This article is the sixth article featured in our Spring 2019 journal. For the complete journal, please see the “Current Issue” tab above.
By Ben Kane
Edited by: Emory Wolf, Nicholas Draper, and Ben Menzies
In establishing government-facilitated health insurance exchanges, the Affordable Care Act fundamentally changed the individual market for health insurance in the United States with the intention of simplifying choices for consumers and ensuring minimal standards of coverage across consumers. However, many consumers shopping for insurance on the exchanges are still confronted with a daunting array of comparisons, even for plans at the same nominal metal tier. Standardized plans, which are required for the California marketplace and have been proposed for the Federally Facilitated Marketplace, can streamline the process of shopping for health insurance for consumers, allowing them to compare plans based on fewer, more salient factors and enabling consumers to more easily select plans with less cost-sharing.
The Affordable Care Act and Health Insurance Plan Designs
Before the passage of the Affordable Care Act (ACA), the individual market for health insurance — where those not covered by public programs or through their employers went to shop — was a very different place. Consumers were frequently denied coverage based on a pre-existing condition and, even if they were able to obtain coverage, found that their insurance plan had coverage gaps for essential medical care such as hospitalization, prescription drugs, or maternity care.
The ACA completely overhauled this market through new requirements for insurers to cover a comprehensive array of 10 benefit categories dubbed “essential health benefits.” It also set maximum out-of-pocket levels for what consumers would be expected to pay during a plan year — the mirror image of many pre-ACA plans which had caps on annual and lifetime coverage by the insurer.
Plans are now sold through health insurance exchanges, either set up by a state or run by the federal government. Plans are differentiated by metal tiers such as Bronze, Silver, Gold, and Platinum depending on how generous they are in their coverage. What the ACA did not do, however, was require insurers to follow specific plan designs and instead allowed plans to organize benefits and cost-sharing between consumers and the insurer so long as they comply with minimum federal standards.
These variations in benefit design can have significant consequences for consumers in making optimal plan choices, spending out of pocket, and accessing care. Cost-sharing amounts and the applicability of the deductible to services have a large impact on a consumer’s bottom line, as well as access to care. The available evidence shows that consumers are adversely impacted when faced with choices that are too complex and too numerous. Instead of allowing insurers to offer a vast range of plans, plan standardization streamlines decision-making to the benefit of both the consumer and insurer. State-based and federal marketplaces can and should recognize the existing evidence supporting standardization and offer standardized plans that benefit the consumer by reducing the complexity of decision-making in buying insurance.
A Tale of Two Cities Illustrates Variation in Benefits and Coverage
In 2018, a 27 year-old living in Sacramento can log on to the website for Covered California, California’s state-based health insurance exchange, and purchase one of five silver plans from five different carriers. These plans vary in networks and premium, but they all have a $2,500 medical deductible, $130 pharmacy deductible, and a $7,000 maximum out-of-pocket limit. Because qualified health plans in California’s individual market have standard benefit designs, there is a uniform approach to cost-sharing and the applicability of the deductible within a metal tier. This means that of the 20 outpatient care services covered as an essential health benefit in California’s individual market, all silver plans exempt 19 outpatient services from the deductible and have uniform copay or coinsurance levels for each respective service (e.g., all insurers exempted primary care and had a $35 copay).
If that same 27 year-old were to move to Atlanta and browse their choices on the federal marketplace, Healthcare.gov, they would instead be faced with a choice of 11 silver plans from just two carriers. As seen in Table 1, the combined deductibles on these plans range from $2,750 to $7,050 and benefits covered before the deductible also vary widely. For example, all California plans cover imaging services such as an MRI or CT scan before the deductible, while just one of 11 plans does in Atlanta. No Atlanta plans cover emergency services, durable medical equipment, or diagnostic tests before the deductible while plans in California cover all of these services.
A consumer in Atlanta must weigh dozens of factors that differ from plan to plan, such as premiums, deductibles, cost-sharing amounts, maximum out-of-pocket costs, and provider networks and quality. How much someone spends out-of-pocket on health care over the span of the year could be hugely impacted by plan choice in this scenario. In California, standard designs narrow the choices a consumer must make to premiums, provider networks, and quality.
As this “tale of two cities” illustrates, decisions about cost-sharing — whether to apply the deductible, a copayment, or a coinsurance — to benefit categories can vary across plans, all while complying with the broad ACA regulations for plan actuarial value (AV), a measure of the share of financial expenses covered by the plan which also determines the metal tier. Consumers face a wide variety of possibilities for financial responsibility depending on which plan they choose, resulting in a system with disparate and inequitable outcomes.
A History of Cost-Sharing (Co-Pays, Coinsurance, and Deductibles)
Why do we have an insurance system with such complex benefit designs? American health care plans began experimenting with these new “innovations” in health insurance in the middle of the twentieth century. Deductibles were first introduced in 1949 and were intended to improve health insurance by lowering premiums, ensure that health insurance coverage focused on major financial costs, and combat the “moral hazard” problem.2 Insurers believed that requiring consumers to meet a deductible would make them cost-conscious and avoid “moral hazard,” a phenomenon whereby consumers use medical services more often because they are shielded from the full cost of services. All cost-sharing is thus intended to reduce utilization to a certain extent, by making the consumer liable for at least part of the costs.
More recently, health care costs have steadily risen over the last two decades, and insurers have responded by leaning more heavily on cost-sharing and shifting responsibility to the consumer. Between 2006 and 2016, cost-sharing for employees at large firms has increased 53.5 percent.3 The bulk of this growth has come from consumer spending on deductibles — while spending on copayments decreased over this period, the amount spent on deductibles increased 176.2 percent. Deductibles accounted for 28.8 percent of cost-sharing payments in 2006 but over half of payments in 2016.
Complex Deductibles and Cost-Sharing Primarily Burdens Consumers
As cost-sharing has increased, the financial and health stakes for consumers have likewise grown. Research finds that deductibles, along with other cost-sharing mechanisms, do in fact reduce health care spending. However, these savings are achieved almost entirely by decreasing utilization without regard to value of care — consumers use both high-value and low-value services less as cost sharing increases [4, 5]. Studies show that reducing cost sharing for high-value services increases utilization of services, in one case demonstrating better medication adherence and improvements in clinical outcomes and quality of care . Cost-sharing may also have disproportionate impacts on vulnerable populations, such as low-income and sicker people, whose utilization is impacted to a greater degree when cost-sharing is increased . For instance, the patient in Atlanta covered under a Healthcare.gov plan may think twice about scheduling a routine outpatient surgery when he is responsible for the full cost before meeting his deductible, which can be as much as $7,050. In many cases, cost-sharing is also regressive by forcing the poor and sick to pay for insurance coverage while simultaneously creating financial barriers to care .
In the face of large consequences to economic and overall health, how can policymakers empower consumers to make more effective plan selections? Behavioral economics research finds that consumers make lower quality decisions when presented with too many choices . Research demonstrates that more choice in benefit design leads to poorer decisions, especially among the most financially vulnerable consumers. A study of employees at a large U.S. firm found that a majority chose plans that were more expensive, with “lower-income employees, female employees, older employees, and employees with chronic health conditions… all significantly more likely to select” more expensive plans . Experiments demonstrated that in the absence of decision-making tools, consumers are very likely to choose plans that are not the most cost-effective and also likely to not even realize it . For example, a consumer who relies on medication to treat a chronic condition could choose the plan that appears cheaper because it has a lower premium, but it may in fact cost her much more money over the course of the year due to the cost-sharing amounts she must pay to obtain those drugs.
Standardized plans offer a solution to the problem of consumer choice, by simplifying the available options and allowing consumers to focus on network, price, and plan quality rather than complicated cost-sharing variations. With standardized plans, the same consumer can shop on the sticker price she sees — the premium — and other factors like plan network and quality without worrying that she will be face enormous cost-sharing differences to obtain her medication. The advent of the ACA and its marketplaces, which intended to streamline and simplify the health insurance shopping experience, provides states ample flexibility to shift toward standardized plans.
Opponents of standardized plans argue that these plans reduce choice and harm consumers by limiting competition and precluding specialization to consumer needs. In the first year of the exchanges’ operation, however, researchers found that rating areas with more silver plans had higher differences in premiums and deductibles between the second-cheapest and average silver plans . The Atlanta example demonstrates this point, where deductibles range all the way from $2,750 to $7,050 among available silver plans. More plan offerings might seemingly mean more plentiful choice for consumers. But those choices include more expensive and higher deductible plans available in the states with more plans. Critics of standardization argue that more plan options theoretically allow the most consumers to access the most services depending on their level of expected use. However, as previously noted , the research [1,2,3] in this field finds that more choice in benefit design in fact leads to poorer economic outcomes for consumers.
Public Marketplaces Can Promote Efficiency in Benefit Design
Before the ACA, insurers in the individual market found success using “risk selection through benefit design and medical underwriting which allowed them to select consumers based on risk, charge higher premiums depending on applicants’ health status and deny coverage due to a pre-existing condition” . In human terms, cancer survivors and members of law enforcement were denied coverage and women were charged higher premiums than men . The state of the market led to glaring inequities and politically unpopular outcomes for consumers which in turn set the stage for reform efforts.
Massachusetts established the first health insurance exchange, which later served as a model for the federal law’s exchanges, including the introduction of tiered metal levels benchmarked to AV that vary based on the share of financial expenses covered by the plan. Unlike the pre-ACA individual market, the ACA’s health insurance exchanges exist to promote transparency and competition for the benefit of consumers. Exchanges can serve as market innovators , simplifying choices and minimizing out of pocket costs for consumers. Indeed, many state-based exchanges, such as those in Massachusetts, California, and even the federally-facilitated marketplace, have already taken steps in this direction.
Federal and State Activity toward Standardization
In 2010, the Massachusetts exchange moved to require that insurers begin selling standardized plans, as a result of feedback from consumers and a desire to simplify consumer choice. The exchange hoped to shift consumer choice to plan network and quality, rather than differences in benefit coverage and cost-sharing.
Subsequent research found that Massachusetts achieved its goals. Comparing the market before and after, researchers found that “standardization improves outcomes for consumers” and that insurers able to provide more generous plans can also benefit from the change. After standardization, consumers chose more comprehensive plans as a result of shifting toward a clearer choice set, and they benefited financially as a result [4, 5, 16].
After the passage of the ACA, based in large part on the Massachusetts model, states took varied approaches toward establishing exchanges. The majority chose to participate in the federally-facilitated marketplace (FFM) on HealthCare.gov while a smaller number created their own state-based marketplaces (SBMs). As of 2016, seven exchanges require insurers to offer standardized plans on their marketplace. Six of them — Connecticut, the District of Columbia, Massachusetts, New York, Oregon, and Vermont — also allow the sale of non-standardized plans alongside the standardized plans. The other, California, is the only state to require standardization of all plans. All seven of these marketplaces have commonly stated goals of providing consumers with “apples-to-apples” comparison shopping and plan designs that are “patient-centered” because they increase access to high-value care .
The federal government followed suit by introducing standardized plan options in the FFM for benefit years 2017 and 2018. The U.S. Department of Health and Human Services (HHS) specified the cost-sharing structure for these plans, including fixed deductibles and fixed copayment or coinsurance for key essential health benefits. Primary care visits, specialist visits, urgent care, and all categories of prescription drugs were exempted from the deductible in the standardized silver option. In 2016, most plans offered on the FFM had subjected the majority of these services to the deductible (e.g., 64 percent of plans subjected Specialist Visits to the deductible) . These plans were a step in the right direction toward simplifying choice and benefiting the almost nine million consumers on Healthcare.gov. Unfortunately, under the Trump Administration, the federal government has reversed course and eliminated these plans, returning to the status quo of wide variation that harms consumers.
Through legislation and administrative regulation, California chose to standardize all plans on its marketplace, Covered California, since its launch in 2014. Not only were insurers prohibited from selling non-standard products on the exchange, they were required to offer standard products at every metal level and sell “mirror products” off-exchange . Covered California worked with advocates to develop plans with the intent of simplifying consumer choice to improve decision making, limit out-of-pocket costs, and promote access to high-value care. Seeking to achieve these goals, Covered California exempted services from the deductible, emphasized copays over coinsurance, and lowered cost-sharing dollar amounts where possible. California to this day remains the sole state to require standardized plans to be sold on the exchange.
Standardization Benefits Consumers
Media coverage and public discussion of rising costs in exchange plans often focuses on the sticker price seen by consumers — premiums. But the complex benefit designs in health insurance can have enormous impacts on both a consumer’s out-of-pocket costs and their utilization of health care.
Recall that the 27 year-old moving from Sacramento to Atlanta faces a vastly different landscape for buying health insurance on the individual market in each city. In California, that 27 year-old can be assured of a standard deductible, maximum out-of-pocket, and copay/coinsurance amounts for services he or she needs to access. In Atlanta, however, that same 27 year-old could choose a plan with a $2,750 deductible or one with a $7,050 deductible. He or she must also decide whether to have a plan that covers imaging services like CT scans and MRIs before the deductible. At the same time, he or she must accept meeting the deductible for any emergency services, durable medical equipment, or diagnostic tests.
The benefits of standardizing consumer choices on health insurance marketplaces are clear. The stakes for a consumer’s financial and general wellbeing are high: Cost-sharing greatly impacts total out-of-pocket costs and expected utilization of health services. By focusing on differences in premium, plan quality, and provider network, consumers are able to make better decisions when purchasing health insurance. Choosing a plan among seemingly endless iterations of cost-sharing combinations, as is currently the case on the federal exchange and many state-based marketplaces, is not helpful to consumers and may in fact actively harm the most at-risk populations.
Standardized plans lead to better outcomes for consumers and refocus choice and competition on factors that matter most to consumers. Federally-facilitated and other state-based marketplaces that do not currently offer standardized plans should recognize the existing evidence and standardize plan options to reduce the complexity of decisions for consumers.
Ben Kane is a second-year Master of Public Policy candidate at the Goldman School of Public Policy.
- Note: Monthly Net Premiums for Silver 70 plans available in 2018 to a 27 year-old making $35,000 per year.
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Ben Kane is a second-year Master of Public Policy candidate at the Goldman School of Public Policy.