By Andrew Mackenzie, FSA, CERA, MAAA, Senior Actuarial Consultant at Santa Barbara Actuaries
A version of this article has been published by Employee Benefit Plan Review Magazine
Many employers provide their employees with multiple health insurance plan options. This is done to be competitive and to offer value to employees. The rationale for choice is that individuals have different medical needs and preferences. A healthy, young, single employee may benefit significantly from a Health Savings Account attached to a narrow network, High Deductible Health Plan while another employee with more health needs may desire a plan with low copays and wide provider selection.
While the idea of choice adds value to a benefits offering, many employees struggle to interpret the complexity of different health insurance plan offerings and often do not choose the plan that they would choose if they had a comprehensive understanding of the plan options. Research has demonstrated the fact that employees frequently do not choose a plan with the best financial outcomes given their unique circumstances.1,2 More importantly, we’ve observed that employees not only choose plans that will be more expensive for them but also plans that they do not actually prefer! We know this to be true because we see employee health plan election behavior change when they are presented with easier to understand information about their benefit choices.2,3
Because employees frequently do not choose plans that they prefer or that save them money, both employers and employees spend much more than they need on health insurance and employees are less satisfied with their benefits than they otherwise could be. The size of this financial loss (which accrues to the employees and the employer) varies widely based on the plan options and decision support tools available to employees but in most cases is quite substantial.
There are three primary components of cost savings when plan elections are made optimally:
The drivers of these three components can be described as over-insurance (the tendency to buy more coverage at a higher price than one’s actual risk-tradeoff preferences) and under-insurance (having too little insurance for one’s actual risk-tradeoff preferences). Over-insurance is very common and is likely caused by human tendency to overestimate small risks. Hence, when presented with a simple benefits calculator, a majority of people buy down from their original elections.1 Under-insurance stems from not understanding the cost sharing components of a plan design and instead just being anchored by the plan contribution. We provide an example of both under-insurance and over-insurance in Exhibits 1 and 2.
In this first example, the employee chooses Plan A even though Plan B has a lower expected cost and even a lower total maximum liability. The employee does this because he likes the idea of low cost sharing and undercounts the size of the monthly contribution difference. However, when presented with a more complete picture of the financial implications, this employee would likely decide to choose Plan B instead of Plan A since Plan B is a better option.
Exhibit 1: Over Insurance Example
| Item | Plan A | Plan B |
| Monthly Contribution | $500 | $300 |
| Network | Identical to B | Identical to A |
| Deductible | $0 | $1,000 |
| Coinsurance | 90% | 80% |
| Out of Pocket Maximum | $3,000 | $5,000 |
| Expected Total Cost (Contribution + Expected Out of Pocket Costs) | $6,800 | $6,000 |
| Maximum Total Cost | $9,000 | $8,600 |
In the second example, the employee chooses Plan D but does not understand how a Health Savings Account works, has no money set aside for out of pocket costs, and actually has sufficient medical needs that Plan C would provide lower total costs than Plan D.
Moreover, in situations of under-insurance, we are trying to avoid unnecessary events that can be caused by the employee reacting to the first bill that hits his deductible. Imagine a scenario where an employee goes to the emergency room because a dependent has the flu but then incurs a $1,200 ER bill. Not expecting that and having no money set aside, this employee then discourages his family from using preventative utilization and becomes very upset with his health plan and employer. Because of this avoidance of preventative care, the employee stops taking his diabetes medicine and later ends up in the hospital with hyperglycemia which causes the employee’s overall health to deteriorate, causes him to miss days at work, and results in a bill of $9,500 to his family and a bill of $18,000 to the employer. All of this could have been avoided if the employee had chosen the better fit plan given his needs, preferences, and current health/financial literacy.
Exhibit 2: Under Insurance Example
| Item | Plan C | Plan D |
| Monthly Contribution | $500 | $150 |
| Network | Identical to B | Identical to A |
| Deductible | $0 | $5,000 |
| Coinsurance | 90% | 60% |
| Out of Pocket Maximum | $3,000 | $11,000 |
| Expected Total Cost (Contribution + Expected Out of Pocket Costs) | $6,800 | $8,000 |
| Maximum Total Cost | $9,000 | $12,800 |
As a demonstration of the impact of decision support on bottom line medical expense trend, we saw in our pilot program with California Schools Employee Benefit Organization (CSEBO) a 7.7% real reduction in medical trend between 2018 and 2019 in CSEBO’s self-insured book (after applying a 2.2% medical trend rate).3,5 Roughly 40% of this financial savings (3.1% of the 7.7%) was due to changes in cost sharing but the rest (4.5%) was due to a change in utilization patterns. There are multiple reasons for the change in utilization patterns. Credit is due to the way in which plans were implemented and communicated by the employer; but, one of the most powerful drivers of this savings was the increase in HDHP offerings accompanied by the MyPlanChoices decision support tool. We saw a 53% increase in HDHP elections for those using the tool.
Given the average cost of healthcare was $13,087 per employee per year in 2019 according to Willis Towers Watson4, a 7.7% reduction in healthcare costs would represent over $1,000 per employee or $3 million dollars for an employer with 3,000 employees over the course of a year.
While bottom line financials are important, what we consider even more fundamental is helping employees make plan election decisions that are the best option for themselves and their families. We strongly believe in the power of choice, but an optimally designed benefits offering needs not only choice but also support for that choice. In summary, based on the extensive literature and our own experience with the MyPlanChoices decision support tool, we conclude that health plan election decision support has the power to create significant financial savings for both the employer and employee while more importantly helping each employee make the best health plan election decision for their family.
About MyPlanChoices
At MyPlanChoices we are proud to say that 90% of users have found our decision support tool useful in choosing their benefits and 89% have said it has taught them something new about their plan and 82% have said that the tool has influenced their choice of plan.
About the Author
Andrew Mackenzie, FSA, CERA, MAAA, is an actuarial consultant specializing in financial outcomes evaluation and predictive modeling in the healthcare space. Andrew is passionate about ways to increase efficiency and effectiveness in healthcare and strives to find ways to support care optimization.
He can be reached at amackenzie@sbactuaries.com. Learn more at http://sbactuaries.com.
Endnotes