Improving Value

Evidence-Based Approaches to Premium Setting and Cost Sharing

Almost every American family needs insurance coverage to help protect against catastrophic health care expenses.  We need to be thoughtful about how premium subsidies and cost sharing are structured to avoid creating barriers to needed care while discouraging low-value care. Fortunately, we have strong evidence to guide these decisions.

Start with the Cost-Sharing Design

Cost sharing should not be a barrier to needed medical care. Fully half of Americans report delaying medical care in the past 12 months due to concerns about cost.¹ The Commonwealth Fund estimates that twenty-eight percent of U.S. adults who have health insurance through their employer were underinsured in 2018, and 42 percent of those who bought coverage on their own were underinsured.² 

Moreover, health plan cost-sharing designs—terms like deductibles and coinsurance—are very difficult for consumers to navigate:

• Insured people do not understand key insurance terms, nor do they understand what is, and is not, covered by their insurance plans, making it very difficult to estimate the likely out-of-pocket costs when they experience an illness.³
• Nearly 20 percent of individuals with high-deductible health plans do not know preventive services are exempt from deductibles.⁴ This confusion leads enrollees in these plans to get fewer free preventive services than enrollees in other types of plans.⁵
• More than half of U.S. adults lack the facility with mathematics essential to understand health insurance information.⁶
• Limited understanding of health insurance is particularly acute among low-income and otherwise disadvantaged populations.⁷ 

The solutions, while rarely used, are well tested:

Simplify Cost-Sharing Designs. Eliminate deductibles and coinsurance, the two most difficult cost-sharing approaches for consumers.⁸ Consumers prefer copays because their costs for in-network care are understandable and predictable. We shouldn’t be surprised, but less complex cost-sharing programs stimulate adherence to recommended care.⁹ 

Standardize Benefit Designs. Requiring health plans to adhere to just a few standard (and patient-friendly) cost-sharing designs can greatly facilitate “apples-to-apples” plan comparisons at the point of health plan shopping. Moreover, standard cost-sharing encourages health plan competition based on other plan attributes such as provider network, quality and customer service.¹⁰

Standardization becomes particularly important when consumers have a choice of plans, such as when they purchase on their own¹¹ or their employer offers a choice of plans. For nongroup markets, states can:

• require all nongroup insurers, both inside and outside the marketplace, to offer standardized benefit designs, or
• require standard plan designs only of marketplace insurers, and/or
• require standardization at only selected tiers, such as only for silver and gold plans; and/or
• choose the specific types of benefits or services for which cost-sharing will be standardized.

The benefits of requiring standard cost-sharing designs is undermined when states allow insurers to offer non-standardized options as well. Of the seven states that require standardized plans within their marketplaces, only California requires all plans sold via the marketplace to be standardized.¹²  More on Standard Plan Designs.

Ensure Cost-Sharing is Affordable.  Most insurance plans sold outside the ACA marketplaces¹³ do not vary cost sharing based on family income, despite strong evidence that lower-income families forgo care at higher rates than high-income families due to concerns about cost.  Massachusetts carefully considered such an approach but deemed it administratively difficult.¹⁴ An alternate approach is to craft the standard cost-sharing designs so they vary in generosity—ensuring plans with very low cost-sharing are available for lower-income individuals and families – and then to vary the amount of premium subsidy by income to ensure financial access to those plans.

Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRA) are another technique for increasing the affordability of out-of-pocket costs, by allowing account holders to use pre-tax dollars to pay for care. Unfortunately, the most relief flows to the high-income families rather that the low-income families, suggesting that other approaches should be explored.

Subsidize Premiums Wisely

There is a direct tradeoff between the cost sharing in a health plan and the premium being charged. All other things being equal, lower cost sharing is associated with higher premiums for enrollees. However, few insured persons pay the full premium for their coverage:

Coverage	Percent of the Population15	Type of Subsidy
Employer Coverage	49%	The employer-paid portion of health insurance is sometimes viewed as employee wages that have been redirected, but this type of coverage benefits from another type of tax-payer funded subsidy. The employer-paid portion is not treated as taxable compensation by the federal government or states and hence benefits from income tax relief. In contrast, life insurance paid by the employer is a taxable benefit if the policy is worth more than $50,000.  Highest income employees get the most benefit.
Individually purchased, private coverage from ACA marketplaces	7%	Premiums are publicly subsidized, with the subsidy declining as income rises. This subsidy disappears at incomes above 400% of FPL—approximately $100K/year for a family of four in 2019.
Medicaid and CHIP	21% (includes those dually eligible for Medicare and Medicaid)	The Medicaid and CHIP programs are jointly financed by states and the federal government.16 Designed to benefit very low-income families, beneficiaries rarely face premiums and have little or no cost-sharing when they get services.
Medicare	14%	All seniors benefit from federal subsidies that lower the cost of their Part D drug coverage and make Part A (the hospital benefit) free. Lower-income seniors can qualify for help paying their Part B (doctor benefit) premiums.

 

Ensure premium subsidies slide with income. States should follow the example of Massachusetts¹⁷ and a few employers,¹⁸ and provide premium subsidization schedules that slide with family income, with lowest income families getting the most benefit. While challenging, we need to rethink public subsidy programs that are based on income tax relief, like the subsidization of employer-provided coverage and tax shelters like HRAs and HSAs. Because these programs allow premium and out-of-pocket spending to essentially be paid out of untaxed income, the most relief flows to the highest income families—a reflection of our progressive income tax structure. From an efficiency and a fairness perspective, we need to rethink how these health care subsidy dollars are allocated.

Harmonize across programs. Even better, states should craft an evidence-based set of health care affordability standards and harmonize subsidy efforts across all types of coverage. Today’s approach to subsidization reflects widely varying affordability standards that results in large disparities in the level of protection, even for similarly situated families, and too many households that are uninsured or under-insured.

Notes

1. https://www.kff.org/health-costs/issue-brief/data-note-americans-challenges-health-care-costs/ As this study shows, financial toxicity is the leading reason that insured consumers avoid or delay care: Kyle T. Smith et al., Access Is Necessary but Not Sufficient: Factors Influencing Delay and Avoidance of Health Care Services, March 2018. https://journals.sagepub.com/doi/full/10.1177/2381468318760298

2. https://www.commonwealthfund.org/press-release/2019/underinsured-rate-rose-2014-2018-greatest-growth-among-people-employer-health

3. Consumers Union, What’s Behind the Door:  Consumers’ Difficulties Selecting Health Plans, Washington D.C. (January 2012). 

4. Reed, Mary E., et al., “In Consumer-Directed Health Plans, A Majority of Patients Were Unaware of Free or Low-Cost Preventive Care,” Health Affairs, Vol. 31, No. 12 (December 2012). https://www.healthaffairs.org/doi/pdf/10.1377/hlthaff.2012.0059

5. Sood, Neeraj, et al., Price Shopping in Consumer-Directed Health Plans, RAND, Washington D.C. (March 2013).

6. Peters E, Meilleur L, Tompkins MK. Appendix A: Numeracy and the affordable care act: opportunities and challenges. In: Health literacy and numeracy: workshop summary. Washington, DC: The National Academies Press; 2014. p. 91–136 and Long, SK, Shartzer, A, Politi, M. Low Levels of Self-Reported Literacy and Numeracy Create Barriers to Obtaining and Using Health Insurance Coverage. Washington, DC: Urban Institute, Health Policy Center; 2012. 

7. Politi MC, Kaphingst KA, Kreuter M, Shacham E, Lovell MC, McBride T. Knowledge of health insurance terminology and details among the uninsured. Med Care Res Rev. 2014;71:85–98. doi: 10.1177/1077558713505327.

8. https://catalyst.nejm.org/simple-case-health-insurance-complexity/

9. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6195970/

10. Another advantage of standard plan designs in the ACA marketplaces is states can maximize federal tax credits with a higher actuarial value (AV) patient-centered silver plan.

11. Recall, under the Affordable Care Act, in the non-group market, certain other health plan dimensions were standardized: all participating plans must meet actuarial value standards and cover minimum essential health benefits. Plans cannot have dollar-based annual or life-time limits.

12. https://www.urban.org/sites/default/files/publication/82611/2000862-Missed-Opportunities-State-Based-Marketplaces-Fail-to-Meet-Stated-Policy-Goals-of-Standarized-Benefit-Designs.pdf

13. The ACA has significant public subsidies to reduce cost sharing for enrollees with incomes below two and a half times the poverty level.

14. https://www.healthcarevaluehub.org/advocate-resources/publications/making-healthcare-affordable-finding-common-approach-measure-progress/

15. https://www.kff.org/other/state-indicator/total-population/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

16. https://www.kff.org/medicaid/issue-brief/medicaid-financing-the-basics/view/print/

17. In 2006, Massachusetts became the first state to enact near-universal health coverage. In crafting the affordability standards for the program, the state initially focused on premium costs,

18. https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1220&context=yjhple