(cross-posted from tpmcafe)
Donut hole insurance plans often seem generous because they don't require an up-front contribution to health care every time you see the doctor. Instead, you only pay past a certain point of spending. But as a recent Health Affairs article by Meredith Rosenthal of Harvard detailed, donut hole deductibles actually end up being twice as large as standard deductibles, increasing both financial risk and out of pocket contributions by patients.
The economic theory goes like this: a standard (aka first-dollar) deductible, like those in high deductible health plans (HDHPs), affects everyone. Let's say a plan has a $250 deductible. Each person who spends between $1 and $250 on health care (which will be nearly everyone) will be affected by the deductible, and thus pay more, with an average amount being saved by the insurance company because of cost sharing. In contrast, consider a donut hole deductible, from $500-$1,000. In a donut hole plan, fewer people will pay the same average amount of the standard deductible. That's because the number of people who will spend more than $500 (the donut hole threshold) on health care will be much smaller than the number who will spend between $1-$250 (the standard deductible plan). In order for the insurance company to save the same amount as the standard deductible, the donut hole must be bigger to capture the same number of people. How much bigger? According to Rosenthal, the donut hole will need to be about twice as large to compensate.
This theory holds for the Medicare Part D, and Rosenthal estimated that if the new benefit had a standard deductible instead of a donut hole deductible, the size of the deductible could be decreased by half.
This design means that although the insurance companies (and the government) will save the same amount of money by actuarial estimates, much greater risk is shifted to enrollees. That's because those who have the highest costs are now facing an out of pocket payment that's twice as large as a standard deductible.
As Rosenthal notes:
Most beneficiaries will thus perceive that a doughnut-hole policy is more generous than one with a first-dollar deductible, despite the gap in risk protection. This may be the case because although employees and Medicare enrollees should theoretically prefer first-dollar deductibles, they may be more concerned about getting their "fair" share of annual benefit spending than about risk protection. They may also greatly underestimate their risk of having health care spending in the doughnut hole.
The average amount spent on health care usually determines where donut hole deductibles begin. For Medicare, that was $2,318. The Part D donut hole starts below this, at $2,250, so a good portion of enrollees will end up paying in the donut hole, many much more than they anticipate.
It's unclear whether donut hole designs restrain costs either. Patients may be less likely to restrain spending because they'll have to pay in the future instead of making those payments up-front.
In any case, we need to think deeply about insurance plans that punish the sickest members of our society. Most people who get into high levels of spending have no control over their illness. They didn't ask to be ill, and donut hole deductibles saddle them with an out-of-pocket payment that's twice as large because of it. Is that the moral thing to do?