Picwell Blog

Is the Lowest Cost Health Plan Always the Best Option? (Part 2)

Sep 29, 2022 2:46:25 PM / by Picwell

So far we’ve reviewed how preferences and financial wellness impact employees’ benefits selections and as a result, why the lowest cost plan is not always the best option.

Before going any further, let’s clarify what we mean when we talk about the “lowest cost option”.  We are not talking about the plan with the lowest premiums. Rather, we are talking about the plan that has the lowest total cost after adding up premiums, predicted out-of-pocket costs and employer HSA contributions, where applicable. 

Now that we’ve got that definition out of the way, let’s take a closer look at how some different factors influence when the lowest cost plan is - and is not - the best option for your employees.

When the lowest cost option IS NOT the best plan

Picwell will not give the highest score to the lowest cost option whenever we identify cases where an employee can get more value by spending more.  As we’ve covered on earlier posts, employees’ risk aversion and financial situations both influence the value that they get from different health plan options, but characteristics of the options available to each employee will also affect how likely it is that we would recommend the lowest cost option.

Personal Factors 

First, let's look at how personal factors impact the types of plans that Picwell recommends.  The graph below shows how often the lowest cost plan is also the top scoring plan based on employees’ varying levels of risk aversion and capacity to pay for unexpected medical bills.

best plan graph

Each line represents a different level of risk aversion, and for each level of risk aversion, the points along each line represent different levels of capacity to pay for unexpected medical bills. Two things immediately jump out when we look at this graph:  

  • When risk aversion is higher, we are less likely to recommend the lowest cost option.
  • When capacity to pay is lower, we are less likely to recommend the lowest cost option.

Those who have low risk aversion and the highest capacity to pay represent the employees who place the least value on additional risk protection and are best prepared to deal with the risks of surprise medical bills. For this segment, we recommend the lowest cost option 92% of the time. 

At the other end of the spectrum, those who have high risk aversion and the lowest capacity to pay include the employees who both get the most value out of additional risk protection and have the greatest financial need to limit exposure to high, unexpected costs. Among these employees, we recommend the lowest cost option 69% of the time.  That’s still a lot, and we’ll talk more about that later, but it’s quite a bit different from what we would recommend to people who place little value on added risk protection.

When the lowest cost option does not have the highest score, that means Picwell is telling employees that, based on their preferences and financial situation, they would be better off spending more on average, because the employee will get more value from a plan that gives them some extra risk protection.

Benefit factors

In addition to employees’ personal factors, the characteristics of the benefits available influence how Picwell scores plans. For example, we see that when employees have more health plans to choose from, Picwell is less likely to recommend the lowest cost option.

As the graph below shows, when only two options are available, the lowest cost option almost always receives the highest score, but Picwell recommends the lowest cost option less and less as the number of options increases. We also see that this relationship becomes stronger as risk aversion increases. This means that when employees have more options to choose from, they are more likely to find a plan that better matches their preferences. This is especially true for people who place a higher value on risk protection.

best plan risk aversion graph

So what does this mean for your organization?

This shows that when a larger variety of benefits is offered, they will better serve the needs of the two-thirds of employees who are more risk averse.

When the lowest cost option IS the best plan

So far, we’ve looked at how personal factors as well as the characteristics of the benefits offered can impact whether the lowest cost plan is, in fact, the best plan. One of the things that you can see from the data that we’ve covered is that, even after we account for a lot of these factors, the lowest cost plan is still the best plan a pretty large share of the time. For example, even among the most risk averse, most capacity constrained people, the lowest cost option had the highest score 69% of the time.

Why is that? Let’s start with a couple more obvious cases. 

Low risk employees

Your employees might just be really healthy and not need much health insurance. One of the central components to our decision support technology is a machine learning model that calculates the amount of risk that employees will face in each plan. If your employees look like they are pretty healthy, then, even if they are very risk averse and capacity constrained, Picwell is still likely to recommend the lowest cost plan. 

In this case, we are essentially saying,
“We hear you. We understand that you place a lot of value on risk protection, but we’re here to show you that the risk that you face is pretty low, so this is a good opportunity for you to save some money.”

It costs too much to buy up

Another case that we often see is that, even though an employee may place a high value on more risk protection, the cost of “buying up” and choosing a more comprehensive option is just too high to ever make it worthwhile.  Sure, an employee might like more extensive medical coverage, but we can’t assume their willingness - and ability - to pay more for that extra coverage is limitless.

There are a couple of other, less obvious, factors that we frequently see when we recommend the lowest cost plan in spite of strong preferences for risk protection.

The more expensive plan isn’t actually better

In a lot of cases, we see sets of health plans where the more expensive plans don’t actually do a better job of limiting the financial risk to employees. In these cases, the more expensive plans might look better at first glance because they do a better job of covering ‘low stakes’ medical care (like routine office visits and prescriptions), but they still expose people to really high cost sharing for bigger ticket items like emergency care, hospitalizations and specialty drugs. Additionally, when things like out-of-pocket maximums, premium differences, employer contributions and tax benefits are accounted for, the more expensive plans actually don’t provide additional risk protection. In fact, they can end up costing more in those worst-case scenarios where employees could reach or get close to the out-of-pocket maximum.  This can lead to cases where the more expensive health plan is what economists call a “dominated option”, which basically means that there is no scenario where someone would be better off in that plan. If that happens, Picwell will never recommend that plan. No matter how risk averse or capacity constrained your employee is, there just isn't any value there.

Employer HSA contributions reduce cost and increase risk protection

How employers treat the HSA eligible plans that they offer also influences how we score plans.  This might seem obvious, but we’ll cover it anyway.  Most of the employees who used Picwell last year could have received HSA contributions from their employers, but we still saw enough people without these contributions to measure how much this influenced our recommendations, and it turns out that it has a big impact. As the green bars in this figure show, when employers offer an HSA contribution, we very frequently recommend the lowest cost option, regardless of how risk averse an employee is, and we would see the same thing if we broke this out by capacity to pay.  When employers do not offer an HSA contribution, we recommend the lowest cost option less frequently, and the recommendations become much more sensitive to risk aversion.  One of the reasons that we get this result is that an employer HSA contribution is a very effective way to shield employees from financial risk.  hsa graph

Employer HSA Contributions also lower the overall cost, since we account for these funds when determining the total cost of a plan. Given this relationship, we also see that employer HSA contributions tend to be slightly higher in the cases where we recommend the lowest cost plan. Among employers with individual coverage, the average annual employer HSA contribution was $775 per year when the top score went to the lowest cost option, compared to $570 when we did not recommend the lowest cost option.

When it Comes to Benefits, Value Matters

Picwell’s goal is to reduce benefits confusion and ensure employees are in the best plans for their needs. So, as your organization explores various benefits decision support solutions, it’s important to know what you’re getting. A tool that just recommends the lowest cost plan every time will not necessarily put your employees in the best position. 

As you can see, Picwell’s approach to health plan recommendations takes various factors into account. While the lowest cost plan can be the most valuable depending on employee preferences, when that is not the case, the tool will always recommend the plan that provides the best value.

Tune in next week as we begin to take a closer look at recommendations around Health Savings Accounts (HSAs) and how they affect enrollment and contributions.

Ready to see how Picwell can help your employees? Schedule a demo today.

Topics: Benefits Decision Support, Health Insurance, health savings account, hsa, virtual open enrollment, risk aversion

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Written by Picwell