Health Insurance Deductible-Coverage on Medical Usage Spending

With the passage of the Medicare Reform Act in late 2003 and its provisions for Health Savings Accounts (HSAs), attention again turned to the effects of higher deductibles on healthcare spending. Individuals and employers are able to establish tax-sheltered spending accounts that allow unused balances to be rolled over from one year to the next if they have an eligible health insurance plan. Among other requirements, an eligible health insurance plan must include a deductible of at least $1,000 per individual. This amount is to be adjusted annually for inflation under the terms of the legislation.

The effect of a deductible depends on the nature of coverage once the deductible is satisfied. Suppose you have an annual deductible of $500 and must pay an out-of-pocket co-pay of $20 for each physician visit once the deductible is satisfied. If you knew with certainty that you would satisfy the deductible, then you would consume as though the price of a doctor visit was $20. If you knew you would not satisfy the deductible, then you would consume as though you had to pay the full price of the visit—perhaps $60 per visit. The higher the deductible, the less likely you are to satisfy it and the more likely you are to act as though you are paying the full price for medical insurance services.

There has been virtually no empirical research on the effects of deductibles on medical usage, at least in the United States. The RAND-HIE is, again, the exception. As part of the experiment, some participants were enrolled in the 95 percent plan. In this plan, people paid 95 percent of every medical bill until they had spend 5, 10, or 15 percent of their family income (depending on the plan) or $1,000, whichever was lower. This was essentially a plan in which participants faced a deductible of $1,000 and afterward paid nothing out-of-pocket. In 2006 dollars, this is equivalent to a deductible of $4,160.

In recent work, it is reported the effects of alternative deductibles in private health insurance plans for elderly in the Netherlands in 1996. In the Netherlands (at least during this time period), about 32 percent of the population voluntarily bought private health insurance price from a number of different firms. The benefits packages differed largely with respect to the size of the health insurance deductible. Once the deductible was satisfied, there was little if any out-of-pocket payment for the wide range of services considered in analysis. Considerable care was taken in the study to account for adverse selection by using a family’s prior healthcare expenditure to predict what expenditures would have been had the deductibles not been present in 1996.

The highest range of deductibles, more than 1,750 Dutch guilders, is roughly equivalent to a deductible of more than $1,280 in 2006 U.S. dollars. Those Dutch residents with this level of deductible were estimated to have reduced their medical care spending by $650, nearly 28 percent. This compares with the RAND-HIE results, which found a 31 percent reduction for a deductible of $4,160. Given the differences in the health systems and the details of the range of the Dutch deductible, these results are remarkably consistent. The Van Vliet study suggested that deductibles in the neighborhood of $1,000 U.S. dollars could reduce medical care expenditures by about 14 percent. Care must be taken in this generalization, of course. First, the Dutch study only applied to upper-income groups with such coverage. Second, if catastrophic coverage plans with HSAs require co-pays for the use of health services once the deductible is satisfied, the savings would be somewhat greater.