Timing of Drug Purchases and Out-of-Pocket Costs for HDHPs
Background: A lot of analysts advocate high deductible health plans (HDHPs) for two reason — low premiums and access to tax deductible savings accounts. These advantages are real.
Less attention has been spent on differences between how HDPPs and standard plans differ in their reimbursement of prescription medicine. Most standard deductible health plans with low deductibles pay a share of prescription drug costs prior to the deductible even being met. By contrast, most high-deductible health plans do not reimburse any health care costs until the entire deductible is met.
Moreover, many insurance companies that sponsor both standard and high-deductible health plans have less generous benefits for certain drugs under the high-deductible health plan.
Drugs can be very expensive especially when a generic alternative does not exist. The prices of some commonly used drugs presented below was obtained from a major reputable insurer which offered both a standard deductible and HDHP.
|Prices of Some Drugs|
Prices are for 90-day supplies.
This insurer typically required consumers to pay around 25 percent of the cost of the non-generic drug. However, I noted that the insurer paid 25 percent of the cost for a 90-day supply of Cialis 5-mg daily use under the standard plan and 0 percent under the HDHP.
Most consumers evaluate insurance plans based on broad reimbursement levers, deductibles, out-of-pocket expense limits, and coinsurance rates. However, increasingly narrow policy rules including the reimbursement rate for a drug or whether a procedure is medically necessary can have a large impact on out-of-pocket costs and financial exposure.
There is another complexity associated with the use of high-deductible health plans and reimbursement for prescription drugs. The complexity is the result of the higher coinsurance rate for prescription drugs than for most hospital services. In some plans the coinsurance rate (the share paid by the customer) is 25 percent for prescription drugs and only 5 percent for hospital visits. This feature combined with rules governing deductibles can result in the timing of medical services impacting the total amount paid by the customer.
A person who pays $X for a car and $Y for a vacation will pay a total of $X +$Y for both items regardless of when the purchases occur. However, the amount of out-of-pocket expenses incurred by a person purchasing prescription drugs and a visit to the ER or a hospital can vary quite a bit depending upon when the purchases occur.
The purpose of this post is to show that the timing of drug purchases and visits to the hospital can have a nontrivial impact on out-of-pocket health costs when reimbursement is guided by the rules of a high-deductible health plan with a high coinsurance rate for drugs and a low coinsurance rate for hospital stays.
Let’s illustrate the timing effect with a couple of simple examples.
Situation One: An individual-only health insurance policy has a $1,500 deductible and a catastrophic limit of $5,000. The plan has a 5 percent coinsurance rate on hospital visits and a 25 percent coinsurance rate on prescription drug purchases.
How much does a person insured by this plan pay if she purchases $1,500 of prescription drugs prior to December 2018 and then has a $1,500 ER visit in the middle of December?
How much does a person insured by this plan pay if she has a $,1500 ER visit in early January 2018 followed by $1,500 in purchases of prescription drugs though out the year?
Assessment of Situation One:
The person who starts off the year with prescription drug expenses pays $1,500 on the prescription drugs and $175 (0.05 x $1,500) for the ER visit.
The person who starts off the year with an ER visit will pay $1,500 for the visit to the ER and $375 (0.25*$1,500) for the drugs.
The difference is around 19 percent of the lower amount.
The lesson here is that you should consider scheduling your ER visits for early in the year. (Just kidding. It is obviously very hard to schedule your ER visit.)
Situation Two: A family has household coverage with $5,000 deductible. The catastrophic limit on the plan is $13,500. The family incurs two types of expenses during the year — $5,000 of drug costs and a $20,000 operation.
How much does the person who starts off the year with prescription drug expenses and ends with the operation pay in total out-of-pocket expenses?
How much does the person who starts off the year with the operation and ends with prescription drugs pay in total out-of-pocket expenses?
Assessment of Situation Two:
The person purchasing drugs prior to the operation pays $5,000 out-of-pocket for drugs and $1,000 for (0.05*$20,000) for the operation.
The person with the early operation pays $5,750 for the operation ($5,000+0.05*$15,000) and $1,250 (0.25*$5,000) for the drugs for a total of $7,000. The difference as a percent of the smaller amount rounds to 16.7 percent.
A Note: The two examples presented here result in the person who has the major-medical event later in the year incur more expenses than the person who starts the year with a major- medical event. This is not always the case when the major-medical event is very large. I hope to address this post in a separate post.
Implications: I am the first to acknowledge that disparities resulting from timing of drug purchases under a HDHP are not the largest factor impacting health insurance markets. As many have noted crappy insurance beats no insurance every single time.
However, the issue raised here is non-trivial for a few reasons. First, a few hundred dollars or a thousand dollars is a non-trivial amount for a household struggling with student debt or just generally living pay check to pay check. Second, the lack of transparency on this issue reduces the credibility of the insurance industry and the economists and financial advisors who work for it. Third, based on the calculations demonstrated here some people may underutilize pharmaceutical drugs and/or delay needed medical services. Fourth, based on the findings presented here policymakers should consider changing the rules governing eligibility for health savings accounts.
Other readings on advantages of different plan types can be found here.
Health Insurance Math – Problem One
High Deductibles Versus High Out-of-Pocket Limits
Health Plan Comparisons:
My sense from these papers is that lower deductible plans with high catastrophic limits and higher coinsurance rates would benefit both the industry and the consumer. The decision to only provide tax preferences for holders of high deductibles was a very bad one.
I would be happy to write the definitive study on this topic but funding and data are both needed.