evident. A few
people would have medical expenses of several hundred thousand dollars,
and many others would have no medical claims. The characteristics of the
distribution, however, would be about the same as those shown in Figure
V.
Figure VI shows that when individuals are given a choice, those who choose
a $1,000 deductible rather than a $250 deductible can expect a one-third
reduction in health insurance premiums. A one-third reduction in claims
costs (and therefore in premiums) 12 is possible for a large group if the
deductible is increased from $250 to about $2,500. Considering that higher
deductibles cause people to change their behavior, however, a one-third
reduction in premiums for a large group will probably occur at a deductible
between $1,000 and $2,500.
The first statement, popularized in a widely distributed Blue Cross-Blue
Shield publication, 11 implies to many people that most of the money is spent
on people who are very sick. By contrast, the second statement implies that
most medical bills are small bills. As Figure V shows, both statements are
correct.
