Attention, large plan sponsors: Cost-sharing works, but dump the deductible
Incremental tweaking of cost-sharing percentages can deliver solid results both in health outcomes and cost to the boss.
Employers that care about employee health and the bottom line are getting help from research teams in finding a balance between the two.
A new study that examines health insurance plan design for employees of Harvard University reports that incremental tweaking of cost-sharing percentages can deliver solid results both in health outcomes and cost to the boss.
The study is but the latest in a steady stream of probing and thoughtful research intended to help large employers in particular make better plan design choices.
Related: 4 major trends in health benefits plan design
This one moves the body of work forward by considering slight shifts in how costs are shared with plan members. For instance, it finds that low- or no-deductible plans where cost shifting occurs at other points improve choices and utilization by plan members.
The working paper contains sufficient detail on plan design supported by the research to be of keen interest to plan sponsors determined to find the design sweet spot for plan members. It includes recommendations for managing the number of insurance carriers that offer products to plan members, saying, in effect, that one wants enough to facilitate pricing competition but not so many that provider price negotiations are undermined.
“Health Insurance Menu Design for Large Employers” by Kate Ho (Princeton University) and Robin Lee (Harvard University) for the National Bureau of Economic Research studies several years of plan design, utilization, cost and outcomes for Harvard’s union and non-union employees.
“For a single insurance plan, how much cost-sharing is optimal, and should it take the form of a deductible (full liability until the deductible is reached), coinsurance (a fixed percentage of spending), or some combination of the two? How much can then be gained by introducing a menu of plan options, and how sensitive is this to how enrollee selection across plans is managed?” they asked when designing their study.
“Much has been written about the theoretical tradeoffs of imposing various forms of cost-sharing in insurance markets. Less is known about the mapping between real-world variation in underlying health needs and preferences and the optimal cost-sharing for a single plan; and the extent to which an employer, able to freely set premiums and cross-subsidize plans, can manage adverse selection … and achieve gains that a competitive marketplace cannot.”
Their working paper lays out the complex system of variables they reviewed. It includes several caveats, among them that Harvard generally offers plan members between health plan terms and choices than do many employers.
Caveats aside, here’s what they concluded:
1. No-deductible plans rule. A moderate coinsurance rate with no deductible is the optimal design to balance effective plan choices by members and cost to the sponsor. “A positive coinsurance rate of approximately 30% with a zero-dollar deductible can be optimal for an employer offering a single plan, yielding average household gains of over $100 per year relative to full coverage and demonstrating the effectiveness of simple cost-sharing arrangements.”
2. Alternative plan design should not be based solely on cost. Differentiating plan options solely or primarily based on cost is not as effective as presenting choices among “plans that are differentiated along both financial and non-financial dimensions.” By differentiating plans to allow members to select a plan that will better meet a family’s medical needs, the sponsor can “better manage enrollee selection and generate substantially larger gains. In our setting, pairing more financially generous plans with characteristics that attract enrollees for whom more generous plans are socially efficient yields economically significant benefits.”
3. Some plan member cost-sharing is mutually beneficial. Plan member sensitivity of medical spending to cost-sharing “is significant in the population covered by large employers. Given this finding, we show that requiring a moderate level of enrollee cost-sharing can substantially reduce spending and—when this additional spending is less beneficial than its cost—generate substantial average surplus gains for employees.”
The study provides validation for large plan sponsors that have been seeking ways to increase member utilization, especially upstream in medical care.
“Our findings can broadly be interpreted as supporting the actions being taken by some large employers (including the one that is the focus of our study) to impose limited cost-sharing on plans where it was absent, and to introduce plans that vary along non-financial dimensions, such as provider networks and policies for obtaining out-of-network care.”
Meantime, large employers should also consider a balance between too many and too few insurance carriers.
“There is an open question of how many insurance carriers (as opposed to plans) an employer should offer as options to its employees. Working with multiple insurers may induce them to compete more fiercely with one another on premiums or administrative fees. …
“It may also protect an employer from hold-up in future negotiations with insurers, particularly if there are large switching costs borne by employers when changing insurers. However, by offering plans from too many insurers, a large employer may limit insurers’ bargaining leverage with medical providers, making it harder for them to negotiate favorable medical rates.”
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