High-Deductible Health Insurance Crushes Health Spending



A new working paper published by the National Bureau of Economic Research (NBER) shows how much high-deductible health plans reduce spending:

We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which forced all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending ($100 million lower spending per year). We decompose this spending reduction into the components of (i) consumer price shopping (ii) quantity reductions (iii) quantity substitutions, finding that spending reductions are entirely due to outright reductions in quantity. We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services).

(Z.C. Brot-Golberg, et al., “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics,” NBER WP No. 21632, October 2015.)

That is as far as the working paper goes before delving into economese, which I’ll refrain from quoting. Sarah Kliff of Vox.com summarized the details:

Average per-patient spending fell from $5,222.60 in 2012 to $4,446.08 in 2013. That’s about a 15 percent decline in a single year—and it held true across all types of health services. Between 2012 and 2014, there was a 25 percent drop in emergency room spending, an 18 percent decline in physician office visits, and a 6 percent decrease in mental health services.

Ms. Kliff writes that “this study is forcing economists to rethink high-deductible health insurance” for a few reasons. The two most important reasons are that sick people cut spending as much as healthy people; and that patients did not shop around for better prices, but simply did not seek care.

I don’t think this research demands a do-over for high-deductible health plans at all. First, it is not clear that all the wasted health spending in the United States is incurred by healthy people. Sick people get plenty of unnecessary care, too. (Just look at the spate of stories on how much “heroic” care is delivered to very elderly people near the end of their lives.) The dogma that all preventive care is valuable is untrue.

What is very impressive about the NBER study is its finding that even patients who spend through the deductible reduce their spending under the deductible. Sure, they likely do not perfectly anticipate their risk of blowing through the deductible. Nevertheless, this is a powerful result.

Ms. Kliff is rightly concerned that all spending cuts came from not seeking care, rather than price reductions. However, as she recognizes, price shopping for medical care that is covered by health insurance is still very difficult for patients to execute. Health insurers need to get out of the business of fixing medical prices. Only then will true price competition arise.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s book, A Better Choice: Healthcare Solutions for America, by John C. Goodman.

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