While many popular policies that require individuals to share the costs of their health care can be counter-productive, as when high deductible health insurance plans discourage people from seeking necessary care, Christopher Robertson’s “scaled cost-sharing” proposal offers considerable promise.
Robertson observes that employers typically use a one-size-fits-all approach to the cost-sharing features of their health insurance plans. Whether workers earn $40,000 or $400,000, they face the same deductibles, copayments, and other cost-sharing features that kick in when individuals seek care. In particular, these cost-sharing requirements come with an annual cap on out-of-pocket spending that is the same for all employees. Plans that cap out-of-pocket spending at $5,000 apply that cap to all workers, and plans with $10,000 caps also apply their cap to all workers. The Affordable Care Act (ACA) reinforces the practice of standard caps with its maximum amounts for in-network, out-of-pocket spending.
As Robertson notes, fixed annual caps come with a number of problems. For example, they are regressive in the way that flat tax rates are regressive, and highly so. If employers peg their annual cap for family plans at $8,000, the $40,000 wage-earner would have to pay as much as 20 percent of income on health care while the $400,000 wage-earner would have to pay only up to 2 percent of income. In addition, standard annual caps distort health care decision making. For the highly paid employee, a cap at only 2 percent of income may encourage overconsumption of health care. For the poorly paid employee, a cap at 20 percent of income may result in underconsumption of health care.
To address the problems with fixed caps, Robertson would switch from a dollar-based annual cap to an income-based annual cap. That is, instead of using a standard cap of $8,000, employers might peg their caps at 6 percent of income. A worker earning $40,000 would face an annual cap of $2,400, while a worker earning $400,000 would face an annual cap of $24,000. Such a switch would be desirable from a number of perspectives. It would be fairer to low-paid workers, it would reduce the distortions in health care decision making, and it would be financially advantageous to employers. Employers would benefit because their higher-paid employees would bear a larger share of the company’s insurance costs. Nevertheless, the health of those workers should not suffer—income-based annual caps address the incentive that fixed caps create for overconsumption of health care by highly-paid employees. Indeed, writes Robertson, empirical data indicate that cost-sharing leads higher-income persons to reduce their consumption of health care without compromising their health.
Robertson also considers the barriers to adopting income-based annual caps. For example, health insurance is a group-based benefit, making it difficult for employers to treat workers differently under their plans. In addition, changes in the law are needed to facilitate the adoption of income-based caps. In particular, Congress needs to revise—or the Department of Health and Human Services waive—the ACA’s maximums for annual caps. Currently, out-of-pocket annual caps may not exceed $6,600 for an individual plan or $13,200 for a family plan. An income-based cap of 6 percent would work up to incomes of $110,000 for individuals or $220,000 for families. Hence, while it is possible to fully implement income-based caps for low-income workers, ACA limits their use for high-income workers.
In the meantime, Robertson provides an intriguing argument for why current law might actually require some degree of income-based caps (i.e., income-based caps when fixed caps present a barrier to care for low-income workers). As Robertson observes, federal health insurance law includes anti-discrimination provisions to prevent employers from favoring their highly-compensated employees. But when low-income employees must pay a higher percentage of their income for their care, they are less able to afford care and therefore less able to draw on their health care benefits. Fixed annual caps very much favor highly-compensated employees.
And the disfavoring of low-income employees can come with harms to health. As Robertson points out, much of the problem with cost-sharing in health insurance comes from its impact on low-income individuals who are more likely to suffer an adverse impact on their health when increases in cost-sharing lead them to reduce their demand for medical care. By tying cost sharing to income, employers can better ensure that all of their employees realize the benefits to health from health care insurance.