In Defense of Medical Cost-Sharing

There is near consensus that health insurance isn’t working well in America. Why, then, are we so hostile to its alternatives?

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On June 1st 2021, a story broke in the Boston Globe telling one woman’s experience with a cost-sharing organization that ended with her being on the hook for $75,000 in medical bills. This story, and others like it, really bother me. But not in the way you might think.

Let me pause briefly to issue some disclaimers because if I don’t, a subset of my audience will think my commentary on the matter to be tone deaf or outright distasteful.

The situation this woman now finds herself in is absolutely horrible. The hospital that billed her $75,000 for the procedure and her 4-day stay almost certainly overcharged her. A seventy-five grand bill is an outrageous sum; one almost guaranteed to be financially ruinous. Make no mistake: Betsy Hargreaves is in an unenviable position, and I hope the publicity this story generates will bring her the assistance and relief she so desperately needs.

However, the media’s black-and-white depiction of these stories—where cost-sharing organizations are pilloried as villains—is just not accurate. Situations like these are complex and genuinely difficult to parse. And I don’t believe for a moment that the Globe intentionally misrepresented this story. At the same time, it’s important for those who can to set the record straight on medical cost-sharing since we cannot seem to be able to trust health policy experts or journalists to treat the subject fairly.

Pre-Existing Confusion

At issue in Hargreaves’ story is that her medical cost-sharing organization, OneShare Health, denied reimbursing her for a double-hip surgery. OneShare did so on grounds of the procedure being related to a “pre-existing condition.” Hargreaves appealed and OneShare rejected the appeal, citing her medical record which showed she began experiencing hip pain roughly a year before she switched from her old insurance plan to medical cost-sharing (roughly two years prior to the surgery itself).

It’s worth lingering on pre-existing conditions for a moment. Even though medical cost-sharing is not classified as insurance (cost-sharing organizations are abundantly upfront about this for reasons I’ll discuss later), it does share the feature of pooling risk among many individuals. This means that any cost-sharing organization that doesn’t plan on going under must stipulate certain restrictions on new entrants. To protect the integrity of sharing the risk, and to discourage people from hopping into a medical cost-sharing group just before they’ll require substantial financial assistance.

In this way, medical cost-sharing does exactly what health insurers did before the Affordable Care Act (ACA). They protect themselves from adverse selection; that is, from selecting members of their risk pool who will adversely affect it.

ACA proponents love to advertise that ACA-compliant health insurance plans cannot discriminate against people with pre-existing conditions. Unfortunately, simply saying something doesn’t make it so. Traditional health insurers cannot blatantly discriminate against individuals with pre-existing conditions but, in exchange, effectively discriminate against everyone in their book of business equally. That’s because the financial risk associated with pre-existing conditions didn’t simply evaporate into thin air when President Obama signed the ACA into law in 2015. No, the financial burden was merely veiled and spread invisibly throughout the entire risk pool by a mechanism known as “Community Rating.”

Because of Community Rating, if I purchase an individual plan through the state Exchange (like Hargreaves originally had), I will pay the same monthly premium as any other 26-year-old in my area regardless of any health differences between us. Past, present, or future.

This feature is of obvious benefit to those with enormous medical burdens. And distributing the financial risk of society’s sickest individuals across the entire group very well may be a laudable goal in and of itself, as a matter of protecting our most vulnerable (who, in a different world, might have been us) and of purchasing some semblance of equity in an unjust world.

Reasonable minds can disagree about whether this is the best way to handle pre-existing conditions, or other related questions of healthcare ethics. And in the interest of a fair-minded discussion, I won’t insert my own private politics by betraying which side of the fence I come down on.

My point is simply this: Expensive pre-existing conditions exist and it’s not obvious what to do about them. However, pretending like they don’t exist by banning underwriters from taking them into consideration when assigning premiums is not a viable long-term solution. It is directly responsible for the unrelenting ascent of health insurance premiums which have increased 22% over the last 5 years and 54% over the last 10.

Under the ACA, health insurers lack an incentive to keep insurance premiums down and have a convenient excuse (pre-existing conditions) to continually raise them. Soon everyone is equally priced out of the market for ACA insurance. Could this be the reason why Betsy Hargreaves pivoted toward medical cost-sharing as an alternative, non-traditional form of catastrophic protection? Likely so.

Caveat Emptor (Latin for “Let the Buyer Beware”)

According to the Globe’s article, Hargreaves had an ACA insurance plan “through a broker since 2015” but “switched to OneShare at the beginning of 2020” because “her [insurance] premiums [had risen] significantly.” The switch saved her “hundreds of dollars” per month.

This begs an obvious (but apparently uninvestigated) question: “If medical cost-sharing is less expensive by a few hundred dollars every month, did Hargreaves expect nothing to be materially different about it?”

The reason monthly cost-sharing contributions are so much lower than premiums for a comparable ACA-compliant insurance plan is precisely because of the differences between them. Cost-sharing organizations are upfront and unambiguous about not being insurance, as the ACA defines and regulates it. This disclaimer is not intended to shield them from liability or to allow them to say “nothing is guaranteed,” as critics often allege—implicitly if not explicitly. Not being ACA insurance is a meaningful classification because of the way it enables cost-sharing members to access low-cost care, which in turn keeps contribution amounts low for all members. Allow me to explain.

When I step into a doctor’s office that takes insurance, the first question they ask me is if I am insured. Why? When I got my first and second COVID vaccine, why did I have to check a box each time to certify that I did not have any type of insurance plan? If I were to get into an accident and were rushed to the hospital, why would the most interesting piece of information about me be which insurer I had coverage with?

Here’s why: Hospitals, facilities, clinics—any provider of medical services you interact with—make most of their money through payments from private insurance. In many of the contracts between health systems and private health insurers, there are non-discrimination sections referred to as “Most Favored Nation” clauses which specify, in no uncertain terms, that the health system is prohibited from offering a better deal to another contracted party. If the health system gives it to anyone else, the MFN clause kicks in and the hospital is required to give that very same price to the insurer. Otherwise, the health system has breached contract.

Some scholars have pointed out the anticompetitive effects of MFN clauses. I think the case for that is very strong. It’s certainly one reason why cash pay rates are almost always lower than “negotiated” prices between health systems and insurers. And it is precisely these low cash pay prices that members of medical cost-sharing organizations can access. An opportunity that does not present itself so easily to someone on an ACA insurance plan.

Consider the following real-world example: Christopher Habig, CEO and Co-Founder of Freedom Healthworks, and his wife had their first baby last year. The hospital billed $42,000 to their insurance company, of which Chris’s new family was required to pay $11,000 out-of-pocket. Chris and his wife paid $800/month for the privilege of being exposed to that kind of financial hit through ACA insurance.

Round Two. Chris’s family grows again in 2021 (Congratulations is in order!). This time, the Habigs are a little wiser. They have since dropped their ACA insurance and become members of a medical cost-sharing group called Zion Health. The cost-sharing plan Chris chose expects him to pay the first $1,000. But this time, as an uninsured patient, he received an upfront cash price for $7,300 all-in (assuming no labor & delivery complications). Zion Health’s many members will share in the remaining $6,300, together. And for the record, I doubt Chris’s family pays anywhere near $800/month to protect themselves from catastrophic medical bills. (Zion Health’s family package is $570/month with an additional discount for members who have a DPC doctor)

Set aside all other differences between ACA insurance and medical cost-sharing for a moment. The cash pay opportunity alone, accounts for almost the entire “story” behind why cost-sharing is a more affordable alternative to insurance.

It also points directly at a core difference that seldom gets mentioned in media coverage or health policy discourse: Medical cost-sharing members are expected—quite explicitly—to be proper healthcare consumers. To always ask for cash prices, to shop around aggressively when possible, and to never accept a medical bill at face value. The inconvenience of one for the good of the many. For example, here’s an excerpt of Sedera’s Member Stewardship Responsibility:

Joining a medical cost-sharing group isn’t just choosing a product. It’s an affirmative commitment to self-select into a conscious, likeminded group of individuals who understand that the only way to pay less for catastrophic medical protection—insurance or otherwise—is to pay less for the healthcare itself (more about this idea in my last article).

When critics badmouth cost-sharing organizations, they typically write some version of “buyer beware” or “they didn’t understand what they were getting into.” Hargreaves’ story is a “cautionary tale,” according to a Suffolk Law professor quoted in the Globe's reporting. These statements are true in a literal sense. Upon closer inspection, however, the way the words are written intimates something suspicious, suspect, and perhaps even sinister about a voluntarily exercise of one’s own freedom of contract.

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In Hargreaves’ case, she sought counsel from her insurance broker on whether making the switch was a good idea. It is only logical to presume that the broker OKed it after examining her situation and helped her transfer her affairs over to cost-sharing. How this crucial detail managed to escape the scrutiny of the Globe’s Consumer Advocacy reporter is beyond me. (I know a thing or two about consumer advocacy, having worked for a non-profit that advocates investor protection for 6 years)

Does Hargreaves’ broker not bear any responsibility for failing to caution her, a 58-year-old “longtime” athlete with hip pain, against switching from her existing plan? Does she not bear any responsibility here? At what point does paternalistic consumer protection end and personal responsibility begin?

When assessing the aftermath of Hargreaves’ situation, it’s important not to lose sight of the most important detail: The price tag. Her double-hip replacement did not have to cost $75,000. If she had searched Google for a transparently priced facility, she would have come across a transparent, all-in quote of $15,499 x 2 at the Surgery Center of Oklahoma.

Again, please understand. I’m not asking her to be omniscient nor am I victim blaming. Trust me, I know how hard it is to shop for healthcare in this country. But attempting to find a lower-cost alternative to an exorbitantly priced surgery is part and parcel of the medical cost-sharing bargain. It comes with the territory.

Medical Cost-Sharing Isn’t for Everyone. And Nobody Understands This Better than the Cost-Sharing Community

None of what I have said here should be misconstrued as an uncompromising endorsement of medical cost-sharing. Like anything else, cost-sharing organizations have limitations:

• Because they are exempt from strict oversight by the Department of Insurance, one must always take care to verify their financial solvency.
• Many (though not all) are religious ministries, which can result in a misalignment of values and a denial of cost-sharing for health needs viewed as inconsistent with The Faith. Sedera and Zion Health stand out as secular cost-sharing options.
• Policies on cost-sharing for counseling, therapy, and mental health needs—specifically the lack thereof—should give certain individuals/families pause.
• Pre-existing condition limits may make it financially unfeasible for individuals with chronic illnesses or other extenuating circumstances to make it past the initial years where there are defined limits on cost-sharing for those expenses.

If you ask cost-sharing representatives a few pointed questions on these limitations, I suspect you will find they are quite upfront about the distinctions from ACA insurance and its potential drawbacks. These representatives understand that in order for the cost-sharing community to thrive and stay afloat, they need behavioral buy-in from educated, informed members.

Cost-sharing organizations simply can’t afford to onboard members who don’t understand how the process works. They'd cease to exist if they did. Unlike—I feel obligated to point out—health insurance companies, who have in effect built a business model around customers not understanding how their policies work.

Double Standards

I want to make this last point briefly because this article has stretched on long enough. But my analysis wouldn’t be complete without closing out an important point raised by the previous paragraph.

The asymmetry in expectations between cost-sharing and ACA insurance is staggering. Customers routinely fall prey to the fine print of an insurance policy or are outright mistreated by an insurer. I’m not saying there isn’t any media criticism of ACA insurance. That would be absurd. However, the criticism leveled against insurers is confined to the details of the case. It does not rise to the level of indicting the system itself—as I see commonly in criticism of cost-sharing.

Furthermore, it is difficult not to see a vicious double standard emerging when I see medical cost-sharing being dismissed with back-of-the-hand language like “nothing is guaranteed.” As if insurance companies don’t routinely deny coverage for any number of inscrutable reasons, with confused and frustrated patients left holding the bag. A 2011 report found that in California (perhaps the state with strongest consumer protections apart from New York), health insurers denied 13.1 million claims—26% of the total—in the first 9 months of 2010 alone.

"Compared to What?"

As a student of economics, I have been trained to evaluate all systems and situations by reflexively asking the question: “Compared to what?”

Journalists, health policy experts, and healthcare commentators would do well to contemplate this question the next time they are tempted to present medical cost-sharing in a dim light.

I, for one, am glad that I can survey the shortcomings of ACA insurance, ask “Compared to what?”, and actually have an alternative to choose. We all deserve to have a choice in how we finance our healthcare.

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You can download a PDF of this article here.

Disclaimer: None of the information in this article should be misconstrued as professional advice. It is merely my perspective on an emerging and ongoing trend within the employee benefits industry at large and should be understood purely in that context.

Neither Wincline nor I have any financial relationship or professional affiliation with medical cost-sharing organizations, consistent with our identity as fee-only benefits advisors who receive 100% of our compensation from our clients. I have recently become a member of Sedera myself. That is the full extent of my affiliation with medical cost-sharing, so I have no conflicts of interest to disclose.