The year is 2075. Your grandson has had a bad car accident and had to receive emergency care at the hospital. His bills total $40,000, and the way health care costs rose over your lifetime, his deductible is $20,000. Unfortunately, as a college student, your grandson has little in the way of savings.
He is prepared, though. He has gap insurance, sometimes called deductible insurance. This is supposed to protect him in just such a situation—where he has an emergency but is unable to meet his deductible. He’s supposed to receive a payout of exactly $20,000.
But unfortunately, your grandson didn’t read the fine print. As it turns out, his deductible insurance also has a deductible! He’s supposed to pay $5,000 first, before his gap insurance kicks in to cover the deductible on his major medical plan. Only then will his actual insurance plan cover the rest of his $40,000 bill.
So your grandson has to come up with $5,000—despite having medical insurance and gap insurance.
“Sorry sir,” says the customer service representative. “Would you like to add on our accident and critical illness rider for $10 more per month? In the future, it will help cover the $5,000 deductible in the event that you’re hospitalized.”
And you thought just having health insurance was enough?
Not anymore. Already, you arguably need insurance for your insurance. And if costs keep rising, the situation above could become real. Your grandson very well may need insurance for his insurance for his insurance.
So what are we paying for? And how did this happen? Let’s look at a few factors. First, why do insurance companies have deductibles in the first place?
The reasoning behind deductibles
Some consumers may remember the days “first dollar coverage,” or plans with no deductibles at all. Others may remember extremely low deductibles by today’s standards. Under those plans, your insurance covered all or nearly all of your care costs. After all, that’s what you pay premiums for, isn’t it?
Deductibles have been increasing for decades, but over the last fifteen years, they have skyrocketed. According to the Kaiser Family Foundation, average deductibles for an employer-sponsored family plan rose 63 percent from 2001 to 2006, 31 percent between 2006 and 2011 and 20 percent between 2011 and 2016. Compare that to an average overall inflation rate of 10 percent between 2001 and 2016, and you can see that the rising costs have been significant.
But why? Ultimately, it all comes down to rising medical costs, and the complicated negotiations that take place between insurers and providers that obscure the dollar value of our care.
Medical costs have risen significantly over the last few decades, as the population ages, technology advances, and hospitals bear more leverage in reimbursement negotiations. Why do they have more leverage? Because employers buy insurance for their employees, who want access to advanced hospitals and other sites of care.
Hospitals know insurers are trying to include them in-network, which gives them more leverage to set prices. Further, some insurers are for-profit, and even nonprofit carriers have to maintain legally mandated reserves. This keeps them from absorbing the full brunt of the rising costs.
So rising services costs are passed back to the employer through increased premiums and deductibles. Faced with the choice between higher premiums or higher deductibles, many consumers are choosing the latter.
Rising adoption of high deductible plans
So many, in fact, that the insurance lobbying group America’s Health Insurance Plans reports 20.2 million Americans have a high deductible health plan.
But the value of premiums can be quickly overtaken for consumers who wind up owing the full amount of their deductible. They can be as high as $6,000 for an individual and over $10,000 for a family. Many Americans have no or limited savings and are unable to pay their deductibles after an accident or critical illness.
This is also putting a crunch on hospitals, to whom the bills are typically owed, who have seen rising “bad debt” rates, or bills they send to collections or write off as unpaid.
Enter deductible insurance. The coverage is billed as a smart way to protect yourself from your own deductible, and these plans are becoming more widespread, rising in tandem with deductibles.
It’s not a bad idea—for $25 to $50 per month, you could be protected for your full deductible amount. But it does illustrate how our high healthcare costs are forcing consumers to rely exponentially on insurance.
What is the point of health insurance? To protect you from high medical costs. What is the point of insurance that requires its own insurance?
Further, it is not hard to imagine how we get from this point to needing yet another layer of health insurance. If deductible insurance becomes as common as high deductible health plans, claims for the carriers will quickly become unsustainable. Before you know it, they’ll roll out deductibles of their own, or tack on other cost-sharing mechanisms to reduce their risk in insuring your insurance.
The over-reliance on insurance to protect consumers from medical costs is part of what drives the conservative vision for health reform. Many conservative plans would rely more on skinnier, catastrophic health plans, and Health Savings Accounts to pay for care.
But under our current system of inflated medical costs, many consumers would be unable to afford healthcare without relying on robust insurance coverage. Including, as the rise of deductible insurance shows, the insuring of insurance plans.