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Policies that have a deductible inserted in the middle instead of at the front expose enrollees to more risk

The new Medicare prescription drug benefit, to be phased in by January 1, 2006, as well as the latest "consumer-directed" health benefits offer coverage with a deductible inserted in the middle rather than at the traditional front end. These policies reflect the growing trend toward what Meredith B. Rosenthal, Ph.D., of the Harvard School of Public Health, calls doughnut-shaped insurance policies.

A deductible is a dollar amount below which the insurance plan does not share in the cost of health care. Plans use deductibles as a way to reduce the premium cost of an insurance plan and to a lesser degree the demand for health care services. In doughnut-hole plans, the enrollee enjoys (with coinsurance in the case of Medicare) coverage up to a point, bears full risk up to another cut-off (when the deductible kicks in), and then shares with the insurer costs incurred thereafter, typically limited to an annual out-of-pocket maximum.

Critics note that doughnut-shaped "consumer-directed" plans will save money in part by attracting healthier people who don't expect to spend enough money to reach the point when the deductible begins. Dr. Rosenthal, whose work is supported in part by the Agency for Healthcare Research and Quality (HS10803), notes that these plans will be more risky than traditional plans.

Dr. Rosenthal uses a few simple examples from the economic literature on insurance to show that for a given premium, first-dollar deductibles always offer more protection from financial risk than doughnut-hole deductibles. For example, many doughnut-hole plans include sizable deductibles of $1,000 to $2,000 that begin around the mean annual health spending for enrollees. The plans may cover the first $500 or so of health care spending to pay for a set of services that the sponsor is concerned will be forgone by consumers facing a sizable deductible, such as recommended immunizations and other preventive care. However, plans could choose to pay for the highly valued services separately instead of providing an initial lump-sum account that could just as easily be used by the enrollee for therapies of low value, suggests Dr. Rosenthal.

For more information, see "Doughnut-hole economics: Insurance often serves purposes other than risk protection," by Dr. Rosenthal, in the November 2004 Health Affairs 23(6), pp. 129-134.

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