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Thursday, March 9, 2017
Free the Big Deductible
C. Edmund Wright
There is a near ubiquitous misunderstanding of the function of a deductible in insurance, and it is crippling our national debate on health care. A lot of people in positions of power don't even know what insurance actually is in the first place, and the fear of the big deductible is a major element of this general confusion. Do not fear the big D. Embrace it.
Now why do I advocate for large deductibles? Easy, and it's not because I'm some fat cat insurance CEO -- because I'm not. For years, I have criticized the abuse of large deductibles in the political discussion of health care, not to mention both the regulation and practice of health care under ObamaCare by bureaucrats and insurance companies alike. We have no argument there. In fact, all this inefficiency and corruption perverts the way a big deductible works in a freer market.
No, the reason I like them is that large deductibles are how the risk management industry can control premium costs, and by reducing paperwork, can reduce marginally the cost of the health care services itself. But this only happens in a somewhat free market. We must free the big deductible for it to work its magic.
How? It's pretty easy really. There are several components that take money out of our pockets related to our health care, and they include our premium costs, our deductible and coinsurance costs, and any cash for goods or services we pay for items not covered under insurance.
Of those, the only cost we are guaranteed to incur in a year's time is the premium. Some will say but wait, I don't pay my premium, my employer does. Uh, no. I hate to break it to you, but your employer only collects your insurance premium, and he or she does so by collecting it out of your salary and other compensation. It may not show specifically on your check stub, but the immutable law of economics guarantees that if you are worth a hundred thousand dollars to your employer, and your health plan costs him, say, 14 grand a year, you're only going to be paid 86 thousand, including other benefits.
So yes, we all pay, either directly or indirectly. Let's take this simple example further, and stipulate that an employer health plan leaves our sample family with a two-thousand-dollar deductible. In such a scenario, they will pay a minimum of fourteen thousand dollars a year for health care (via paycheck withholding). If, say, health bills equaled five thousand dollars for the year, they would incur the two-grand deductible expense as well, bringing the total tab to sixteen grand for the year, premiums plus deductible.
Now let's apply the big bad deductible to this situation. Let's say the employer plan includes a ten-thousand-dollar deductible, but the premium is only five thousand dollars a year. Under the same example, the employee is still worth that hundred grand to the employer, but this frees up nine thousand dollars more to pay the employee directly. You may say but wait, my greedy boss won't pay me the savings. Perhaps you're right, but that's the fault of the boss's greed and of ignorance of how this works, not the fault of the big deductible per se.
The laws of economics are what they are, and that's the point here.
So, if this family incurred the same five thousand dollars in medical costs for the year, the out of pocket would be five thousand against the higher deductible instead of two thousand, meaning they're three grand in the hole under the big D plan. But remember, they are nine thousand dollars ahead on the premium savings. So under the big bad deductible policy, such a family is six grand to the good versus the plan with the two thousand dollar deductible.
Not only that, but the whole system incurred fewer administrative costs.
Okay, so what if we're looking at a bad year with a catastrophic claim of several hundred thousand dollars? In this worst-case situation, the high deductible scenario and the low deductible scenario are similar, with the family still having a couple thousand less in total premium plus deductible out of pocket costs under the high deductible plan. With a high deductible, you may or may not win, but you cannot lose (compared to higher premium lower deductible plan).
Best case? Say they're extremely healthy for a year (it happens.). They save nine grand on premium, and almost nothing against their deductible. They win big. The insurance company wins, and more importantly, the free market wins. And while you may loathe insurance companies, and most people do, you have to realize that a financially unstable insurance company is of no use for you.
Think about it: if your insurer can't pay for the EKG and echo stress test, good luck getting your bypass operation paid for. Conversely, the insurance industry, and the entire health care industry, needs people who can pay their premiums without going broke. This is the great misunderstanding. Insurance has become almost totally confrontational, with so few realizing that both sides have to win here for it to be sustainable. (Those pesky laws of economics again.)
And this brings us to back to the almost universal misunderstanding of what insurance is. It is a financial risk management tool, period. Insurance cannot protect your health, or your car, or your house either. The only thing insurance can protect is your assets against the cost of repairing your body, your house, or your car.
This risk is managed by making it predictable, which is done by spreading the risk. You pay six grand in premiums with a ten-thousand-dollar deductible, you can predict that your out of pocket costs will be anywhere from six to sixteen grand in a year, but no more than sixteen. This is true if you have zero claims, or if you have the three-hundred-thousand-dollar cancer issue. The insurers need a few of the zeros in order to be able to pay for the big ones. Economics 101, again.
Yet we'll never have a national system that really recognizes this. Political pressure means we do whatever we can to lower deductibles, even though that's the least efficient way to insure anything. People don't want high premiums either, which means a lot of government aid and tax credits and other stinky complicated things are brought in to satisfy a nation that demands both low deductibles and low premiums. In a lot of ways, we are a nation of people as clueless on health care as Bernie Sanders is on the cost of college.
ObamaCare confused all this by making everything that was working in health care illegal, and by multiplying everything that was failing. The realities of human nature, the driving force of economics, was totally ignored, as they regulated a lot of good plans out of existence.
The example above uses figures that are not too far off my family situation. We have been enjoying the benefits of a low premium high deductible plan for years. It works for us, our insurer, and our providers. Ours also includes a Health Savings Account option, which makes it even better. But with or without an HSA, insurance simply works better as catastrophic coverage, because it's more efficient than micromanaging every prescription and minor appointment. We used to have this in the country, and we called it major medical.
We'll never get back to that, unfortunately. I can only hope that whatever mess evolves from this repeal and replace plan, that it still allows the freedom for those of us who want the big deductible, and the smaller premiums, and less paperwork.
Edmund Wright is a contributor to American Thinker, Breitbart, Newsmax TV, and ghost wrote about ObamaCare and economics for a major talk radio personality during the ObamaCare debate, and has written many articles on the subject for American Thinker.