Last week we met with the human resources executive of a new employer client. The meeting’s goal was to finalize the modernization of the firm’s existing group medical plan menu. Specifically, we were converting the firm’s three existing health plan options into these three new options:
- A regional, narrow network, low-cost option
- A national, broad network, health savings account (HSA) qualified high-deductible health plan (HDHP)
- A national, broad network, normative EPO
Before this modernization, the only plan offering with out-of-network benefits was a PPO with a $1,000 in-network deductible. We modernized this plan into the above mentioned national, broad network, HSA qualified high-deductible health plan, and our client asked if this HDHP should retain out-of-network benefits. This question led to a broader conversation regarding the true value of out-of-network benefits and to the idea for this column.
As context, prior to conversion, the existing PPO’s out-of-network benefits featured:
As benefit professionals, what conclusions can we quickly draw about the value of this out-of-network benefit?
· Individuals will rarely exceed these deductible amounts. For example, if the only out-of-network provider regularly seen by an enrollee is a dermatologist with an average 150% of Medicare reimbursement rate of $250 per visit, this employee would have to have 12 visits to this provider just to meet the deductible ($3,000 ÷ $250 = 12 visits). Or, for example, if another individual saw an out-of-network mental health provider biweekly at a 150% of Medicare reimbursement rate of $135, this individual would only crest over the annual deductible by $510.
- When individuals rarely do meet the deductible, the plan does not actually pay 60% of the resulting charges. Because this plan’s “allowance” of 150% of the Medicare reimbursement rate is generally far less than providers’ retail charges, this 60% will generally feel more like 30 to 40%.
- The out-of-pocket maximums, while much higher than most of us could afford to pay in cash, are not even close to representing the true out-of-pocket risk to the enrolled individual. For example, we know that if the individual enrolled in single coverage incurs a $75,000 inpatient out-of-network retail bill, the individual could easily end up owing the hospital and providers an amount vastly exceeding $10,000 (even after the insurer or administrator attempts retrospective negotiation).
In short, we know that this out-of-network benefit doesn’t offer true risk transfer protection to the individual. The trouble, though, is that when an employee enrolling in single coverage glances at the above chart, behavioral economics suggests that he or she likely will vastly overestimate his or her odds of incurring a non-emergency claim out of network exceeding the deductible and then may conclude, “The extra premium I’m paying to cap my out-of-network payment risk at $10,000 is worth it.”
Meanwhile, the actual real-life cap is nowhere near $10,000.
Given these risk management considerations, when my team and I redesigned this PPO into a HDHP, we recommended eliminating the out-of-network benefit. However, for comparison purposes, we shared the available out-of-network benefit and pricing:
The insurer asked for a 5% increase to the HDHP premiums to retain this out of network benefit. This 5% increase represented a $600 annual premium increase per enrolled employee.
From a risk management standpoint, to better isolate the risk/reward choice, let’s imagine that the insurer’s base policy is the in-network benefit with individuals permitted to purchase the above out-of-network benefit as a rider at a cost of $600 per year. Questions to consider:
- Would paying $600 in premium for this “rider” make financial sense?
- How many enrollees would ever make it through these $5,000 and $10,000 deductibles?
- How many enrollees would incorrectly think that their out-of-pocket risk was actually capped at these out-of-pocket maximum levels?
Naturally, this astute HR executive and her team quickly concluded that retaining this out-of-network benefit was financially imprudent — and, worse, the false out-of-pocket cap could create a financial bear trap for individuals.
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