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.
http://www.americanthinker.com/articles/2017/03/free_the_big_deductible.html