High Deductible HMO Plans: Who Wins, Who Loses?

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In a front page story in the Boston Globe on August 9, 2002, Liz Kowalczyk reported on the growing use of high deductibles in Massachusetts HMO plans. What are the implications of this potentially important shift in HMO cost sharing methods?

Background

Many economists have long supported the use of deductibles in health insurance. Deductibles preserve the loss protection of insurance for high, potentially catastrophic, expenses, while providing incentives for the patient to consider costs and conserve resources in using more common, routine care.

Kowalczyk reports, however, that HMOs say the motivation for use of high HMO deductibles is coming from employers seeking to avoid increases in their employer health insurance premiums. High deductible plans have been commonly used for some fee-for-service and PPO plans, but are new to HMOs. Is this just a new ploy to shift costs from employer premiums to employee out-of-pocket spending? Or, could this trend significantly alter competition in health care markets?

Who Wins?

Employers. The direct beneficiaries of high deductible plans are, of course, the employers who chose to offer them. Massachusetts employers facing a 12 to 15 percent increase in premium for the coming year are able to get about a 20 percent reduction in the total premium. Employers, typically picking up about 80 percent of their employee health plan cost, benefit most from the savings. High deductible HMO plans may help small employers struggling to maintain health insurance benefits in the face of rising healthcare costs.

HMOs. HMOs that offer high deductible plans will be well positioned to meet the needs of some cost sensitive employers. But such HMOs can be affected in several other ways as well.

First is a cost allocation (or cost shifting) effect. HMOs reduce their liability for the first $1000 to $2000 of costs for each patient or family. The HMOs or their providers would collect additional payments, beyond the usual $5-$20 copay, from patients who have not yet met the deductible. This is offset by some additional administrative expense -- tracking and billing for services, credit card processing, record keeping, and collections.

Second is a utilization effect. We expect that use of services by those not expecting to exceed the deductible will be reduced as they would pay the full cost of such care out of pocket. However, those who expect to go over the deductible would generate none of the favorable utilization effect-- why conserve on costs when you are going over the deductible anyway? Plans tend to exempt preventive services from the deductible to avoid additional service use and costs that preventive care can help avoid.

The third possibility is an enrollment selection effect which (when employees have a choice of plans) could adversely affect HMOs. Healthy individuals, not expecting to exceed the deductible, may find their HMO looks more like a fee-for-service plan. Some low users, accustomed to nominal out-of-pocket payments, could now see a fee-for-service plan with a modest copay requirement as more attractive. They could leave a high-deductible HMO unless their employee premium is significantly reduced. On the other hand, less healthy HMO enrollees, who expect to exceed the deductible and would be relatively unaffected by the plan, may choose to remain with the HMO. This enrollment selection effect could leave the HMO with greater numbers of less-healthy individuals unless the employer shares enough of the savings to induce low-use employees to continue their HMO enrollment. How the enrollment effect plays out will depend on how much of the savings employers choose to share with their employees. Employers keeping too much of the savings could be bad for the HMO.

HMOs may correctly anticipate all three types of effects and set appropriate rates without being pressured into an unfavorable deal by employers. If so, then they should find the net benefits of their high deductible plan to be positive.

Generic Drugs. Patients and their high-deductible-HMO physicians will have greater incentives to use generic drugs. Patients, under the deductible, will look for lower-cost alternatives. And HMOs will encourage their physicians to help the HMO enrollees stay below the annual deductible with generic or formulary approved drugs.

HMO Information Systems. As noted managing deductibles and payments may required additional administrative activities at HMOs. This may entail additional work for firms that upgrade and adapt HMO information systems to deal with billings under the new plans.

Who Loses?

High-Cost Providers. HMO patients with high deductibles can be expected to seek out lower cost providers. They may tend to avoid higher cost teaching hospitals for minor procedures that would be below the deductible in cost. Similarly, hospital emergency rooms will be a less attractive source of primary care for services that can wait or be delivered elsewhere. In plans with a point of service (POS) option, in-network providers will be even more strongly favored over out-of-network providers.

Discretionary Care Providers. Providers of services that patients may choose to avoid, delay, or use less frequently may be adversely affected by high HMO deductibles. Unless exempted from the deductible, these may include mental health, chiropractic, and therapy services.

Traditional Insurers. HMO entry into high-deductible plans presents an additional competitive challenge to traditional non-HMO health insurance plans and non-HMO PPO networks. They may, however, find opportunities to pick up some relatively healthy enrollees who may be disenchanted with a high-deductible HMO plan.

Assessment

Use of high deductibles by HMOs is a trend to watch. If effectively implemented, such plans may give a competitive edge to HMOs, especially in the small employer market. However, there are dangers to HMOs as well -- in the less obvious areas of enrollment effects and administrative costs. Some other sectors may be hurt. This type of HMO plan could put additional pressure on providers of discretionary care and drug makers with generic or substitute-drug competitors.

Thomas Grannemann, Ph.D.  
President, Andover Economic Evaluation