Anatomy of a policy failure

How high-deductible health insurance plans, touted by free marketeers, caused the medical debt crisis and degraded public health.

The 2003 Medicare Modernization Act, best known for its senior citizen drug plans, also encouraged the rapid expansion of high-deductible health plans (HDHPs). It allowed people, mostly well-off, to put pre-tax earnings into health savings accounts (HSAs) – the equivalent of an IRA for out-of-pocket health care expenses.

The “purported advantage of HDHPs” was that they would “lower health care costs by causing patients to be more cost-conscious,” a contemporaneous Commonwealth Fund analysis said. Since people would be spending their own money on the high deductible, which currently is defined as the first $1,600 a year in expenses or more, they would quickly learn to shop around for the lowest priced health services.

The Heritage Foundation has been peddling this ridiculous idea for more than two decades—ridiculous because no patient/consumer has the foggiest notion of what the price of services are, despite a legal requirement that these must be posted somewhere on hospital websites. This rightwing repository of extremist libertarian thought, funded mostly by oil money, recently issued its blueprint for dismantling a wide range of federal policies, including Obamacare, during a second Trump administration.

Despite warnings that putting people on the hook for first-dollar coverage would lead many to self-ration care and worsen health outcomes, employers rapidly expanded their HDHP offerings. No surprise there. Businesses profit from HDHPs because they cost less than their traditional plans. They leave it to their employees to pick up a larger share of costs when they get sick.

Employers encouraged their employees to switch to HDHPs by setting monthly co-premiums well below that of their traditional plans. Many lower income people jumped at the opportunity to lower their monthly out-of-pocket cost. Many employers also contributed to their employees’ new HSAs, which put at least some cash into an account reserved for unexpected health care bills.

Given those incentives, people flocked to HDHPs. Between 2004 and 2013, the share of privately-insured workers choosing HDHPs more than doubled to 18 percent, according to the Employee Benefits Research Institute.  People buying individual plans on the Obamacare exchanges followed a similar path. More than a quarter of enrollees last year purchasing bronze plans, which cover only 60% of health care costs and usually come with high deductibles.

The bill eventually comes due

This HDHP marketplace experiment has turned into a disaster for family finances and for public health. “It’s not some accident that insurance has over the last 20 years become more and more out of pocket, which makes it essentially useless once it hits you,” Ruth Landé, vice president for provider relations at Undue Medical Debt, told an online forum sponsored by the Lown Institute this week. The non-profit helps people escape medical debt.

The Census Bureau recently estimated 20 million people or one in 12 adults owed money for past medical services, a collective debt of $220 billion. About 14 million people owed over $1,000 and three million owed over $10,000. If one includes health care debts carried on credit cards and owed to family members, over 40% of U.S. adults are burdened with health care debt, according to a Kaiser Family Foundation poll.

The people most harmed by rising medical debts are low- and lower-middle income and disproportionately minority. Their meager savings evaporate when hit with huge medical bills. It damages their credit scores, which limits their access to housing and car loans. It reduces their employment prospects when unemployed.

Adults with medical debt are far more likely to skip or delay medical care due to cost concerns. They may cut back on food, utilities and other necessities. They report high levels of stress, which can lead to greater health problems. Fully 60 percent of those with medical debt say their mental health deteriorated while in debt, which strains relationships and lowers self-esteem.

The problem of skyrocketing medical debt has drawn intense scrutiny from the nation’s health care press with Kaiser Health News taking the lead. The non-profit news agency (no connection to Kaiser Permanente) has run dozens of stories over the last two years highlighting the problem, often based on anecdotes from reader submissions through its website. (You can find the submission form here.)   

Reform efforts moving slowly

Yet not much has changed, at least at the federal level. The Biden administration is limited in what it can do without control of Congress. Last September, it announced plans to bar credit agencies from including unpaid medical bills on credit scores. Late last month, the Consumer Financial Protection Bureau issued a report documenting the problem, the first step in what will undoubtedly be an extended rulemaking process.

Meanwhile, Bernie Sanders (I-VT) and Jeff Merkley (D-OR) in the Senate and Rho Khanna (D-CA) and Rashida Tlaib (D-MI) in the House this month introduced Medical Debt Cancellation acts. The bills would eliminate existing medical debt and limit accrual of future debts by reforming provider debt collection practices.

Their legal handle is the fact that 80 percent of hospital beds in the U.S. are run by non-profit institutions, which by law are required to provide charity care to those in need to maintain their tax-exempt status. Last year, the National Consumer Law Center and over 50 other groups urged the CFPB and IRS to bar non-profit, tax-exempt hospitals from aggressive debt collection practices.

States under Democratic Party control are moving more quickly. “Seventy five percent of medical debt is hospital debt, so if you want to solve the problem, you have to deal with hospital behavior,” said Elisabeth Benjamin, vice president for health initiatives at the Community Services Society of New York, which knit together a coalition of 50 organizations to press for incremental reforms in Albany.

New York reforms enacted over the past few years included capping interest rates on medical debts at two percent; prohibiting liens on homes or wages; and banning the inclusion of medical debts on credit reports. “Work the punch list and we proved you can win,” she said.

Some states have begun using federal COVID emergency funds to buy up medical debt at pennies on the dollar, thus lifting the burden from some of their lowest income residents. Undue Medical Debt uses charitable contributions to pursue the same strategy. A year ago, it helped Cook County, Illinois, abolish over $280 million in medical debt through a county-wide medical debt relief program.

Most health care is not discretionary

None of these incremental reforms get at the root cause of the rising medical debt burden, which is the very existence high deductible plans. The only people for whom they make sense are the very well-off without chronic medical conditions.

When an expensive illness like a heart attack or cancer strikes the upper middle class, they can usually afford the first few thousand dollars of expenses incurred under a HDHP. Poorer people cannot. When they are in a HDHP and get seriously ill, they are rewarded during their recovery with a mountain of bills they cannot afford to pay.

The idea that people in HDHPs would begin shopping for services and drive down prices was bogus from the start. Less than 40 percent of health care spending is considered “shoppable.” As I wrote a decade ago in an editorial in Modern Healthcare, no one on an ambulance gurney during a heart attack says to the EMTs, “Let’s go shopping.” The highest bills and a third of all health care spending are incurred in hospitals, whose costs, even for a single day at an in-network facility, are well beyond the maximum out-of-pocket cost of an HDHP.

What’s needed is a strict limit on out-of-pocket expenses – for every American. It can be legislated as a percent of annual income: Out-of-pocket expenses must end once they go beyond five percent of income in any given year. Plus, there should be bans on hospitals and other providers using collection agencies or filing liens to recover on unpaid bills until they have extended clear, easy-to-use charity care programs for people harmed by the widespread adoption of high-deductible plans.