Skin to Win – Increased Co-Insurance and Deductibles Lowers Premiums!

Businesses need to make important decisions regarding health insurance, now more than ever.  The implementation of the “Employer Mandate” in January 2014 is fast approaching.  Not only are employers faced with a “provide or penalty tax” decision, they are faced with decisions regarding health insurance plan design as part of their financial decision.

Decision makers will be struggling with a situation that appears to pit “morals vs. money”, they can choose to offer health insurance to their employees or not.  Each decision carries a moral and financial price.  Choosing the level of coverage can also cause a dilemma between offering the most coverage vs. the amount of coverage a business can afford.

Fortunately, studies and real life examples make this decision easier.

The best example of this is the analysis of a study performed by the Rand Corporation called the “Health Insurance Experiment” (HIE), which ran from 1971 to 1986.  The HIE explored the ramifications and effects of differently designed health insurance programs on overall health of the participants.  The study randomly assigned health insurance coverage to 5,809 people with either no cost sharing, 25%, 50% or 95% coinsurance rates in order to gauge the health effects and usage of service effects over a long period of time.

One of the astounding conclusions that the numbers came up with was that the relative health of the participants did not vary widely based on the out of pocket expense.  The usage of medical services by participants rose as their out of pocket contribution to office visits dropped, but the result of extra office visits did not yield better overall health for those participants!

As the cost of health care rose (in terms of out of pocket expenses), usage of medical services dropped.

A current example that illustrates the relative costs/benefits of higher vs. lower deductible/co-insurance rate health insurance programs comes from an analysis of two large insurance programs in the state of Nebraska.

On the one hand, the State of Nebraska employee health insurance program pays one of the highest average premium rates in the country.  It is a self-funded program with an award winning model wellness program in place, yet their health insurance premium rates continue to climb.  Self-funded health insurance programs reflect the actual health costs incurred by a group as they are derived from actual past expenses plus the administrative fees from the insurance carrier.

On the other hand, the University of Nebraska has an employee health insurance program whose annual family premium rates are $11,000 lower than the State employees plan!

An analysis of the comparative plans shows remarkable similarities of the populations in terms of both having self-funded insurance administered by the same company, average age, geographical location, number of covered employees and dependents.   By most actuarial standards the health insurance premiums should be similar.  In fact, given the award winning wellness program in place for the State employees, and no wellness plan for the University, one would think that the State program should cost less than the University.

There is one BIG difference between their health insurance plans.  The University of Nebraska has higher deductibles, and maximums placed on certain wellness doctor visits, and pays a percentage of a variety of emergency and hospital visits as opposed to flat co-pays.  Over time, given the results from HIE, state employees use more health services than their University counterparts.  Data is not available to compare health statistics of the different groups, but it stands to reason that the group with the highest amount of money spent on health services should be the less healthy of the two groups, all other things being equal.

Decision makers need to weigh these factors carefully, and make the decision that is best for their organizations.  My suggestion is to share stories like this with employees to help them understand that a decision to involve higher deductibles and co-pays is probably better for all parties concerned in the long run.

What remains true in both of these examples is that as the price of “out of pocket” health care service expenses rise, utilization of excess medical services drops without significant decreases in overall health.

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