Utilization: The Direct Cost Driver
Higher cost-sharing reduces utilization — members who pay more out of pocket use less healthcare. This is the primary mechanism through which plan design affects cost. However, reduced utilization is not always beneficial — members who delay necessary care due to cost-sharing may incur higher costs later.
Adverse Selection: The Hidden Cost Driver
Adverse selection occurs when sicker members disproportionately choose richer plans. In a multi-plan environment, if the rich plan is priced the same as the lean plan, sicker members will choose the rich plan — driving up its cost and potentially creating a "death spiral" where the rich plan becomes unaffordable.
IQ Insight
Adverse selection is managed through contribution strategy — charging more for richer plans — and decision support tools that help healthy members understand that the HDHP may be a better financial choice for them. Employers who price all plans the same regardless of richness are inviting adverse selection.
Moral Hazard: The Behavioral Cost Driver
Moral hazard is the tendency to use more healthcare when someone else is paying. When members have low cost-sharing, they may choose more expensive providers, request more tests, or seek care for minor conditions they would otherwise manage at home. Higher cost-sharing reduces moral hazard — but must be balanced against the risk of underutilization of necessary care.