Fifty Dollars is Not Always Fifty Dollars

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Floating in a sea of problems is a rare answer to rising healthcare costs. Many of the things we imagine would cut costs – technology, coordinated care, wellness programs – don’t. That rare answer is high deductible health plans (HDHP), which are repeatedly shown to reduce healthcare spending. This realization would seem to be cause for celebration. For the most part, it’s not.

While the sober response is justified in certain ways, it also stems from some fundamental misunderstandings that are correctable.

Americans are terrible at saving and planning. In a recent Federal Reserve survey, 47% of individuals answered that they didn’t have money to cover an emergency expense of $400.  A deductible is the amount a person must pay in medical expenses before insurance starts paying; a HDHP has a deductible of at least $1,300.  This, in many ways, is the root of the consternation about HDHPs.

Take these two insurance plans in Georgia from Kaiser Permanente (KP):

kaiser health insurance plans
From HealthSherpa.com

The KP GA Gold would be categorized as “good” insurance. “Good insurance” in this country has come to mean insurance that acts as a method of payment for even the most common of procedures – the less you directly pay at the doctor’s office, the better your insurance is.

Following this narrative, insurance companies and employers who provide insurance to 150 million people are increasingly giving us “bad” insurance, like the KP GA Bronze. Suddenly, a doctor’s office visit costs more than an insignificant co-pay. Suddenly, getting that extra scan is a several hundred dollar experience. While this may be particularly painful in comparison to “good” insurance, it is the model that every other form of insurance operates within; insurance is for unlikely, catastrophic events, not certainties like that fact that someone will access healthcare.

The real mistake in dubbing insurance “good” and “bad” by this standard is that the difference stems from when you pay more than what you pay.

Say you go to a resort with two choices:

  1. All-Inclusive Pricing: Your room, food and drinks are all included in a single, upfront bill.
  2. Alternative Plan: You pay for your room upfront and then pay for all food and drink purchases as they occur.

Behavioral economist Richard Thaler explains the advantages of the all-inclusive pricing in his paper Mental Accounting Matters:

“First, the extra cost of including the meals in the price will look relatively small when combined with the other costs of the vacation. Second, under the alternative plan each of the small expenditures looks large by itself, and is likely to be accompanied by a substantial dose of negative transaction utility given prices found at most resorts.”

But to whose advantage is this pricing model? From a monetary perspective, the resort is almost certainly the winner. Potential consumption, including from patrons who “vow to get their money’s worth,” can be overestimated and priced into the bill in a way that would rarely go unnoticed if the charges were itemized and delivered at the time of each meal.

This similar effect has happened with monthly payroll deductions. There are a bunch of numbers, a bunch of taxes and some percentage of one’s salary going to health insurance premiums. Not only has money been hidden in plain sight, but it is money the employee never really felt.

Insurance isn’t being overpriced because it is a payroll deduction. What is happening, though, is that savings being achieved by an employee who chooses (or is forced) to pick the lower premiums of a high deductible plan aren’t fully registering. The employee is upset having to pay $100 to see the doctor even as there would have been very little anger if the payroll deduction had been an extra $100 for “good” insurance.

More thoughts from Thaler:

“Compare the impact of paying $50 in cash at the store to that of adding a $50 item to an $843 bill. Psychophysics implies that the $50 will appear larger by itself than in the context of a much larger bill, and in addition when the bill contains many items each one will lose salience.”

Furthermore, if given the choice between paying $100 directly to the doctor, or spending that same amount in premiums, direct payments to the doctor is rationally preferable. After all, money spent in premiums may never be used, like the 30 drinks allotted by the resort that you don’t completely finish, and you never get the money back; out-of-pocket medical dollars that aren’t spent are dollars you get to keep.

Of course, humans aren’t exactly rational. Hence the $400 emergency fund problem. But that doesn’t mean HDHPs have to be a painful experience. It’s just that in this period of transition where insured members are directly paying for more medical services, tools to help the process are needed.

CaredUp, by combining the efficiency of text messaging with the ability to translate the complexity of healthcare in simple and personalized English, is one such tool. Learn more here.

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