HLTH 3510 Week 2 Health Plan Comparison Brief Example

Who Absorbs the Loss When Care Turns Out to Be Expensive? Three Plan Designs Tested on a Quiet Year and a Bad One

Student Name

Walden University

HLTH 3510: Health Insurance and Reimbursement

Instructor Name

Month Day, Year

Who Absorbs the Loss When Care Turns Out to Be Expensive? Three Plan Designs Tested on a Quiet Year and a Bad One

Purpose and Method

Comparisons of health plans often ask which plan is best, as if one answer fit everyone. This brief asks a narrower question: when care turns out to be expensive, who absorbs the cost under each of three common arrangements, the member, the plan or the providers? The three designs are a health maintenance organization (HMO), a preferred provider organization (PPO) and a plan with a high deductible plus an employer-funded health savings account (HSA), all from one composite employer, using two illustrative years for the same member: a quiet year and a bad year. All plan terms and costs are illustrative, chosen to resemble common designs; they do not describe a real employer's plans. The aim is to show how plan design moves risk, not to recommend a plan.

The Three Plans

Table 1 sets out the illustrative terms.

Table 1

Illustrative Terms for Three Plans Offered by One Employer

Note. All values are illustrative and chosen to resemble common designs.

The Quiet Year

In a quiet year, the member has two office visits and a generic prescription, with allowed amounts totaling about $500. Under the HMO, the member pays $60 in copays plus small prescription copays, about $80, and the plan pays the rest. Under the PPO, the $500 falls within the deductible, so the member pays all of it. Under the high-deductible plan, the member also pays all $500, from the HSA if they choose, though federal rules let high-deductible plans cover certain preventive care before the deductible.

Adding premiums, the member's total cost for the year is about $1,880 under the HMO, $3,200 under the PPO and $1,400 under the high-deductible plan, or $650 after the employer's $750 HSA contribution is counted. In a quiet year, the high-deductible plan costs the member least, and the plan absorbs almost nothing under the PPO or high-deductible plan.

The Bad Year

In a bad year, the member is hospitalized for three days with pneumonia and needs follow-up visits and imaging, with in-network allowed amounts totaling $28,000.

HMO. The member pays a $250 hospital copay and visit copays, perhaps $400 in total, well under the $3,000 maximum. The plan absorbs about $27,600.

PPO. The member pays the $1,000 deductible, then 20% of the remaining $27,000, which would be $5,400, but the out-of-pocket maximum caps the member's share at $4,500. The plan absorbs $23,500.

High-deductible plan. The member pays the $3,000 deductible, then 10% of the remaining $25,000, which would be $2,500, for $5,500 in total, but the out-of-pocket maximum caps it at $5,000. The plan absorbs $23,000.

Adding premiums and the HSA contribution, the member's total cost is about $2,200 under the HMO, $7,200 under the PPO and $5,150 under the high-deductible plan. In a bad year, the HMO protects the member most, and the high-deductible plan is cheaper for the member than the PPO only because of its lower premium and the employer's HSA contribution.

Who Absorbs the Loss, and Why

The comparison shows three different answers. The HMO absorbs most of the loss itself in a bad year, but it controls its risk in another way: through a network and referral rules that limit which providers the member can use and that channel care through primary care. The cost of that protection is borne partly as reduced choice. The PPO and the high-deductible plan shift more of the loss to the member, up to the out-of-pocket maximum, and accept more choice of providers in return. The high-deductible plan shifts the most risk to the member in the early part of the year, through the deductible, which is meant to make members more cost-conscious about routine spending.

Providers absorb loss too, though less visibly. Each plan pays contracted rates far below list charges, and if a member cannot pay a large deductible, the unpaid balance may become bad debt for the hospital. A plan design that shifts more cost to members therefore also shifts some collection risk to providers. The theory behind cost-sharing is that members who pay part of the cost will avoid unnecessary care (Pauly, 1968), but research has found that people facing high deductibles cut back on care broadly, including care that is likely valuable, rather than shopping selectively (Brot-Goldberg et al., 2017).

What the Comparison Does Not Show

The comparison uses one member, two years and one illustrative set of terms. It does not show which plan is better for a given person, because that depends on their likelihood of a bad year, their savings, their preferred providers and how much they value choice. It also does not include out-of-network care, where the HMO would pay nothing except emergencies and the other plans would apply higher cost-sharing and maximums. A member who needed an out-of-network specialist would face a very different picture. Finally, the comparison treats premiums as fixed, although premiums reflect the claims of everyone in the pool; if many healthy employees chose the high-deductible plan, the premiums of the other plans would likely rise over time, an example of the risk-sorting our textbook discusses (Shi & Singh, 2022).

Using the Comparison

For an employee choosing a plan, the useful questions are simple: How likely is a bad year for me? Could I pay the deductible and out-of-pocket maximum without hardship? Do I need providers outside a narrow network? For an employer or administrator designing a benefit menu, the comparison shows that each design is a choice about who absorbs the loss, and that a menu with very different designs will attract different kinds of employees to each plan.

References

Brot-Goldberg, Z. C., Chandra, A., Handel, B. R., & Kolstad, J. T. (2017). What does a deductible do? The impact of cost-sharing on health care prices, quantities, and spending dynamics. The Quarterly Journal of Economics, 132(3), 1261-1318. https://doi.org/10.1093/qje/qjx013

Pauly, M. V. (1968). The economics of moral hazard: Comment. The American Economic Review, 58(3), 531-537.

Shi, L., & Singh, D. A. (2022). Delivering health care in America: A systems approach (8th ed.). Jones & Bartlett Learning.