Here’s Why This Healthcare Economist Likes High-Deductible Plans

In this series, MedPage Today is asking healthcare economists and policy experts the same questions about the high costs of U.S. healthcare. They’ll reveal what they believe is working, what’s not working, and what else can be done to bring costs down.

In this interview, Stephen Parente, PhD, MPH, chair of health finance at the University of Minnesota, who served on the U.S. Council of Economic Advisers during both the first Trump administration and the Biden administration, says he likes high-deductible plans because people need to “have some skin in the game.”

“A serious event like a cancer diagnosis, they might be out $10,000, but the lion’s share of recovery that will cost $300,000 will be paid,” he said. “My benchmark is that if the out-of-pocket payment is less than the base model Kia, then we’re okay.”

What has been the greatest contributor to high healthcare costs in the U.S.?

Parente: Probably the greatest contributor is the relatively higher prices that we have in the U.S. compared to most other countries. It’s well documented that many of our providers … get paid more than others. And there are also more of our folks [that have jobs] in the healthcare industry than in other places. That probably contributes to the lion’s share of it.

Has physician pay contributed to high costs?

Parente: It has … but with a big caveat. If you look at the average salary for an internal medicine physician … it might be a little higher in the U.S. compared to most other industrialized countries, say Germany or France. But where there really is a difference is in the specialties. So there are not many instances where physicians say, even in Switzerland, would be earning more than a million dollars, whereas in the U.S., that’s quite common, whether it’s orthopedics, anesthesiology, radiology, oncology. They’re really vital specialty areas, but they’re also ones that have a much higher net payment to physicians than most others.

Have administrative costs contributed to high costs?

Parente: It definitely is a factor. I wouldn’t say it’s the most overwhelming factor. It’s hard to quantify these things in different countries.

Just through our insurance system and third-party payments, whether or not it’s through Medicare or Medicaid, we pay more to process the money that keeps our healthcare system operational. Whereas if you look at the U.K. or other countries, there’s a central budget model. It’s collected through taxation. People are paid salaries. There might be some elements of public insurance that’s associated with it. But they’re generally government-run and a little more efficient.

One thing to keep in mind, too, is while we say Medicare is very efficient, it’s important to understand that Medicare itself does not pay any claims. Medicare contracts out all of its claims payments to this entire ecosystem of private health insurers and has since its inception in 1967. And that cost is never adequately accounted for when we talk about all the administrative savings that, say, a Medicare-for-All plan would have.

What is the best solution you’ve heard for lowering the cost of healthcare?

Parente: I think people need to … have some skin in the game. They need to have some coverage for something that’s serious and catastrophic. They need to have some coverage for preventive care. But by-and-large … people should be paying out of their own pockets.

I’m a big fan of high-deductible health plans. They are, by their design, more affordable because it’s just like car insurance. If you have a higher deductible car insurance policy or homeowners policy, your premium is less. They’re more affordable. But there are rules in the Affordable Care Act that say that even if you have a high-deductible policy, there still needs to be coverage, pre-deductible, for office visits and certain preventive services and tests. I actually worked on policy so that in addition to primary coverage, secondary coverage — meaning if I have diabetes, I can get insulin pre-deductible for free or at a very low cost — that was something that came about 5 or 6 years ago, but it’s not talked about quite as much.

Those types of things typically put into check this issue that I and other economists talk about, moral hazard, where it’s like the benefit designs are too generous if they have first-dollar coverage all the way through. It’s just a statistical fact that if you have a high-deductible health plan, the premiums will be less, consumers will be more engaged. A serious event like a cancer diagnosis, they might be out $10,000, but the lion’s share of recovery that will cost $300,000 will be paid. My benchmark is that if the out-of-pocket payment is less than the base model Kia, then we’re okay.

[It has to be] combined with price transparency. If we’re actually going to have this work like a market and give people the incentives to shop for things … the Trump administration and the Biden administration, too, has tried to make that information more available. It’s just that we haven’t really gotten to that point where what we see on Amazon or Expedia allows us to buy things as easily as what we see in the marketplace today. But it’s coming, I’m hoping.

Would greater transparency in pricing help bring costs down?

Parente: Greater transparency at the margin can definitely bring costs down for consumers. Full disclosure, I’ve worked in this space wearing three different hats — an academic hat, a government hat, and an entrepreneur hat. I actually have an app that anyone can use called MyMedVita. What we’ve tried to do is take what CMS defines as shoppable services — there are 70 of them. This is where the money could be saved. Those shoppable services account for about 10% of spend in healthcare dollars.

The truth is, most consumers are just not used to thinking this way. … They don’t think of it the way we think about shopping for lawnmowers or anything else. But what I’m hoping is, eventually … let’s appeal to the digital natives while they’re young and they’re shopping and they’re relatively healthy and they don’t need that coronary artery bypass. Let’s see if they get it and then tell their friends and family, why are you paying so much money? Check out this [app] instead.

As an academic and someone who’s been evangelical about this, what frustrated me was that I played a role in getting that data out there, but just saw that no one was using it for years.

Would having a single payer help control costs?

Parente: I think a single payer would probably help control [costs], but the question is how that single payer is going to operate. The most extreme illustration of a single payer controlling costs is the British National Health Service. … A certain percent of GDP [gross domestic product] is allocated. There are different ways that the money is incentivized with general practitioners, but for the most part, it’s a central budget model. It’s predictable. But there’s also the potential for rationing as well, depending upon where people flex in their budget.

The other model people talk about is Medicare for All. Taxation comes in, money goes out. The question then becomes, if it is that system, how generous is the design? Is it first-dollar coverage or are there other criteria for it? The thing that people have to understand about Medicare for All is that if it truly operates under the Medicare fee-for-service rules, it’s a very expensive system to operate because there is no medical management. There’s no utilization management. There’s no disease management that you’d see in managed care, by law. It sticks to the original 1967 statute that more or less says the physician’s decision is sacrosanct.

Another opportunity is instead of Medicare for All, do Medicare Advantage for All. That would effectively take the system that we have now that people are generally comfortable with, put them into a bid structure for their plans, have performance metrics, have some utilization management, and probably would work better. Then again, there’s a question of budget constraints that people have to worry about too.

Will artificial intelligence (AI) be able to help control healthcare costs?

Parente: I think AI has potential to help control costs. There are certainly some ways that AI can play a role to help consumers navigate benefits and other things better. But there are still some realities that FDA has not really weighed in on, [such as] to what extent AI can replace a practitioner.

I think what people are most excited is about drug discovery, new innovations, things that people haven’t seen before. And there we have a problem because to make these things work, like a large language model, the more data, the better to find those edge cases that really show something that really might be never seen before. And our data, while it’s electronic for healthcare, doesn’t move that freely. You know, this is where the hospital systems that invest in Epic or something else like that are more or less closed wall systems. There is the possibility, you know, Epic allows for the data to be linked, but it’s not ubiquitous.

We as a culture are very concerned about privacy of our data, particularly medical data. Other cultures are not. And so not naming countries per se, but to the extent that the data flows more freely to a large language model that looks at all medical records and imaging, and ours doesn’t, that could be a strategic disadvantage to us.

Other Interviews in This Series:

Price Controls ‘Inevitable’ in U.S. Healthcare, Economist Says

Hospital Prices Drive High Healthcare Costs, Economist Says

Single Payer ‘Hands Down’ the Best Way to Solve High Healthcare Costs, Advocate Says

AI May Drive Health Costs Up, Doc-Economist Says

Maybe Doctors Could Price Shop Services on Behalf of Patients, Economist Says