Health Care’s Coming Crisis: Out-of-Pocket Costs

Soaring deductibles, co-pays and other costs will be the next big debate in health care.

Americans have a lot to gripe about when it comes to health care. But there is one very legitimate complaint: the rising cost of co-pays, deductibles, what individuals pay for insurance premiums, and other out-of-pocket (OOP) costs that has remained largely overlooked, thanks to continuing battles over other issues such as Obamacare.

U.S. health care spending now amounts to a mind-boggling $3.3 trillion per year. But if total U.S. health-care spending has risen stratospherically, OOP costs are shooting into outer space. And the rising burden of these costs will be – and should be – the next big health-care issue for consumers and policymakers.

The percentage of the typical American’s income spent on OOPs – a tame acronym for a phenomenon that smacks more of profit-driven intent than a minor mistake – has nearly doubled, from 5.3 percent a decade ago to 9.6 percent today, hitting lower-income Americans especially hard, according to the consulting firm Deloitte. During the same period, the average deductible has risen by 130 percent to $1,318 in 2015, with a quarter of workers now in high-deductible plans costing families an average of $4,332 per year, and the average cost of premiums has increased by 60 percent, according to the Kaiser Family Foundation and the Commonwealth Fund.

As a result, Americans already under financial strain are finding themselves in even more dire straits. At least one in seven Americans skip treatment because of high OOPs, according to the Corporation for Enterprise Development, and 63 percent of Americans don’t have enough savings to cover $1,000 in co-pays for an emergency room visit.

Why are OOP costs rising?

Increased cost-sharing by employers is one factor, although the role of employers in this morass is complicated. On the one hand, they have been hit by rising premium costs charged by insurers, making non-wage labor costs grow while arguably making wage increases more difficult. On the other hand, they are passing along more of the total premium costs to their workers. For Americans whose employers provide insurance, the average family premium is $17,545, with employees contributing $4,995, according to Kaiser. Some, on both sides of the aisle, say that Obamacare’s “Cadillac Tax” – which is an excise tax on high-cost plans that is scheduled to take effect in 2018 – will incentivize employers to switch to plans that will increase “cost-sharing” with their workers.

Co-pays for doctor visits and prescriptions drugs, which half of Americans and 90 percent of the elderly take, also have been rising. After deductibles are met, the average worker pays a $24 copay for a primary-care office visit and $308 for a hospital admission.

Insurance industry consolidation may also be contributing to rising premiums and OOP costs. Once a patchwork of small, local companies, the $900-billion-a-year private health-insurance industry has been consolidating and growing at lightning speed. UnitedHealthcare (UHC), Anthem, Aetna, Cigna, and Humana are all Fortune 100 companies, and these, together with the Blue Cross Blue Shield association of insurers, accounted for 83 percent of the market in 2014.

Third, the prices charged by providers are rising as well. Pharmaceutical companies and for-profit hospital and nursing-home chains keep raising prices, knowing that someone will pay. Prescription drug prices rose by more than 10 percent in 2015, with copays also rising; a quarter of Americans taking a drug said that they were hard to afford. One recent study found that hospitals mark up prices for common procedures by anywhere from two-and-a-half to 12 times what Medicare has determined is an “allowable cost.” The current “fee-for-service” system also encourages providers too order too many tests and procedures, because they are paid for services, not outcomes – and the public generally has been conditioned to ask for more than they need. Government policies like excluding employer-provided insurance as taxable income and barring Medicare from negotiating drug prices also play a part.

To the extent that economists have argued that increasing out-of-pocket costs would rein in Americans’ “overconsumption” of health care, this is no longer the case. Untreated illness will reduce productivity, hurting the economy. And, if more Americans don’t get needed care and become both indigent and critically ill, ultimately Medicaid – read, the taxpayer – is likely to have to pick up an even larger tab.

It’s not surprising that the problem of high out-of-pocket costs is becoming a hot political topic. A December poll found that 62 percent of Republicans and 67 percent of Democrats want candidates to address the issue. Former Secretary of State Hillary Clinton has proposed creating a new tax credit of up to $5,000 to help families pay high out-of-pocket costs, requiring insurers to cover three doctor visits each year before people have to pay to meet their deductible, and capping monthly out-of-pocket costs to $250 per month. And Sen. Marco Rubio (R-Fl.) has called for a refundable tax credit that all Americans could use to purchase health insurance.

But the most significant action so far has been at the state level, as a Cap the Copay movement has won victories in both blue and red states. Measures to cap an individual’s monthly co-pay at between $150 and $500 have become law in California, Maryland, Louisiana, Montana, Delaware, and Vermont, and bills are pending in Kentucky and Illinois.

Given the many factors contributing to rising health care costs, simply capping co-pays is unlikely to be a silver bullet. Insurers say, for example, that the likely result would be even higher premiums. But as a growing number of voters start tuning in to this concern, politicians would be wise to devise solutions that won’t create more problems than they solve.

Andrew L. Yarrow

Andrew L. Yarrow is the author of recent books such as Thrift and Measuring America. He is a public-policy professional, historian, and writer whose articles and books have focused on the relationships between economics, culture, and politics. See: www.andrewlyarrow.com.