On High Deductible Health Insurance

I wondered aloud last week at the fact that I when I raised my annual health care deductible to $2500, my annual premium savings were over $3000.   Which meant that from an economic standpoint, it was crazy to do anything but have a high-deductible health plan (even without considering the knock-on effects to the overall system of my now wanting to actually price shop for services).

TJIC offers one explanation that seems reasonable to me:

What kind of person is unwilling to pay the first $2,500 out of pocket? A person that intends to make lots of claims.

They know that they're going to use much of that first $2.5k.

Question: between one person who has no intention of going to the doctor for every little thing, and another person who does, let's assume that both get broken legs, which push them each to $5k in expenses "¦ which one is going to demand more follow up visits, cancel and reschedule more often, demand an extension on their course of painkillers, etc. ?

The one who was intending to use lots of service down at the low end, I'd wager my middle nut.

Three other possible explanations:

  • As alluded to above, it is in the insurance company's interest to get their customers to start actively price-shopping for some medical services, so they encourage high deductible policies.
  • Claims in the deductible range tend to be small and carry a disproportionately high overhead / processing cost as a percentage of the claim amount
  • It is an economic IQ test, with results somehow correlated to attractiveness as a customer

This latter theory results from my experience at McKinsey & Co, a management consultant.  When I joined, they offered a $5,000 one-year interest-free loan to cover relocation costs.  As I became more senior and was responsible for hiring new consultants, some of them would come to me and say "that's OK, I don't need the money."  I would look at them and respond, "we aim to hire the best young business minds in the country.  If you turn down an interest-free loan, we may have to rethink our hiring decision.  Go sock it in a 12-month CD like I did."  My personal theory was the offer was really an IQ test, not a benefit.


  1. Daublin:

    There's a simpler explanation. With a high-deductable plan, participants actually see the amount of money spent. While I don't expect people to put a lot of energy into saving money for a medical insurer, some of them will at least put a token effort into removing the more outrageous expenditures. With a low-deductable plan, people are less likely to even know what the costs are.

  2. kbyrd:

    I had a conversation with my auto insurance company about this ($250 vs $500 vs $1000 deductable, but that's per incident, not per year). They agent said something to the effect of: "We have a bunch of data on how many claims and how much money it costs us for each group. It doesn't matter why the $250 and $500 groups cost us that much more than $1000, they just do. Since the $1000 group costs us so much less to service, we can offer it to you at a lower price and still make money on it."

  3. morganovich:

    another explanation is that many times the policy holder is not actually paying the insurance fee. they get reimbursed by an employer or some such. therefore, all they care about is low deductible.

    saving the $3000 overall means $2000 more out of pocket for them.

  4. joshv:

    Oh wow, take the $5k relo-bonus and put it in a CD - even at 5% that's what - $250? Not worth the time and hassle of the paperwork.

  5. Reformed Republican:

    Also, some employees might not want to be taking advantage of their employer. To some, it is a matter of integrity not to accept money they do not need, and they might not want to be in the position of being a debtor to their employer.

  6. DrTorch:

    Agree w/ joshv and Reformed Republican...there are other factors that your candidates may have weighed. RR is right, many people take pride in not owing money, even if they can pay it back readily.

    And, certainly the paperwork and hassle involved in obtaining the funds. McKinsey should respect people for thinking beyond the obvious. As you've stated, your time is worth money...factoring that in is a sign of an astute candidate.

    And dealing w/ the company bureaucracy may even be easy when compared to the tax consequences.

  7. CT_Yankee:

    I used to look out for my insurance co, doing things like getting the hospital to drop the charge for a 2nd X-ray when thier tech filmed the wrong spot (foot vs ankle). Then they screwed me on a $65 tetanus shot, so last year I booked an extra appointment to discuss my vitamins. This year I think I might like to discuss the weather with my doctor because I heard that towards the end of the year there is some risk I might catch cold. Sure, I end up paying more in $25 co pays, however it makes me feel good when I originally felt cheated.

  8. traderpaul:

    When a high deductible health insurance policy is purchased the buyer is, in effect, telling the insurance company that he believes he is in good health and expects to remain in good health. Who else would know better?!
    I am sure actuarial tests would bear this out.

  9. Dr. T:

    Part of the explanation may lie with how your high deductible policy is structured. Do all medical expenses, including mental health expenses count towards the $5000? Do they count based on what you paid, or based on some arbitrary value assigned by the insurer (you paid $100 for an office visit, but the insurer only gives you $70 credit)?

    If they go by your actual payments on any medical expense, then you got a good deal. If they limit categories or use their own value scheme, it may not be such a good deal.

  10. Craig Howard:

    A couple weeks ago, you complained about people who lie about earning money while on unemployment. Why is taking the relocation loan OK? Because it didn't affect you negatively?


  11. Dr. T:

    "This latter theory results from my experience at McKinsey & Co.... When I joined, they offered a $5,000 one-year interest-free loan to cover relocation costs. As I became more senior and was responsible for hiring new consultants, some of them would come to me and say “that’s OK, I don’t need the money...." My personal theory was the offer was really an IQ test, not a benefit."

    We have different views. If I lived nearby and didn't have to move, I would have turned down the loan. Why, am I stupid? No. First, I consider it unethical to take a relocation loan when I'm not relocating. Second, issuing the loan costs the company time, costs it money (no return on the loaned money), and costs it time again when accepting and processing the repayment. Third, my accepting the loan would cost me time: filling out corporate paperwork, setting up a CD, depositing the check, cashing in the CD, paying back the loan, and reporting the gift on my taxes. (Yes, an interest-free loan is a gift. You have to report the "free" interest as income.)

    At 6% interest, a CD would earn only $300. The total amount of time and hassle for this interest-free loan certainly exceeds $300. (Plus you would have to pay taxes on ~$600 for the "interest-free" part of the loan.) By not accepting the unneeded loan, I would be helping the company that just hired me while saving myself some hassles.

  12. gadfly:

    High deductible insurance plans are the backbone of HSAs - Health Savings Accounts. Although these Republican-sponsored insurance programs are touted for company-sponsored insurance, an individual can set up such a plan.

    Buy the HD insurance from a carrier such as Blue Cross, and walk into you bank and open a medical saving account. Contributions to the MSA are tax free. Money left over after using these funds for paying deductibles in your HD insurance policy can become tax-free retirement income.

    Having said that, HSAs die with Obamacare!

  13. Rick C:

    @Craig Howard: one obvious difference is that lying to claim undeserved unemployment money is not the same as taking a loan that you intend to pay back.

    I might not take the loan either if I didn't need it, but it's not stealing from the company, unlike taking a relocation bonus from the company when because they're going to move you across the state...knowing you are going to leave the company in a couple months for a higher-paying job in the new location (which someone I know actually did.)

  14. Kyle Bennett:

    The interest on a 12-month CD is, what, 2%? That's $100 minus taxes. If I didn't need the money for moving or paying off other loans, I could make $100 - a year from now - by going to the bank, filling out whatever paperwork I need for the CD, then later remembering to cash it out, and write you a check, and reporting it all on my 1040. And, depending on the timing of when I get your check and when I set up the CD, I might actually have to pay you back the $5000 out of pocket and then cash out the CD some days later. It's iffy whether the cost is worth it (though I might have something better to do with the $5000 than a CD). I'd consider counter-offering "how about you just give me $75 now", but in any case turning it down might indicate a better understanding of business than the shallow thinking of the interest as "free money".

  15. Bob Smith:

    Yes, an interest-free loan is a gift. You have to report the “free” interest as income

    Normally, that is true, but a special provision of the tax code allows your employer to loan you up to $10,000 interest-free without recognizing imputed income.

  16. Mike H:

    Regarding the interest-free loan, this is the same reason I don't sign up for my companies health services account, where you put it money and get to spend it on health expenses, pre-tax. The potential $100 or $200 savings for somebody of my age and health isn't worth the hassle of having to track every tiny expense.

  17. Doug:

    TJIC was only half right. Even if a person doesn't intend to file lots of claims giving him a low deductible policy provides plenty of incentive to do just that.

    A few years back the company I worked for announced an arrangement with an HMO that called for a $5 copay and no deductible for all doctor's office visits. I called it madness and said the copay needed to be more like $25 to have any effect at all. The plan ended after one year when it cost the company over a half million to settle up for the year. The main culprit was more office visits than anticipated.

  18. John Moore:

    Unless the insurance company gets the provider to give you the same discount the insurance company gets (say, in PPO agreements), your deductible is going to disappear in no-time, as you pay 3-10 times the cost that the insurance company would have paid.

    One huge distortion in our current system is the extreme difference between "retail" medical costs and what the insurance companies and governments end up paying. It is the uninsured and underinsured who pay retail. As I reported here once before, in my case, for a routine procedure, the retail was $5000 but the PPO amount was $480.

    Plus... if the insurance payments are tax deductible (to your employer, which might be your own company), then you have to look at the after-tax situation.

  19. David:

    My frustrations with a high deductible plan generally came from not understanding it. My employer effectively removed the non-high-deductible plans one year, and my wife and I have very different medical needs: she has complicated and expensive needs, while I have simple ones. What I didn't grok at first was that prescriptions were going to be *very* expensive in January for me.

    I do think that HD plans are the way to go long term, but that's inherently because they are closer to the actual "insurance" model than non-HD plans are.