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November 1 marks the start of open enrollment season, when millions of Americans take steps to choose the right healthcare plan for themselves and their families. Consumers will be making key decisions impacting both their financial and physical health amongst a changing healthcare market, rising out-of-pocket spending, and live discussions on how to effectively reform the U.S. health care system. With this context in mind, we reflect on JPMorgan Chase Institute research that informs these issues and provides insights into how families make choices around healthcare.
Our research on medical spending has explored the link between a family’s out-of-pocket healthcare expenses and the rest of their financial life. Drawing on our Healthcare Out-of-Pocket Spending Panel (HOSP), we have investigated the financial pressures of out-of-pocket healthcare spending, the financial burden of extraordinary medical payments, and the role of cash-flow dynamics in enabling consumers to seek medical care. As families consider their coverage options, it is important for policymakers, providers, and payers to understand the relationship between out-of-pocket expenses and how and when consumers seek and pay for medical care.
Our research has shown that broadly, families across the income spectrum tend to experience a high level of income and spending volatility on a month-to-month basis. The typical family experiences more than 30 percent swings on a month-to-month basis in both income and spending. We estimate that families need a liquid buffer of six weeks’ worth of take-home income in order to weather a simultaneous income dip and expense spike. But most families—65 percent—do not have such a financial buffer. Furthermore, out-of-pocket medical expenses can be a key source of expense volatility and financial burden. Even though most people in this country (91.5 percent) have health insurance, we find that one in six families (or 17 percent) make at least one extraordinary healthcare payment (more than $400 and roughly $2,000 on average) in any given year. Paying such a large out-of-pocket sum has long-term financial consequences; even twelve months after making an extraordinary payment, families’ had lower levels of liquid assets and higher revolving credit card balances compared to their pre-payment baseline.
Indeed, as families consider their options for healthcare coverage, they will be making decisions in an environment of increasing out-of-pocket costs. For three consecutive years, from 2014 to 2017, out-of-pocket healthcare spending levels accelerated to a year-over-year growth rate of 8.5 percent in 2017. 2017 out-of-pocket spending was $625 on average, and the healthcare burden increased from 1.6 percent of take-home income in 2016 to 1.7 percent in 2017. Growth in healthcare spending occurred across every state and demographic group. This trend shows no sign of slowing, with the continued growth of high-deductible plans amidst significant support from regulators and payers guided by the belief that consumer cost accountability will rationalize healthcare utilization.
Amid experiences of general household financial volatility and growing out-of-pocket costs, families will make a tactical choice during open enrollment season: selecting a health insurance plan. Our research provides insights that can guide consumers as they navigate this complex decision. First, it is important to realize that the choice of what insurance plan is right for a family really does depend on their circumstances. This is because healthcare spending is incredibly concentrated among a small group of families. The top 10 percent of spenders—those families most financially burdened by out-of-pocket healthcare expenses—spent on average $3,255, which is five times as much as the average spender and represents 9.5 percent of their take-home income.
Moreover, those with high out-of-pocket costs in one year are likely to have similar costs in the subsequent year. Healthcare costs are sticky in that sense, and those with high healthcare costs probably know who they are. For example, women experience higher than average healthcare spend burdens, meaning they spend more on healthcare as a share of their income—about 2 percent. Broadly speaking, families with high healthcare spending may be better off in a plan with a low deductible and broader coverage. Families with low out-of-pocket healthcare spending may consider opting into a high-deductible plan if it has a lower insurance premium.
Families also need to think about their choice of health insurance as having direct implications for their savings behavior. We tend to think about our savings goals as separate from our choice of health insurance plan, but one of the most important things we should be provisioning for is our health, by saving for the out-of-pocket healthcare expense we might be on the hook for. In fact, we observe in the data that liquid assets play a key role in healthcare utilization, and healthcare spending is intricately linked to cash flows. Healthcare spending spikes in months when a family has higher-than-average liquid assets and income; for example, we observe tax refund-triggered spending. In the week following the arrival of a tax refund, out-of-pocket healthcare payments increased by 60 percent. 62 percent of this increase was for in-person care, rather than for healthcare bills for care received in the past. Therefore, people often seek medical care when they have the money to pay for it, not necessarily when they actually need the care, which can ultimately have negative impacts on health.
Families with cash reserves are better able to weather a medical expense than their counterparts without such savings and are less likely to defer health expenses until after their tax refund arrives, reinforcing the fact that healthcare spending is intricately linked to cash flows. Given the importance of a cash buffer in weathering an unexpected expense, when evaluating health insurance plans, families ought to consider whether they have a sufficient financial buffer and the risk appetite to cover their deductible and maximum out of pocket costs stipulated by each plan option. When opting into a high- deductible plan, families should strongly consider opening and contributing to a Health Reimbursement Accounts (HRAs) or Healthcare Savings Account (HSAs), which are tax efficient ways to save for short- and long-term healthcare needs. Regardless of whether families have access to HRAs or HSAs, they should take steps to establish a cash buffer sufficient to cover the deductible, since that is, in effect, the amount for which families are self-insuring.
In light of the challenges families have with out-of-pocket healthcare expenses, policymakers, employers, payers, and providers all have a role to play in helping families make better decisions regarding their healthcare. There are a number of approaches to address these challenges, in particular, they can help consumers manage costs, increase transparency, and reduce prices.
- Increase competition and choice, reduce healthcare prices, and improve price transparency. The geographic view of our data shows high variation in out-of-pocket healthcare spending and burden levels across states and counties. For example, Utah and Colorado had the highest average spending levels, at $864 and $797 respectively, while West Virginia had the lowest average spending level at $495. Our even more granular analysis at the county level illustrates that even within states, there is variation within healthcare spending and burden levels. For example, we see in California that families in some counties have healthcare spending burdens as high as 2.56 percent in Marin County, while others have lower out-of-pocket spending burdens like Imperial County at 0.94 percent. Thus, there is both variability in cost across geographies—but also a sense of uncertainty that consumers face around expected costs. Many families usually don’t know their out-of-pocket liability until after they receive a statement from their provider or benefits explanation from their insurer. This makes it difficult for families to compare prices or “shop around” for healthcare services, let alone plan for expenses, or balance their short- and long-term needs.
Efforts to mitigate this variability, but still encourage choice while keeping costs low have included (1) reducing drug prices, and (2) creating price transparency for healthcare goods and services prior to the point of care to avoid surprise bills. Bringing transparency to the price of health care and disclosing out-of-pocket costs can enable consumers to make healthcare choices before receiving care and prevent undue burden from unexpected and unmanageable expenses. Providers also have a role to play here through efforts to improve access to information, assist consumers in planning, and simplify billing. Simplifying billing can improve transparency and understanding for consumers.
- Help consumers manage costs by expanding access to Health Reimbursement Accounts (HRA) and Health Savings Accounts (HSAs). The theory goes that if consumers have “skin in the game” they will have an incentive to contain their costs and only seek high-value care. But they need help saving for those expenses, and a series of efforts are underway to expand access to tax advantaged accounts to do just that. However, they also introduce a new set of financial decisions that are not easy to resolve. Consumers may face a choice to save pre-tax dollars for health alone that can roll over year-to-year, pre-tax dollars in a flexible savings account which is lost if not used, or post-tax dollars to be spent whenever and will never be lost. It’s challenging to determine which choice is the right one. These complications serve as barriers to take-up and utilization. Additionally, HRAs and HSAs are not available to everyone, further contributing to heterogeneity in the way consumers prepare for and experience healthcare expenses.
Regardless of potential policy proposals on the horizon, the decision during open enrollment is fundamentally a personal one; and our data suggest, it is a financial decision that should be considered in the broader context of one’s financial life. Given the direct implications for how much one should save in reserve for medical expenses, making an informed decision will help to ensure not only one’s financial health but also physical health.