Deductibles cause sick patients to reduce beneficial care

What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics

By Zarek C. Brot-Goldberg, Amitabh Chandra, Benjamin R. Handel, Jonathan T. Kolstad
The National Bureau of Economic Research, NBER Working Paper No. 21632, October 2015


Measuring consumer responsiveness to medical care prices is a central issue in health economics and a key ingredient in the optimal design and regulation of health insurance markets. We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which forced all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending ($100 million lower spending per year). We decompose this spending reduction into the components of (i) consumer price shopping (ii) quantity reductions (iii) quantity substitutions, finding that spending reductions are entirely due to outright reductions in quantity. We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services). We then leverage the unique data environment to study how consumers respond to the complex structure of the high-deductible contract. We find that consumers respond heavily to spot prices at the time of care, and reduce their spending by 42% when under the deductible, conditional on their true expected end-of-year shadow price and their prior year end-of-year marginal price. In the first-year post plan change, 90% of all spending reductions occur in months that consumers began under the deductible, with 49% of all reductions coming for the ex ante sickest half of consumers under the deductible, despite the fact that these consumers have quite low shadow prices. There is no evidence of learning to respond to the true shadow price in the second year post-switch.

From the Conclusion

In this paper we studied the health care decisions and spending behavior for a large population of employees (and their dependents) who were forced into high-deductible insurance after years of having access to completely free health care.

A meaningful portion of all spending reductions came from well-off consumers who were predictably sick, implying that the true marginal prices they faced under high-deductible care were actually quite low.

We found that almost all spending reductions during the year occurred while consumers were still under the deductible, despite the fact that the majority of incremental spending occurs for consumers that have already passed the deductible. Moreover, about 30% of all spending reductions come from consumers in months when they (i) began that month under the deductible but (ii) were predictably sick, in the sense that they had very low shadow prices for health care.


This study is forcing economists to rethink high-deductible health insurance

By Sarah Kliff
Vox, October 14, 2015

Economists Zarek Brot-Goldberg, Amitabh Chandra, Benjamin Handel, and Jonathan Kolstad studied a firm that, in 2013, shifted tens of thousands of workers into high-deductible insurance plans. This was a perfect moment to look at how their patterns of care changed — whether they did, in fact, use the new shopping tools their employer gave them to compare prices.

Turns out they didn't. The new paper shows that when faced with a higher deductible, patients did not price shop for a better deal. Instead, both healthy and sick patients simply used way less health care.

This raises a scary possibility: Perhaps higher deductibles don't lead to smarter shoppers but rather, in the long run, sicker patients.

Kolstad and his co-authors looked at the case of a large, unnamed company that shifted more than 75,000 workers and their dependents from a plan with no deductible to one with a $3,750 deductible.

Workers' health spending dropped, and did so quickly.

In one sense, then, the high-deductible plan did accomplish a key goal: lower health spending. But when the researchers looked at why spending dropped, they found it had nothing to do with smarter shopping. The average price of a doctor visit wasn't dropping.

Instead, under the high-deductible plan, workers just went to the doctor way less. The paper finds that "spending reductions are entirely due to outright reductions in quantity." Workers did use less "potentially wasteful care," like imaging services, but they also cut back on "potentially valuable care," like preventive visits.

Even more striking: The sickest workers were those who were most likely to reduce their use of care while still under the deductible — even though this is the group that needs lots of care and is most likely to blow through the deductible by the end of the year. Once these sick workers actually exceeded their deductible, though, use of medical services rebounded.

"This is a difficult task for consumers to take on, and we now have very detailed data to show that's the case," (Kolstad) says. "When we've thought about the economics, we've generally thought this type of price change wouldn't be problematic, that sicker people would just spend their deductible and get the care they need. This research suggests that's not the case."

For Kolstad, this makes him skeptical of "demand-side" interventions in health care — those that rely on consumer demands for lower health prices to ultimately lead to less medical spending.



By Don McCanne, MD

This is an important study. It shows that sick patients will not shop prices but rather they will forgo beneficial health care services while they are still under the deductible for their plan.

This confirms that deductibles are an inappropriate tool for reducing health care spending, since health policies should be designed to improve care rather than impair it. This puts the entire concept of consumer-directed health care under question as a means of slowing health care spending. In contrast, single payer policies control spending while benefiting patients.

This study may seem familiar to regular readers. That is because it was covered in our June 15, 2015 Quote of the Day. It was based on an article in “The Conversation” by Ben Handel, one of the co-authors of this study.

What is new is that NBER has now released the full study, and reports of it are appearing in the media. It is a concept well worth repeating. Excerpts of the Vox article by Sarah Kliff are included above in that her description is quite clear, avoiding the technical language of economists and policy wonks.

Quote of the Day, June 15, 2015: