The $25 deductible: A useful tool or no longer relevant?

The annual deductible in group benefits plans is a long-standing strategy for sharing costs with employees and encouraging more responsible consumption of benefits. But in the current environment of high-cost prescription drugs and epidemic levels of chronic disease, some industry experts say it’s time to move away from deductibles in favour of other cost-management solutions.

‘Killing flies with a hammer’

Canadian benefits plans began using annual deductibles about 40 years ago. They typically range from $25 to $50 for each person covered and up to $100 for a family. Depending on the plan, employees may have to pay a deductible on various group benefits, such as drugs, dental care, orthotics and paramedical services.

“Once upon a time, deductibles were seen as an effective strategy for controlling costs,” says Barbara Carnegie, director of group product marketing for the Empire Life Insurance Co. “But as time has gone on, deductibles haven’t moved and are not really effective, especially when benefit costs have risen dramatically. Even a $100 family deductible doesn’t make much of an impact if all three members of the family are taking medications.”

Read: The impact of Ontario’s public drug program changes on private plans

With many families now claiming several hundred dollars a year for drug benefits alone, a $25 or $100 deductible represents a declining share of the overall costs. Sarah Beech, president of Accompass Inc., notes that when plans began introducing deductibles, they typically didn’t have clauses to keep up with inflation. “If deductibles kept up with inflation, they would be three times the amount they are today according to the current value of money,” she says.

But even if deductibles had kept up with infla- tion, many industry experts suggest they’ve lost relevancy as a dwindling number of plans have kept them. A University of British Columbia study, published in Healthcare Policy, took a look at the issue in August 2013. Using data provided by Allied Management Consultants that looked at the use of key cost-control measures by 113,000 private drug plans, the researchers found that the percentage of employees required to pay a deductible dropped to just 12 per cent in 2010 from 48 per cent in 1998.

“I can’t think of any reason to have a deductible. It’s like killing flies with a hammer,” says Michael Law, an associate professor with the university’s School of Population and Public Health and one of the study’s authors. “Yes, deductibles can save the employer some money since they don’t have to pay the $25, but it is not a way to encourage better consumption of benefits. There are different ways to steer consumer behaviour.”

Read: A look at the prevalence of cost-control measures in private drug plans

More recent statistics from Mercer’s national database of 2,000 Canadian benefits plans show that in 2017, 33 per cent of health plans include annual deductibles, says Julie Duchesne, health business leader for Canada at the consulting firm. “That number was 37 per cent five years ago. There is a similar trend for dental benefits, which went from 20 per cent to 17 per cent of plans requiring a deductible.”

She suggests technology is one factor driving the decline of small deductibles. “Ten to 20 years ago, deductibles were considered a way to limit small claims, which are more costly to administer,” says Duchesne. “But now, claims go directly through the drug card and administration fees are automated, so that isn’t a good reason anymore.”

Alternatives to deductibles

Increasing annual deductibles could be one way to boost their relevancy. In the United States, higher deductibles and out-of-pocket costs are on the up- swing in employer-sponsored health benefits plans. The 2017 employer health benefits survey from the Kaiser Family Foundation found a big jump — to 51 per cent in 2017 from 34 per cent in 2012 — in the proportion of covered workers with an annual deductible of more than $1,000 for single coverage.

Deductibles in U.S. plans are now rising faster than premiums and wages, a trend that puts some employees in a tough position when it comes to accessing health care. Although high deductibles can be an incentive for plan members to shop around for health care, a U.S. study published last year by JAMA Internal Medicine found that employees with high deductibles were no more likely to compare prices or seek less expensive care. Another paper from the National Bureau of Economic Research found that employees with plans with high deductibles were more apt to forgo health care altogether.

Read: Canadian companies face benefits cost sticker shock when setting up shop in the U.S.

The U.S. picture, of course, is very different from the Canadian scenario given that U.S. benefits plans also cover hospital care and physicians’ visits. But the potential impact of asking plan members to pay more for health care is a concern in Canada as well.

“If you had a bigger deductible, you don’t want the less affluent or more sick to have to pay more out of pocket,” says Erin Crump, leader of strategic innovation at Green Shield Canada.

“In many cases, drugs treating chronic conditions aren’t expensive, so the deductible isn’t an issue. But potentially, it could cause someone to not fill a pres- cription. Sure, the $25 deductible is outdated, but if advisors think they need to increase it, they should consider other cost-based strategies.”

Describing an increase in deductibles as simply another form of shifting costs, Chris von Heymann, chief operating officer and co-founder of Cubic Health Inc., says they do nothing to address the underlying pressures plan sponsors are facing. “Shifting the cost of inefficiency in plans to the member isn’t a smart approach,” he says.

“There are so many different ways to remove waste from the system and control costs without simply diverting them to members. You can still provide 100 per cent coverage, just not 100 per cent of everything.”

Instead of deductibles, von Heymann suggests other measures, such as reference-based pricing (requiring the lowest-cost alternative in a therapeutic class), can have a much bigger impact on managing costs. As an example, he suggests that using lower-cost alternative drugs for a single member to treat three common health conditions (depression, hypertension and stomach hyperacidity) can save $2,000 a year. “That’s 80 $25 deductibles,” he adds, noting that generic substitution alone isn’t enough to solve the problem since there are lower-cost alternatives among generic drugs, too.

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Plans can also share costs more equally through co-insurance and plan contributions, Crump suggests. According to the Canadian Life and Health Insurance Association, co-insurance is typically up to 20 per cent of eligible claims but it may run as high as 50 per cent for major restorative dental services or orthotic treatments.

Co-insurance, however, could also potentially lead to hardship for some plan members, particularly when it comes to high-cost drugs. “Even a 10 per cent co-insurance could mean some drugs have a higher financial impact on plan members,” says Crump.

“With some drugs costing $100,000 or more annually, coming up with $10,000 after tax is hard for most people.”

Still, co-insurance remains a favoured cost-shifting mechanism for many plans in Canada. The University of British Columbia study found that while the number of employees required to pay a deductible fell, the requirement to pay co-insurance rose slightly to 61 per cent from 58 per cent of employees between 1998 and 2010.

During the same period, the proportion of employees required to pay dispensing fees rose to 27 per cent from just three per cent. Overall usage of copayments also grew to 79 per cent from 71 per cent of employees. In addition, more employees faced lifetime and annual maximums on benefits.

“Our clients don’t see deductibles as a priority,” says Beech.

Read: A primer on some of Canada’s catastrophic drug programs

“It is more common to go to co-insurance, which can raise awareness and shared accountability. But there is still the concern that some costs are very expensive. One way to manage costs and not penalize people is to put in an out-of-pocket maximum. Some plans are also adding catastrophic insurance, with a $100 or $500 deductible.”

Carnegie agrees that co-insurance and copayments can be useful. “But from my point of view, cost-management strategies should be based on what the goals are for the plan. I’m seeing more movement to managed formularies with prior authorization and step therapy for maintenance drugs. And it is important to have education to engage members and help them better understand costs, to become better shoppers and to better manage their own disease states.”

Major transformation predicted

As employers continue to struggle with finding a balance that saves money but doesn’t have a negative impact on employees, plan members may not like the idea of sharing costs. The Canadian Union of Public Employees, for example, prefers 100 per cent employer-paid benefits. “We think that is the best option for promoting retention and the health of employees,” says Hugh Pouliot, senior communications officer for CUPE.

That type of full coverage, however, is on the wane as fewer plans reimburse claims at 100 per cent with no deductible, says Duchesne. “It is now the norm to add co-insurance, and we are seeing new forms of deductibles, such as per-prescription payments, where the plan member pays the first $10 of each drug claim. That can help control costs. But the $25 annual deductible doesn’t control costs and is not well-received by employees.”

In its case, the Saskatchewan Teachers’ Federation, a professional organization representing 13,000 teachers, introduced a per-claim deductible when its benefits plan moved to an administrative services-only arrangement several years ago. “The arrangement was a big driver to the decision to have a $5 deductible,” says Nikki-Lynn McKeague, manager of benefits.

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The federation, she adds, “has never had a flat annual deductible, as it wouldn’t meet our benefit philosophy, which is to provide equitable access to all. But the $5 deductible is recognized as a lever to help manage costs. It could be increased if drug costs go up or reduced if drug costs ever went down.”

In the future, traditional deductibles are likely to fade away as employers favour different ways to manage costs, says Duchesne. “Benefit plans will undergo a major transformation over the next few years to better manage rising costs and meet the diverse needs of five generations in the workforce, an aging population and rapidly evolving expectations,” she says, citing predictions of a shift away from the traditional group model to a combination of a core insurance program, covering unpredictable and higher expenses, with a more customized and flexible approach that includes a broader definition of lifestyle benefits complemented by a digital consumer experience.

“Deductibles could be part of the transformation but not the way they are today,” says Duchesne.

“An employer that sticks with traditional benefits and looks at deductibles as a way to save costs will miss the boat.”

Sonya Felix is a Vancouver Island-based freelance writer.

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