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Employer plans responsible for excessive out-of-pocket costs

April 17, 2020

Topics: Quote of the Day

By Sherry A. Glied and Benjamin Zhu
The Commonwealth Fund, April 17, 2020


Issue: Many studies report that high out-of-pocket health spending is an increasing problem, despite expanded insurance coverage under the Affordable Care Act (ACA). Little is known about how Americans’ out-of-pocket spending has changed over time.

Goals: To observe trends in high out-of-pocket spending and describe the distribution and composition of out-of-pocket spending over time, focusing on the top 5 percent and 1 percent of spenders.

Methods: Analysis of Medical Expenditure Panel Survey (MEPS) data.

Key Findings and Conclusions: Expansions in insurance coverage and in the quality of coverage through the ACA have protected most Americans from high out-of-pocket costs. Recently, however, out-of-pocket costs for the highest out-of-pocket spenders (the 99th percentile) have been increasing. In 2017, one in 100 Americans under age 64 spent $5,000 or more out of pocket for medical services, and about one in 20 spent more than $1,700. High out-of-pocket spending mostly affects those with employer coverage and those with incomes above 400 percent (and, in particular, above 600 percent) of the federal poverty level. The plurality of this spending is for physician services. High deductibles and out-of-pocket maximums in private insurance, combined with exposure to out-of-network bills for physician services, leave many Americans facing very high out-of-pocket costs.

From the Introduction

Americans are increasingly concerned about the high cost-sharing requirements in their health insurance coverage. According to federal data, average deductibles in employer plans more than doubled between 2008 and 2017, from $869 to $1,808. Although most Americans have insurance coverage, only 62 percent of adults in a recent Commonwealth Fund survey reported they were very or somewhat confident in their ability to afford health care, while those earning less than 250 percent of the federal poverty level (FPL) — $12,490 for a single person and $21,330 for a family of three in 2019 — were even less confident.

Health care spending is highly concentrated among the highest spenders. In 2016, the top 5 percent of spenders accounted for half of health care spending, spending about $50,000 annually. Out-of-pocket spending was similarly concentrated: the highest 5 percent accounted for 46 percent of overall out-of-pocket spending.

Very high out-of-pocket expenses may have dangerous consequences: high costs have been linked to poor medication adherence and treatment delays in patients with rheumatoid arthritis, kidney disease, diabetes, oral cancer, and breast cancer. We find that, in 2017, one in 100 Americans under age 65 spent $5,000 or more out of pocket for medical services, and about 1 in 20 spent more than $1,700. Protecting people from such catastrophic spending is among the most important roles of health insurance.

In 2019, ACA-compliant coverage could not have an out-of-pocket maximum above $7,900 for individuals and $15,800 for families. While these out-of-pocket requirements are lower than those seen in the individual market before the ACA, these deductibles and out-of-pocket maximums remain very high relative to household incomes.

Other developments in health care markets have increased the risks of high out-of-pocket spending, especially among those with employer-sponsored insurance. Since 2003, tax policy has encouraged employers to offer high-deductible insurance plans with tax-favored health savings accounts. Today, 19 percent of employees are enrolled in such plans, but few — only 5 percent of taxpayers in 2014 — contributed to their health savings accounts.

From the Policy Implications

As prior analysts have observed, rising cost-sharing requirements and concerns about out-of-pocket exposure do not correspond to rising out-of-pocket spending levels on average. We find, however, that out-of-pocket spending has been increasing since 2014 among Americans with the highest out-of-pocket spending levels. Those with private insurance and those with incomes above 400 percent of FPL (and especially above 600 percent of FPL) have been most affected by rising out-of-pocket costs.

The proliferation of high-deductible plans with health savings accounts among people in these higher income groups may lead to higher out-of-pocket spending in this group.

We find that a small percentage of Americans increasingly bears the brunt of high out-of-pocket costs. High deductibles and out-of-pocket maximums shift the burden of health care costs away from premiums paid by the average insured person to those with serious illnesses and substantial health service use. This pattern undermines a principle purpose of health insurance: to protect people against catastrophic expenses.



By Don McCanne, M.D.

We pay for our health care system through taxes, premiums, forgone wages, and out-of-pocket spending – an inefficient and somewhat inequitable method of financing. Ideally, we would each pay in a fair amount, based on our ability to pay, and then the system would pay for the health care needs of each of us. That’s the fundamental principle of insurance.

But this study shows that a small percentage of Americans who have serious illnesses and substantial health service use increasingly bears the brunt of high out-of-pocket costs. These individuals not only have the misfortune of illness or injury, but they also face financial penalties in the form of high out-of-pocket expenses.

We hear repeatedly that people should not be forced into a Medicare for All program; they should have the option of keeping the insurance they have – predominantly employer-sponsored private health plans. Yet the majority of individuals who are exposed to these out-of-pocket penalties are primarily insured through these private plans. Thus our current system tends to undermine the fundamental principle of insurance.

As far as paying into the system, it would be far more equitable to use progressive taxes, making the system affordable for everyone. As far as paying out, the system should pay based on medical need. There is no reason to require additional payments merely because a medical need developed. The funding of health care would have already been made equitable through the progressive taxes that fund the universal risk pool.

A single payer Medicare for All program would not only bring rationality to our health care financing, it would also correct many of the other inequities, dysfunctions and profound inefficiencies in our health care system. We could have this health care nirvana without increasing our national health expenditures. We just have to get rid of the private insurers.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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